AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON April 28, 2000
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. 12
AND
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 13
TOUCHSTONE VARIABLE SERIES 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
CYNTHIA SURPRISE
INVESTORS BANK & TRUST COMPANY
200 CLARENDON STREET, LEG 13, BOSTON, MASSACHUSETTS 02116
(Name and Address of Agent for Service)
copies to:
Mark Longenecker, Esq. Jill T. McGruder
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)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on __ 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 __ pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Shares of Beneficial Interest
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<PAGE>
TOUCHSTONE VARIABLE SERIES TRUST
PROSPECTUS
MAY 1, 2000
O TOUCHSTONE SMALL CAP VALUE FUND
O TOUCHSTONE EMERGING GROWTH FUND
O TOUCHSTONE INTERNATIONAL EQUITY FUND
O TOUCHSTONE HIGH YIELD FUND
O TOUCHSTONE VALUE PLUS FUND
O TOUCHSTONE GROWTH & INCOME FUND
O TOUCHSTONE ENHANCED 30 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>
NOTES
<PAGE>
TABLE OF CONTENTS
TABLE OF CONTENTS
PAGE
Information About The Funds....................................................4
Touchstone Small Cap Value Fund................................................5
Touchstone Emerging Growth Fund................................................6
Touchstone International Equity Fund...........................................9
Touchstone High Yield Fund....................................................12
Touchstone Value Plus Fund....................................................14
Touchstone Growth & Income Fund...............................................17
Touchstone Enhanced 30 Fund...................................................20
Touchstone Balanced Fund......................................................22
Touchstone Bond Fund..........................................................25
Touchstone Standby Income Fund................................................28
Investment Strategies And Risks...............................................31
The Funds' Management.........................................................38
Investing With Touchstone.....................................................43
Distributions And Taxes.......................................................45
Financial Highlights..........................................................46
For More Information..........................................................52
3
Touchstone Variable Series Trust
<PAGE>
INFORMATION ABOUT THE FUNDS
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 variable
annuity contract or variable life policy. When you purchase a variable annuity
contract or variable life policy, you decide how to invest your purchase
payments by selecting from the available investment options. The investment
options may include the following Sub-Accounts that invest in the Funds of TVST:
Touchstone Small Cap Value, Touchstone Emerging Growth, Touchstone International
Equity, Touchstone High Yield, Touchstone Value Plus, Touchstone Growth &
Income, Touchstone Enhanced 30, Touchstone Balanced, Touchstone Bond and
Touchstone Standby Income.
You should read the prospectus for the variable annuity contract or variable
life policy 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 or variable life policy.
4
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE SMALL CAP VALUE FUND
TOUCHSTONE SMALL CAP VALUE FUND
The Fund's Investment Goal
The Touchstone Small Cap Value Fund seeks long-term growth of capital.
Its Principal Investment Strategies
The Fund invests primarily (at least 75% of total assets) in common stocks of
small to medium capitalization companies that the portfolio manager believes
are undervalued. The portfolio manager looks for stocks that it believes are
priced lower than they should be, and also contain a catalyst for growth.
These stocks may not pay dividends. The Fund may invest up to 5% of its assets
(at the time of purchase) in any one company. The Fund will limit its
investments so that the percentage of the Fund's assets invested in a
particular industry will not be more than double the percentage of the
industry in the Russell 2000 Index.
The Fund may also invest in:
o Cash equivalent investments (up to 25%)
o Short-term debt securities
The Key Risks
The Fund's share price will fluctuate. You could lose money on your investment
in the Fund and 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 manager believes 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 oIf 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.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
You can find out 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 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.
Performance Note
Performance information is only shown for those Funds which have had a full
calendar year of operations. Since the Touchstone Small Cap Value Fund started
May 1, 1999, there is no performance information included in this prospectus.
5
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE EMERGING GROWTH FUND
TOUCHSTONE EMERGING GROWTH FUND
The Fund's Investment Goal
The Touchstone Emerging Growth Fund seeks to increase the value of Fund shares
as a primary goal and to earn income as a secondary 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 (companies whose
price to earnings ratios appear reasonable when compared to their estimated
future earnings growth rates).
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 Securities of companies in emerging market countries (up to 10%)
The Key Risks
The Fund's share price will fluctuate. You could lose money on your investment
in the Fund and 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
6
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE EMERGING GROWTH FUND
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 securities of companies in emerging market countries 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 these 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.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
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.
The Fund's Performance
The bar chart which follows indicates the risks of investing in the Touchstone
Emerging Growth Fund. It shows the performance of the Fund's shares in each full
calendar year since the Fund started.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
7
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE EMERGING GROWTH FUND
TOUCHSTONE EMERGING GROWTH
FUND PERFORMANCE
[BAR CHART DATA]
YEARS TOTAL RETURN
1995 19.57%
1996 11.16%
1997 33.67%
1998 3.28%
1999 46.75%
During the period shown in the bar chart, the highest quarterly return was
27.39% (for the quarter ended December 31, 1999) and the lowest quarterly
return was -19.41% (for the quarter ended September 30, 1998).
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 indicates the risks of investing in the Touchstone Emerging
Growth Fund. It 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 Touchstone Emerging Growth Fund.
For the periods ended December 31, 1999
- --------------------------------------------------------------------------------
Past 12 Past 5 Since
Months Years Fund Started*
TOUCHSTONE EMERGING GROWTH FUND 46.8% 21.9% 21.6%
- --------------------------------------------------------------------------------
RUSSELL 2000 INDEX 21.3% 16.6% 16.9%
- --------------------------------------------------------------------------------
WIESENBERGER SMALL CAP-- MF 32.7% 19.2% 19.5%
- --------------------------------------------------------------------------------
* commenced operations November 21, 1994
8
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE INTERNATIONAL EQUITY FUND
TOUCHSTONE INTERNATIONAL EQUITY FUND
The Fund's Investment Goal
The Touchstone International Equity Fund seeks to increase the value of Fund
shares over the long-term.
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. The fund focuses on companies located in Europe, Australia and
the Far East. The Fund may invest up to 40% of its assets in securities issued
by companies active in emerging market countries.
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. In selecting investments for the Fund, the portfolio
manager combines a top-down regional and country analysis with a bottom-up
security selection. Key factors in determining regional allocations are
earnings, interest rates, valuation and risk. In selecting individual stocks,
the portfolio manager employs a "growth at a reasonable price" approach. The
portfolio manager looks for companies it believes to have above average
earnings growth prospectus, but sell at a fair value.
The Key Risks
The Fund's share price will fluctuate. You could lose money on your investment
in the Fund and 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 go 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 securities of companies in emerging market countries 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 these securities than other foreign securities
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.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
9
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE INTERNATIONAL EQUITY FUND
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.
The Fund's Performance
The bar chart shown below indicates the risks of investing in the Touchstone
International Equity Fund. It shows the performance of the Fund's shares in each
full calendar year since the Fund started.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
TOUCHSTONE INTERNATIONAL EQUITY
FUND PERFORMANCE
[BAR CHART DATA]
YEARS TOTAL RETURN
1995 5.45%
1996 11.47%
1997 14.76%
1998 20.21%
1999 36.47%
During the period shown in the bar chart, the highest quarterly return was
28.12% (for the quarter ended December 31, 1999) and the lowest quarterly
return was -13.95% (for the quarter ended September 30, 1998).
10
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE INTERNATIONAL EQUITY FUND
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 indicates the risks of investing in the Touchstone International
Equity Fund. It 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 Touchstone International
Equity Fund.
For the periods ended December 31, 1999
- --------------------------------------------------------------------------------
Past 12 Past 5 Since
Months Years Fund Started*
TOUCHSTONE INTERNATIONAL EQUITY FUND 36.5% 17.2% 15.7%
- --------------------------------------------------------------------------------
MSCI EAFE INDEX 27.3% 13.1% 13.1%
- --------------------------------------------------------------------------------
WIESENBERGER NON-US EQUITY-- MF 44.9% 14.5% 14.0%
- --------------------------------------------------------------------------------
* commenced operations November 21, 1994
11
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE HIGH YIELD FUND
TOUCHSTONE HIGH YIELD FUND
The Fund's Investment Goal
The Touchstone High Yield Fund seeks to achieve a high level of current income
as its main goal. Capital appreciation is a secondary consideration in
achieving 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% of total assets) issued primarily by U.S. issuers.
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 15%), but only up to 5% of its
assets in securities of foreign companies that are denominated in a
currency other than the U.S. dollar
o Debt securities of issuers in emerging market countries (up to 10%)
o Mortgage-related securities and other types of loans and loan
participations oCurrency futures and option contracts
The Key Risks
The Fund's share price will fluctuate. You could lose money on your investment
in the Fund and the Fund could also return less than other investments:
o If the U.S. enters into a lengthy economic downturn or recession
o If interest rates go up, causing the value of any debt securities held
by the Fund to decline
o Because the issuers of non-investment grade debt 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 securities of issuers in emerging market countries 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 these 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 currency futures and options may reduce the potential gain
from an investment or intensify a loss
12
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE HIGH YIELD FUND
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
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
You can find out 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.
Performance Note
Performance information is only shown for those Funds which have had a full
calendar year of operations. Since the Touchstone High Yield Fund started May 1,
1999, there is no performance information included in this prospectus.
13
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE VALUE PLUS FUND
TOUCHSTONE VALUE PLUS FUND
The Fund's Investment Goal
The Touchstone Value Plus Fund seeks to increase the value of Fund shares over
the long-term.
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.
Approximately 70% of total assets will generally be invested in large cap
companies and approximately 30% will generally be invested in mid cap companies.
The Fund may invest in:
o Preferred stocks
o Investment grade debt securities
o Convertible securities
In addition, the Fund may invest in (up to 10%):
o Cash equivalent investments
o Short-term debt securities
The Key Risks
The Fund's share price will fluctuate. You could lose money on your investment
in the Fund and 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.
As with any mutual fund, there is no guarantee that the fund will achieve its
goal.
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 may be important to you, but you may not want to take extreme risks
in order to achieve it.
14
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE VALUE PLUS FUND
The Fund's Performance
The bar chart which follows gives some indication of the risks of an investment
in the Touchstone Value Plus Fund. It shows the performance of the Fund's shares
for the one full calendar year since the Fund started.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
TOUCHSTONE VALUE PLUS
FUND PERFORMANCE
[BAR CHART DATA]
YEARS TOTAL RETURN
1999 15.02%
During the period shown in the bar chart, the highest quarterly return was
13.79% (for the quarter ended December 31, 1999) and the lowest quarterly
return was - 9.02% (for the quarter ended September 30, 1999).
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 figure for the period.
The table below indicates the risks of investing in the Touchstone Value Plus
Fund. It shows how the Fund's average annual returns for the periods shown
compare to those of the S&P 500 Index, S&P/Barra Value Index, and the Wilshire
Large Cap Value Index.
The S&P 500 Index is a widely recognized unmanaged index of common stock prices.
The S&P/Barra Value Index is a capitalization-weighted index comprised of stocks
of the S&P 500 with high book-to-price ratios relative to the S&P 500 as a
whole. Each company of the S&P 500 is assigned to either the Value or Growth
index so that the sum of the indices reflects the total S&P 500. The Wilshire
Large Cap Value Index is an index comprised of equity securities that fit
Wilshire Asset Management's "value stock" characteristics and fall into the
largest 750 securities in the Wilshire 5000 Index. The stocks represented by
this index involve investment risks which may include the loss of principal
invested.
15
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE VALUE PLUS FUND
For the periods ended December 31, 1999
- -----------------------------------------------------------------
Past 12 Since
Months Fund Started*
TOUCHSTONE VALUE PLUS FUND 15.0% 10.1%
- -----------------------------------------------------------------
S & P 500 INDEX 21.1% 19.9%
- -----------------------------------------------------------------
S & P/BARRA VALUE INDEX 12.0% 8.1%
- -----------------------------------------------------------------
WILSHIRE LARGE CAP VALUE INDEX 3.6% 2.6%
- -----------------------------------------------------------------
* commenced operations on May 1, 1998
16
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE GROWTH & INCOME FUND
TOUCHSTONE GROWTH & INCOME FUND
The Fund's Investment Goal
The Touchstone Growth & Income Fund seeks to increase the value of Fund shares
over the long-term, while receiving dividend income.
Its Principal Investment Strategies
The Fund generally invests (at least 50% of total assets) in dividend paying
common stocks, preferred stocks and convertible securities in a variety of
industries. The portfolio manager may purchase securities which do not pay
dividends (up to 50%) but which are expected to increase in value or produce
high income payments in the future. Although the yield of the Fund's portfolio
usually will be greater than the yield of the S&P 500 Index and similar to the
yield of a value-oriented benchmark like the Russell 1000 Value Value Index, not
every stock in the Fund will have a premium yield.
The Fund invests in stocks with lower valuations than the broad market that,
in the portfolio manager's view, have improving fundamentals. The portfolio
manager uses a three-factor screen combining relative yield, price/earnings and
price/cash flow ratios to identify attractive investment ideas among the largest
1000 U.S. companies and the largest 100 American Depository Receipts (ADRs).
This investment process enables the portfolio manager to evaluate value-oriented
companies and cheap cyclical growth companies that pay little or no dividends.
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
non-convertible debt securities, the full 20% in convertible debt securities
rated as low as the highest level of non-investment grade or up to 5% in
non-convertible non-investment grade debt securities.
The Fund may also invest in:
o Securities of foreign companies including ADRs (up to 20%)
o Real estate investment trusts (REITs) (up to 10%)
The Key Risks
The Fund's share price will fluctuate. You could lose money on your investment
in the Fund and 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
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.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
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.
17
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE GROWTH & INCOME FUND
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.
The Fund's Performance
The bar chart which follows gives some indication of the risks of an investment
in the Touchstone Growth & Income Fund. It shows the performance of the Fund's
shares for the one full calendar year since the Fund started.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
TOUCHSTONE GROWTH & INCOME
FUND PERFORMANCE
[BAR CHART DATA]
YEARS TOTAL RETURN
1999 2..39%
During the period shown in the bar chart, the highest quarterly return was
10.92% (for the quarter ended June 30, 1999) and the lowest quarterly
return was - 11.71% (for the quarter ended September 30, 1999).
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 figure for the period.
18
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE GROWTH & INCOME FUND
The table below indicates the risks of investing in the Touchstone Growth &
Income Fund by comparing the Fund's performance to that of the S&P 500 Index and
the Wiesenberger Growth & Income -- MF index. The S&P 500 Index is a widely
recognized unmanaged index of common stock prices. The Wiesenberger Growth &
Income -- MF is a composite index of the annual returns of mutual funds that
have an investment style similar to that of the Touchstone Growth & Income Fund.
For the periods ended December 31, 1999
- -------------------------------------------------------------------
Past 12 Since
Months Fund Started*
TOUCHSTONE GROWTH & INCOME FUND 2.4% 2.4%
- -------------------------------------------------------------------
MSCI EAFE INDEX 21.1% 21.1%
- -------------------------------------------------------------------
WIESENBERGER GROWTH & INCOME-- MF 12.6% 12.6%
- -------------------------------------------------------------------
* commenced operations on January 1, 1999
19
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE ENHANCED 30 FUND
TOUCHSTONE ENHANCED 30 FUND
The Fund's Investment Goal
The Touchstone Enhanced 30 Fund seeks to achieve a total return which is
higher than the total return of the Dow Jones Industrial Average (DJIA).
Its Principal Investment Strategies
The Fund's portfolio is based on the 30 stocks that comprise the DJIA. The
DJIA is a measurement of general market price movement for 30 widely held
stocks. The portfolio manager seeks to surpass the total return of the DJIA by
substituting stocks that offer above average growth potential for those stocks
in the DJIA that appear to have less growth potential. The Fund's portfolio
will at all times consist of 30 stocks and up to 1/3 of these holdings may
represent substituted stocks in the enhanced portion of the portfolio. The
portfolio manager uses a database of 4,000 stocks from which to choose the
companies that will be substituted in the enhanced portion of the portfolio. A
specific process is followed to assist the portfolio manager in its
selections:
o The 4,000 stocks are reduced to 1,400 by screening for quality and
market capitalization ($10 billion minimum) requirements.
o A model is applied to select stocks that the portfolio manager
believes are priced at a discount to intrinsic value. This model
reduces the stock choices to about 300 companies.
o The portfolio manager then searches for those companies that currently
have a catalyst at work which may help to unlock their earnings
potential.
Stocks are sold when the portfolio manager believes they are overpriced or
face a significant reduction in earnings prospects. The portfolio is
rebalanced periodically or as needed due to changes in the DJIA or the other
securities in the portfolio.
The portfolio manager's selection process is expected to cause the Fund's
portfolio to have the following characteristics:
o Attractive valuation
o Above-average earnings and dividend growth oAbove-average market
capitalization ratio
o Dominant industry position
o Seasoned management
o Above-average quality
Unlike the DJIA, the Touchstone Enhanced 30 Fund is not price-weighted.
20
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE ENHANCED 30 FUND
The Key Risks
The Fund's share price will fluctuate. You could lose money on your investment
in the Fund and the Fund could also return less than other investments:
o If the stock market as a whole goes down
o If the dividend discount model falters in its stock screening process
o If the stocks in the enhanced portion of the portfolio do not increase
the Fund's return as expected
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 as undervalued as
expected
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
You can find out 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 may be important to you, but you may not want to take extreme risks
in order to achieve it.
Performance Note
Performance information is only shown for those Funds which have had a full
calendar year of operations. Since the Touchstone Enhanced 30 Fund started May
1, 1999, there is no performance information included in this prospectus.
21
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE BALANCED FUND
TOUCHSTONE BALANCED FUND
The Fund's Investment Goal
The Touchstone Balanced Fund seeks to achieve both an increase in share price
and current income.
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 two highest levels 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 securities of companies in emerging market
countries.
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. You could lose money on your investment
in the Fund and 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 securities of companies in emerging market countries 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 these 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.
As with any mutual fund, there is no guarantee that the fund will achieve its
goal.
22
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE BALANCED FUND
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.
The Fund's Performance
The following bar chart indicates the risks of investing in the Touchstone
Balanced Fund. It shows the performance of the Fund's shares in each full
calendar year since the Fund started.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
TOUCHSTONE BALANCED
FUND PERFORMANCE
[BAR CHART DATA]
YEARS TOTAL RETURN
1995 24.56%
1996 16.78%
1997 18.61%
1998 5.44%
1999 9.62%
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 -9.15% (for the quarter ended September 30, 1998).
23
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE BALANCED FUND
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 indicates the risks of investing in the Touchstone Balanced
Fund. It 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 (S&P
500), the Lehman Brothers Aggregate, a blend made up of 60% S&P 500 and 40%
LBAggregate, and 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 Touchstone Balanced Fund.
For the periods ended December 31, 1999
- ----------------------------------------------------------------------------
Past 12 Past 5 Since Fund
Months Years Started*
TOUCHSTONE BALANCED FUND 9.6% 14.8% 14.8%
- ----------------------------------------------------------------------------
S&P 500 INDEX 21.1% 28.5% 28.4%
- ----------------------------------------------------------------------------
LEHMAN BROTHERS AGGREGATE (0.8)% 7.7% 7.7%
BLEND-- 60% S&P500, 40% LBAGGREGATE 11.2% 18.7% 18.6%
- ----------------------------------------------------------------------------
WIESENBERGER BALANCED DOMESTIC-- MF 9.7% 15.1% 15.0%
- ----------------------------------------------------------------------------
* commenced operations on November 21, 1994
24
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE BOND FUND
TOUCHSTONE BOND FUND
The Fund's Investment Goal
The Touchstone Bond Fund seeks to provide a high level of current income.
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 (up to 60%)
o Asset-backed securities
o Preferred stocks
The Fund also invests in non-investment grade U.S. or foreign debt securities
and preferred stock which are rated as low as B (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. You could lose money on your investment
in the Fund and 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.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
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.
25
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE BOND FUND
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.
The Fund's Performance
The bar chart which follows gives some indication of the risks of an investment
in the Touchstone Bond Fund. It shows the performance of the Fund's shares for
the one full calendar year since the Fund started.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
TOUCHSTONE BOND
FUND PERFORMANCE
[BAR CHART DATA]
YEARS TOTAL RETURN
1999 (1.28)%
During the period shown in the bar chart, the highest quarterly return was
0.60% (for the quarter ended September 30, 1999) and the lowest quarterly
return was -0.89% (for the quarter ended June 30, 1999).
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 figure for the period.
26
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE BOND FUND
The table below indicates the risks of investing in the Touchstone Bond Fund by
comparing the Fund's performance to that of the Lehman Brothers Aggregate Bond
and to the Wiesenberger: Corporate-Investment Grade Index. The Lehman Brothers
Aggregate Bond is a blend made up of 60% S&P 500 and 40% LB Aggregate. 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:
Corporate-Investment Grade Index is an equal weighted index of variable annuity
subaccounts within the stated investment category. Subaccounts in this category
seek current income by investing a minimum of 65% in investment grade corporate
debt issues. Investment grade securities must be BBB or higher, as rated by
Standard & Poors. The subaccounts represented by this index involve investment
risks which may include the loss of principal invested. This index represents
the component subaccounts at closing unitvalue and includes all annual
asset-based fees and expenses charged to those subaccounts, including management
and insurance fees.
For the periods ended December 31, 1999
- --------------------------------------------------------------------------
Past 12 Since
Months Fund Started*
TOUCHSTONE BOND FUND (1.3)% (1.3)%
- --------------------------------------------------------------------------
LEHMAN BROTHERS AGGREGATE BOND (0.8)% (0.8)%
- --------------------------------------------------------------------------
WIESENBERGER: CORPORATE-INVESTMENT GRADE (1.7)% (1.7)%
- --------------------------------------------------------------------------
* commenced operations on January 1, 1999
27
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE STANDBY INCOME FUND
TOUCHSTONE STANDBY INCOME FUND
The Fund's Investment Goal
The Touchstone 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 the investment made by a separate account.
The Fund does not try to keep a constant $1.00 per share net asset value.
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. You could lose money on your investment
in the Fund and 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.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
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.
28
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE STANDBY INCOME FUND
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.
The Fund's Performance
The bar chart shown below indicates the risks of investing in the Touchstone
Standby Income Fund. It shows the performance of the Fund's shares in each full
calendar year since the Fund started.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
TOUCHSTONE STANDBY INCOME
FUND PERFORMANCE
[BAR CHART DATA]
YEARS TOTAL RETURN
1995 5.90%
1996 5.18%
1997 5.41%
1998 5.71%
1999 4.86%
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 1.06% (for the quarter ended June 30, 1999).
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.
29
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE STANDBY INCOME FUND
The table below indicates the risks of investing in the Touchstone Standby
Income Fund. It shows how the Fund's average annual returns for the periods
shown compare to those of the Merrill Lynch 91-Day Treasury Index, to the 30-Day
Money Market Yield Index and to the Smith Barney 3-Month Treasury Bill 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. The Smith Barney 3-Month Treasury
Bill Index consists of short-term U. S. Treasury Securities, maturing in 90
days.
For the periods ended December 31, 1999
- ------------------------------------------------------------------------------
Past 12 Past 5 Since Fund
Months Years Started*
TOUCHSTONE STANDBY INCOME FUND 4.9% 5.4% 5.4%
- ------------------------------------------------------------------------------
MERRILL LYNCH 91-DAY TREASURY INDEX 4.8% 5.3% 5.4%
- ------------------------------------------------------------------------------
30-DAY MONEY MARKET YIELD INDEX 4.6% 5.0% 5.0%
- ------------------------------------------------------------------------------
SMITH BARNEY 3-MONTH TREASURY BILL INDEX 4.7% 5.0% 5.0%
- ------------------------------------------------------------------------------
* commenced operations on October 3, 1994
30
Touchstone Variable Series Trust
<PAGE>
INVESTMENT STRATEGIES AND RISKS
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 Touchstone International Equity Fund and Touchstone Bond Fund may engage in
active trading to achieve their investment goals. Frequent trading 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.
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.
31
Touchstone Variable Series Trust
<PAGE>
INVESTMENT STRATEGIES AND RISKS
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>
TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE
SMALL CAP EMERGING INTERNATIONAL HIGH VALUE
VALUE GROWTH EQUITY YIELD PLUS
FUND FUND FUND FUND FUND
- -----------------------------------------------------------------------------------------------------------------------
Financial Instruments
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Invests in U.S. stocks o o o o
- -----------------------------------------------------------------------------------------------------------------------
Invests in foreign stocks o o
- -----------------------------------------------------------------------------------------------------------------------
Invests in investment grade debt securities o o o o o
- -----------------------------------------------------------------------------------------------------------------------
Invests in non-investment grade debt securities o o
- -----------------------------------------------------------------------------------------------------------------------
Invests in foreign debt securities o o
- -----------------------------------------------------------------------------------------------------------------------
Invests in futures contracts o
- -----------------------------------------------------------------------------------------------------------------------
Invests in forward currency contracts o
- -----------------------------------------------------------------------------------------------------------------------
Invests in asset-backed securities
- -----------------------------------------------------------------------------------------------------------------------
Invests in mortgage-related securities o o
- -----------------------------------------------------------------------------------------------------------------------
Invests in real estate investment trusts (REITs)
- -----------------------------------------------------------------------------------------------------------------------
Investment Techniques
- -----------------------------------------------------------------------------------------------------------------------
Emphasizes securities of small cap companies o o
- -----------------------------------------------------------------------------------------------------------------------
Emphasizes securities of mid cap companies o o
- -----------------------------------------------------------------------------------------------------------------------
Emphasizes securities of large cap companies o
- -----------------------------------------------------------------------------------------------------------------------
Emphasizes undervalued stocks o o o
- -----------------------------------------------------------------------------------------------------------------------
Invests in securities of emerging markets countries o o o
- -----------------------------------------------------------------------------------------------------------------------
Emphasizes dividend-paying common stocks
- -----------------------------------------------------------------------------------------------------------------------
Invests in short-term debt securities o o o
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TOUCHSTONE TOUCHSTONE TOUCHSTONE
GROWTH ENHANCED TOUCHSTONE TOUCHSTONE STANDBY
& INCOME 30 BALANCED BOND INCOME
FUND FUND FUND FUND FUND
- -----------------------------------------------------------------------------------------------------------------------
Financial Instruments
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Invests in U.S. stocks o o o
- -----------------------------------------------------------------------------------------------------------------------
Invests in foreign stocks o o
- -----------------------------------------------------------------------------------------------------------------------
Invests in investment grade debt securities o o o o
- -----------------------------------------------------------------------------------------------------------------------
Invests in non-investment grade debt securities o o o
- -----------------------------------------------------------------------------------------------------------------------
Invests in foreign debt securities o o o o
- -----------------------------------------------------------------------------------------------------------------------
Invests in futures contracts
- -----------------------------------------------------------------------------------------------------------------------
Invests in forward currency contracts
- -----------------------------------------------------------------------------------------------------------------------
Invests in asset-backed securities o o
- -----------------------------------------------------------------------------------------------------------------------
Invests in mortgage-related securities o o
- -----------------------------------------------------------------------------------------------------------------------
Invests in real estate investment trusts (REITs) o
- -----------------------------------------------------------------------------------------------------------------------
Investment Techniques
- -----------------------------------------------------------------------------------------------------------------------
Emphasizes securities of small cap companies
- -----------------------------------------------------------------------------------------------------------------------
Emphasizes securities of mid cap companies
- -----------------------------------------------------------------------------------------------------------------------
Emphasizes securities of large cap companies o o
- -----------------------------------------------------------------------------------------------------------------------
Emphasizes undervalued stocks o
- -----------------------------------------------------------------------------------------------------------------------
Invests in securities of emerging markets countries o o
- -----------------------------------------------------------------------------------------------------------------------
Emphasizes dividend-paying common stocks o
- -----------------------------------------------------------------------------------------------------------------------
Invests in short-term debt securities o
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
32
Touchstone Variable Series Trust
<PAGE>
INVESTMENT STRATEGIES AND RISKS
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
Foreign companies do not include companies based in Canada with respect to the
Touchstone High Yield Fund.
AMERICAN DEPOSITARY 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.
INVESTMENT GRADE SECURITIES. Investment grade securities are generally rated BBB
or better by Standard & Poor's Corporation (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", "MID CAP" AND "SMALL 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. A small cap company has a
market capitalization of less than $1 billion.
33
Touchstone Variable Series Trust
<PAGE>
INVESTMENT STRATEGIES AND RISKS
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 COUNTRIES. Emerging Market countries are countries 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. When a Fund invests in securities of a
company in an emerging market country, it invests in securities issued by a
company that:
o Is organized under the laws of an emerging market country
o Has its principal trading market for its stock in an emerging market
country
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.
34
Touchstone Variable Series Trust
<PAGE>
INVESTMENT STRATEGIES AND RISKS
How Can I Tell, at a Glance, a Fund's Key Risks?
The following table shows some of the risks to which each Fund is subject. Each
risk is described in detail below:
<TABLE>
<CAPTION>
TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE
SMALL CAP EMERGING INTERNATIONAL HIGH VALUE
VALUE GROWTH EQUITY YIELD PLUS
FUND FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Market Risk o o o o
- ----------------------------------------------------------------------------------------------------------------------
Small Cap and Mid Cap Companies o o
- ----------------------------------------------------------------------------------------------------------------------
Emerging Growth Companies o
- ----------------------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts
- ----------------------------------------------------------------------------------------------------------------------
Interest Rate Risk o o o o o
- ----------------------------------------------------------------------------------------------------------------------
Mortgage-Related Securities o o
- ----------------------------------------------------------------------------------------------------------------------
Credit Risk o o o o o
- ----------------------------------------------------------------------------------------------------------------------
Non-Investment Grade Securities o o
- ----------------------------------------------------------------------------------------------------------------------
Foreign Investing Risk o o o
- ----------------------------------------------------------------------------------------------------------------------
Emerging Market Countries o o o
- ----------------------------------------------------------------------------------------------------------------------
Political Risk o o
- ----------------------------------------------------------------------------------------------------------------------
TOUCHSTONE TOUCHSTONE TOUCHSTONE
GROWTH ENHANCED TOUCHSTONE TOUCHSTONE STANDBY
& INCOME 30 BALANCED BOND INCOME
FUND FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------------------
Market Risk o o o
- ----------------------------------------------------------------------------------------------------------------------
Small Cap and Mid Cap Companies
- ----------------------------------------------------------------------------------------------------------------------
Emerging Growth Companies
- ----------------------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts o
- ----------------------------------------------------------------------------------------------------------------------
Interest Rate Risk o o o o
- ----------------------------------------------------------------------------------------------------------------------
Mortgage-Related Securities o o
- ----------------------------------------------------------------------------------------------------------------------
Credit Risk o o o o
- ----------------------------------------------------------------------------------------------------------------------
Non-Investment Grade Securities o o o
- ----------------------------------------------------------------------------------------------------------------------
Foreign Investing Risk o o o o
- ----------------------------------------------------------------------------------------------------------------------
Emerging Market Countries o o
- ----------------------------------------------------------------------------------------------------------------------
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 Small Cap and Mid Cap Companies. Because small cap and mid cap
companies normally have fewer shares outstanding than larger
companies, it may be more difficult for the portfolio manager to buy
or sell significant amounts of these shares without an unfavorable
impact on prevailing prices. Small cap companies may have limited
product lines, markets or financial resources and may lack management
depth. In addition, small cap and mid cap companies are typically
subject to a greater degree of changes in earnings and business
prospects than are larger, more established companies. There is
typically less publicly available
35
Touchstone Variable Series Trust
<PAGE>
INVESTMENT STRATEGIES AND RISKS
information about small cap and mid cap companies than for larger,
more established companies. Although investing in securities of small
cap and mid cap companies offers potential for above-average returns
if the companies are successful, the risk exists that such companies
will not succeed and the prices of their shares could significantly
decline in value.
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.
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.
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.
36
Touchstone Variable Series Trust
<PAGE>
INVESTMENT STRATEGIES AND RISKS
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 Countries. Investments in a country that is still
relatively under-developed 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.
37
Touchstone Variable Series Trust
<PAGE>
THE FUNDS' MANAGEMENT
THE FUNDS' MANAGEMENT
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 adviser under the
Investment Advisers Act of 1940, as amended (the Advisers Act) since 1994. As of
December 31, 1999, Touchstone Advisors had $474 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.
38
Touchstone Variable Series Trust
<PAGE>
THE FUNDS' MANAGEMENT
The fee paid to Touchstone by each Fund is shown in the table below:
- ----------------------------------------------------------------------
Fee to Touchstone
(as % of average
daily net assets)
TOUCHSTONE SMALL CAP VALUE FUND 0.80%
- ----------------------------------------------------------------------
TOUCHSTONE EMERGING GROWTH FUND 0.80%
- ----------------------------------------------------------------------
TOUCHSTONE INTERNATIONAL EQUITY FUND 0.95%
- ----------------------------------------------------------------------
TOUCHSTONE HIGH YIELD FUND 0.60%
- ----------------------------------------------------------------------
TOUCHSTONE VALUE PLUS FUND 0.75%
- ----------------------------------------------------------------------
TOUCHSTONE GROWTH & INCOME FUND 0.80%
- ----------------------------------------------------------------------
TOUCHSTONE ENHANCED 30 FUND 0.65%
- ----------------------------------------------------------------------
TOUCHSTONE BALANCED FUND 0.80%
- ----------------------------------------------------------------------
TOUCHSTONE BOND FUND 0.55%
- ----------------------------------------------------------------------
TOUCHSTONE STANDBY INCOME FUND 0.25%
- ----------------------------------------------------------------------
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.
Fund Sub-Advisor to Touchstone Small Cap Value Fund and Touchstone Enhanced 30
Fund
Todd Investment Advisors, Inc. (Todd)
101 South Fifth St. Suite 3160 Louisville, KY 40202
Todd has been registered as an investment advisor under the Advisers Act since
1967. Todd provides investment advisory services to individual and institutional
clients. As of December 31, 1999, Todd had assets under management of $3.3
billion. Todd has been managing the Touchstone Small Cap Value Fund and the
Touchstone Enhanced 30 Fund since each Fund's inception.
Curtiss M. Scott, Jr., CFA has primary responsibility for the day-to-day
management of each of the Funds. Mr. Scott joined Todd in 1996. He currently
manages both small cap and large cap products for Todd. He has 16 years of
experience as a small cap portfolio manager and 21 years of industry experience.
With regard to the Enhanced 30 Fund, Mr. Scott is supported by Robert P.
Bordogna, President and Chief Executive Officer, and Bosworth M. Todd, founder
and Chairman. Mr. Bordogna and Mr. Todd have worked together since 1980.
Todd is an affiliate of Touchstone. Therefore, Touchstone may have a conflict of
interest when making decisions to keep Todd 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.
39
Touchstone Variable Series Trust
<PAGE>
THE FUNDS' MANAGEMENT
Fund Sub-Advisors to the Touchstone Emerging Growth Fund
David L. Babson & Company, Inc. (Babson)
One Memorial Drive, Cambridge, MA 02142-1300
Babson has been registered as an investment advisor under the Advisers Act since
1940. Babson provides investment advisory services to individual and
institutional clients. As of December 31, 1999, Babson and affiliates had assets
under management of $66.1 billion. Babson has been managing the Touchstone
Emerging Growth Fund since the Fund's inception.
Marilyn Mendel Han and Lance F. James have primary responsibility for the
day-to-day management of the Fund. Ms. Han has been with the firm since 1994,
and Mr. James has been with the firm since 1986.
Westfield Capital Management Company, Inc. (Westfield)
One Financial Center, Boston, MA 02111
Westfield has been registered as an investment advisor under the Advisers Act
since 1989. Westfield provides investment advisory services to individual and
institutional clients. As of December 31, 1999, Westfield had assets under
management of $1.9 billion. Westfield has been managing the Touchstone Emerging
Growth Fund since the Fund's inception.
William A. Muggia has managed the portion of the Touchstone Emerging Growth
Fund's assets allocated to Westfield by the Advisor since April 1999. Mr. Muggia
has been with Westfield since 1994.
Fund Sub-Advisor to the Touchstone International Equity Fund
Credit Suisse Asset Management, LLC (Credit Suisse)
One Citicorp Center, 153 East 53rd Street, New York, NY 10022
Credit Suisse has been registered as an investment advisor under the Advisers
Act since 1968. Credit Suisse provides investment advisory services to
individual and institutional clients and is a member of Credit Suisse Asset
Management, the institutional asset management and mutual fund arm of Credit
Suisse Group. As of December 31, 1999, Credit Suisse Asset Management had assets
under management of $203 billion. Credit Suisse has been managing the Touchstone
International Equity Fund since the Fund's inception.
The Fund is managed by the Credit Suisse International Equity Management Team.
The team consists of Larry Smith, Richard Watt, Steven D. Bleiberg, Alan Zlater,
Emily Alejos and Robert B. Hrabchak.
40
Touchstone Variable Series Trust
<PAGE>
THE FUNDS' MANAGEMENT
Fund Sub-Advisor to the Touchstone High Yield Fund, Touchstone Value Plus Fund,
Touchstone Bond Fund, and Touchstone Standby Income Fund
Fort Washington Investment Advisors, Inc. (Fort Washington)
420 East Fourth Street, Cincinnati, OH 45202
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 December 31, 1999, Fort Washington
had assets under management of $18 billion. Fort Washington has been managing
the Touchstone High Yield Fund, the Touchstone Value Plus Fund, the Touchstone
Bond Fund and the Touchstone Standby Income Fund since each Fund's inception.
TOUCHSTONE HIGH YIELD FUND: Brendan M. White, CFA, joined Fort Washington
Investment Advisors in 1993. He currently manages $750 million dollars in high
yield assets. His expertise in the fixed income area includes high yield,
investment grade and mortgage-backed securities. Mr. White has more than 10
years of fixed income management experience and was with Ohio Casualty prior to
joining Fort Washington.
TOUCHSTONE 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.
TOUCHSTONE 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.
TOUCHSTONE 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.
41
Touchstone Variable Series Trust
<PAGE>
THE FUNDS' MANAGEMENT
Fund Sub-Advisor to the Touchstone Growth & Income Fund
Scudder Kemper Investments, Inc. (Scudder Kemper)
345 Park Avenue, New York, NY 10154
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 1919. As of December 31, 1999, Scudder Kemper had assets under
management of $295 billion. Scudder Kemper has been managing the Growth & Income
Fund since June 1997.
Lori Ensinger, Lead Portfolio Manager, has managed the Fund since September of
1997. She has been a portfolio manager since 1983 and joined Scudder in 1993.
Diane Sorbin is also a portfolio manager on the Scudder Kemper Institutional
Growth & Income product. She has been a portfolio manager since 1986 and joined
Scudder Kemper in 2000.
Fund Sub-Advisor to the Touchstone Balanced Fund
OpCap Advisors (OpCap)
Oppenheimer Tower, One World Financial Center, New York, NY 10281
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
December 31, 1999, Oppenheimer Capital and its subsidiaries had assets under
management of $52 billion. OpCap has been managing the Touchstone Balanced Fund
since May of 1997.
Louis Goldstein has managed the equity portion of the Touchstone Balanced Fund
since April of 1999. Robert J. Bluestone and Matthew Greenwald have managed the
fixed-income portion of the Balanced Fund since 1997. Mr. Goldstein joined
Oppenheimer Capital in 1991. Mr. Bluestone joined Oppenheimer Capital in 1986
and is Managing Director. Mr. Greenwald joined Oppenheimer Capital in 1989 and
is Vice President.
42
Touchstone Variable Series Trust
<PAGE>
INVESTING WITH TOUCHSTONE
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 variable annuity contract or variable life
policy 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 variable annuity contract or variable life
policy. You should read this prospectus and the prospectus of the variable
annuity contract or variable life policy carefully before you choose your
investment options.
The Touchstone variable annuity contracts are issued by separate accounts of
Western-Southern Life Assurance Company. The Columbus Life variable life
insurance policies are issued by a separate account of Columbus Life Insurance
Company. The separate accounts buy Fund shares based on the instructions that
they receive from the contract owners.
o Investor Alert: Touchstone reserves the right to 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 or sold 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.
43
Touchstone Variable Series Trust
<PAGE>
INVESTING WITH TOUCHSTONE
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.
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.
44
Touchstone Variable Series Trust
<PAGE>
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS AND TAXES
Dividends and Other Distributions
Each Touchstone Fund intends to distribute to its shareholders substantially all
of its income and capital gains. Each Touchstone Fund, other than the Touchstone
Standby Income Fund, will declare and pay dividends annually. The Touchstone
Standby Income Fund will declare dividends daily and pay dividends monthly.
Distributions of any net realized long-term and short-term capital gains earned
by a Fund will be made at least annually.
Tax Information
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 which
issue your variable annuity contract or variable life policy, 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.
[SIDEBAR]: OOOYou should consult with your tax advisor to address your own tax
situation.
45
Touchstone Variable Series Trust
<PAGE>
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
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 for the year ended December
31, 1999 has been audited by Ernst & Young, LLP, whose report, along with the
Fund's financial statements, are incorporated by reference in the Statement of
Additional Information, which is available upon request. Financial Highlights
for the years prior to 1999 were audited by other auditors.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Touchstone Small Cap Value Fund
PERIOD ENDED
12/31/99(A)
- -----------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period $ 10.00
- -----------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) (0.03)
- -----------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments 1.82
- -----------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.79
- -----------------------------------------------------------------------------------------------------------------------
Less Dividends and Distributions to Shareholders from:
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income --
- -----------------------------------------------------------------------------------------------------------------------
Realized Capital Gains --
- -----------------------------------------------------------------------------------------------------------------------
Return of Capital --
- -----------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions --
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 11.79
- -----------------------------------------------------------------------------------------------------------------------
Total Return (b) 17.90%
- -----------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000s) $12,070
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------------
Net Expenses 1.00%(c)
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) (0.48)%(c)
- -----------------------------------------------------------------------------------------------------------------------
Expenses, without Waiver and Reimbursement 2.03%(c)
- -----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 86%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
46
Touchstone Variable Series Trust
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------
Touchstone Emerging Growth Fund
- -----------------------------------------------------------------------------------------------------------------------
PERIOD ENDED 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
Per Share Operating Performance
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.10 $11.27 $12.20 $ 15.40 $ 15.33
- -----------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.11 0.04 0.03 0.02 (0.05)
- -----------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments 1.87 1.22 4.06 0.46 7.13
- -----------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.98 1.26 4.09 0.48 7.08
- -----------------------------------------------------------------------------------------------------------------------
Less: Dividends and Distributions to Shareholders from:
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.15) (0.04) (0.03) (0.03) --
- -----------------------------------------------------------------------------------------------------------------------
Realized Capital Gains (0.66) (0.29) (0.86) (0.52) (3.18)
- -----------------------------------------------------------------------------------------------------------------------
Return of Capital -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions (0.81) (0.33) (0.89) (0.55) (3.18)
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.27 $12.20 $ 15.40 $ 15.33 $ 19.23
- -----------------------------------------------------------------------------------------------------------------------
Total Return (b) 19.57% 11.16% 33.67% 3.28% 46.75%
- -----------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000s) $2,615 $5,771 $19,417 $31,264 $36,879
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------------
Net Expenses 1.15% 1.15% 1.15% 1.15% 1.15%
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 1.09% 0.50% 0.27% 0.14% (0.34)%
- -----------------------------------------------------------------------------------------------------------------------
Expenses, without Waiver and Reimbursement 3.73% 3.22% 2.19% 1.49% 1.42%
- -----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 101% 89% 88% 66% 89%
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Touchstone International Equity Fund
- -----------------------------------------------------------------------------------------------------------------------
PERIOD ENDED 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
Per Share Operating Performance
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.51 $10.00 $ 11.07 $ 12.01 $ 13.96
- -----------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.04 0.06 0.07 0.06 0.06
- -----------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments 0.48 1.08 1.56 2.37 5.00
- -----------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.52 1.14 1.63 2.43 5.06
- -----------------------------------------------------------------------------------------------------------------------
Less: Dividends and Distributions to Shareholders from:
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.03) (0.07) (0.05) (0.10) (0.07)
- -----------------------------------------------------------------------------------------------------------------------
Realized Capital Gains -- -- (0.64) (0.38) (1.41)
- -----------------------------------------------------------------------------------------------------------------------
Return of Capital -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions (0.03) (0.07) (0.69) (0.48) (1.48)
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.00 $11.07 $ 12.01 $ 13.96 $ 17.54
- -----------------------------------------------------------------------------------------------------------------------
Total Return (b) 5.45% 11.47% 14.76% 20.21% 36.47%
- -----------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000s) $5,215 $8,758 $19,703 $33,813 $40,663
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------------
Net Expenses 1.25% 1.25% 1.25% 1.25% 1.25%
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.46% 0.86% 0.71% 0.49% 0.37%
- -----------------------------------------------------------------------------------------------------------------------
Expenses, without Waiver and Reimbursement 3.69% 3.03% 3.19% 1.95% 1.84%
- -----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 86% 90% 149% 141% 156%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
47
Touchstone Variable Series Trust
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------
Touchstone High Yield Fund
PERIOD ENDED
12/31/99(A)
Per Share Operating Performance
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period $ 10.00
- -----------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.58
- -----------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments (1.39)
- -----------------------------------------------------------------------------------------------------------------------
Total from Investment Operations (0.81)
- -----------------------------------------------------------------------------------------------------------------------
Less Dividends and Distributions to Shareholders from:
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.58)
- -----------------------------------------------------------------------------------------------------------------------
Realized Capital Gains --
- -----------------------------------------------------------------------------------------------------------------------
Return of Capital --
- -----------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions (0.58)
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 8.61
- -----------------------------------------------------------------------------------------------------------------------
Total Return (b) (8.11)%
- -----------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000s) $14,916
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------------
Net Expenses 0.80%(c)
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 9.41%(c)
- -----------------------------------------------------------------------------------------------------------------------
Expenses, without Waiver and Reimbursement 1.53%(c)
- -----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 42%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Touchstone Value Plus Fund
PERIOD ENDED 12/31/98(D) 12/31/99
Per Share Operating Performance
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period $10.00 $10.18
- -----------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.03 0.03
- -----------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments 0.18 1.49
- -----------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.21 1.52
- -----------------------------------------------------------------------------------------------------------------------
Less Dividends and Distributions to Shareholders from:
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.03) (0.03)
- -----------------------------------------------------------------------------------------------------------------------
Realized Capital Gains -- (0.45)
- -----------------------------------------------------------------------------------------------------------------------
Return of Capital -- --
- -----------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions (0.03) (0.48)
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.18 $ 11.22
- -----------------------------------------------------------------------------------------------------------------------
Total Return (b) 2.11% 15.02%
- -----------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000s) $3,168 $7,171
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------------
Net Expenses 1.15%(c) 1.15%
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.65%(c) 0.26%
- -----------------------------------------------------------------------------------------------------------------------
Expenses, without Waiver and Reimbursement 7.49%(c) 2.37%
- -----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 100% 101%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
48
Touchstone Variable Series Trust
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Touchstone Growth and Income Fund
PERIOD ENDED
12/31/99(E)
Per Share Operating Performance
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period $ 10.46
- -----------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.23
- -----------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments 0.02
- -----------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.25
- -----------------------------------------------------------------------------------------------------------------------
Less Dividends and Distributions to Shareholders from:
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income --
- -----------------------------------------------------------------------------------------------------------------------
Realized Capital Gains --
- -----------------------------------------------------------------------------------------------------------------------
Return of Capital --
- -----------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions --
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.71
- -----------------------------------------------------------------------------------------------------------------------
Total Return (b) 2.39%
- -----------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000s) $64,779
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------------
Net Expenses 0.85%
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 1.49%
- -----------------------------------------------------------------------------------------------------------------------
Expenses, without Waiver and Reimbursement 1.28%
- -----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 65%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Touchstone Enhanced 30 Fund
- -----------------------------------------------------------------------------------------------------------------------
PERIOD ENDED
12/31/99(A)
- -----------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period $ 10.00
- -----------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.05
- -----------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments 0.55
Total from Investment Operations 0.60
Less Dividends and Distributions to Shareholders from:
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.05)
- -----------------------------------------------------------------------------------------------------------------------
Realized Capital Gains --
- -----------------------------------------------------------------------------------------------------------------------
Return of Capital --
- -----------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions (0.05)
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.55
- -----------------------------------------------------------------------------------------------------------------------
Total Return (b) 5.99%
- -----------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000s) $13,532
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------------
Net Expenses 0.75%(c)
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.83%(c)
- -----------------------------------------------------------------------------------------------------------------------
Expenses, without Waiver and Reimbursement 1.77%(c)
- -----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 9%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
49
Touchstone Variable Series Trust
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Touchstone Balanced Fund
- -----------------------------------------------------------------------------------------------------------------------
PERIOD ENDED 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.17 $11.48 $ 12.84 $ 13.99 $ 13.96
- -----------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.32 0.30 0.31 0.35 0.43
- -----------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments 2.15 1.60 2.05 0.40 0.90
- -----------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.47 1.90 2.36 0.75 1.33
Less: Dividends and Distributions to Shareholders from:
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.37) (0.30) (0.32) (0.37) (0.43)
- -----------------------------------------------------------------------------------------------------------------------
Realized Capital Gains (0.79) (0.24) (0.89) (0.41) (1.06)
- -----------------------------------------------------------------------------------------------------------------------
Return of Capital -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions (1.16) (0.54) (1.21) (0.78) (1.49)
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.48 $12.84 $ 13.99 $ 13.96 $ 13.80
- -----------------------------------------------------------------------------------------------------------------------
Total Return (b) 24.56% 16.78% 18.61% 5.44% 9.62%
- -----------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000s) $2,895 $6,695 $22,287 $41,250 $36,716
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------------
Net Expenses 0.90% 0.90% 0.90% 0.90% 0.90%
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 2.87% 2.76% 2.61% 2.67% 2.55%
- -----------------------------------------------------------------------------------------------------------------------
Expenses, without Waiver and Reimbursement 3.46% 2.72% 2.04% 1.37% 1.35%
- -----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 124% 75% 86% 51% 73%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Touchstone Bond Fund
- -----------------------------------------------------------------------------------------------------------------------
PERIOD ENDED
12/31/99(E)
- -----------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period $ 10.20
- -----------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.76
- -----------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments (0.89)
Total from Investment Operations (0.13)
Less Dividends and Distributions to Shareholders from:
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.09)
- -----------------------------------------------------------------------------------------------------------------------
Realized Capital Gains --
- -----------------------------------------------------------------------------------------------------------------------
Return of Capital --
- -----------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions (0.09)
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.98
- -----------------------------------------------------------------------------------------------------------------------
Total Return (b) (1.28)%
- -----------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000s) $34,700
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------------
Net Expenses 0.75%
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 6.04%
- -----------------------------------------------------------------------------------------------------------------------
Expenses, without Waiver and Reimbursement 1.07%
- -----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 45%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
50
Touchstone Variable Series Trust
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Touchstone Standby Income Fund
- -----------------------------------------------------------------------------------------------------------------------
PERIOD ENDED 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
Per Share Operating Performance
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.03 $10.02 $ 10.01 $ 10.00 $ 10.01
- -----------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.56 0.52 0.54 0.55 0.56
- -----------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments (0.01) (0.01) (0.01) 0.01 (0.09)
- -----------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.55 0.51 0.53 0.56 0.47
Less: Dividends and Distributions to Shareholders from:
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.56) (0.52) (0.54) (0.55) (0.56)
- -----------------------------------------------------------------------------------------------------------------------
Realized Capital Gains -- -- -- -- --
Return of Capital -- -- -- -- --
Total Dividends and Distributions (0.56) (0.52) (0.54) (0.55) (0.56)
Net Asset Value, End of Period $10.02 $10.01 $ 10.00 $ 10.01 $ 9.92
Total Return (b) 5.90% 5.18% 5.41% 5.71% 4.86%
- -----------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000s) $5,790 $9,105 $17,562 $26,450 $29,479
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------------
Net Expenses 0.50% 0.50% 0.50% 0.50% 0.50%
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 5.59% 5.15% 5.42% 5.47% 5.65%
Expenses, without Waiver and Reimbursement 1.73% 1.54% 1.48% 0.95% 0.87%
Portfolio Turnover 159% 143% 251% 328% 56%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Fund commenced operations on May 1, 1999.
(b) Total return would have been lower had certain expenses not been reimbursed
or waived during the period shown.
(c) Ratios are annualized.
(d) The Fund commenced operations on May 1, 1998.
(e) The Fund commenced operations on January 1, 1999.
51
Touchstone Variable Series Trust
<PAGE>
FOR MORE INFORMATION
FOR MORE INFORMATION
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 Service Center
400 Broadway
Cincinnati, Ohio 45202
800.669.2796 (Press 2)
http://www.touchstonefunds.com
Information about the Fund (including the SAI) can be reviewed and copied at the
Commission's Public Reference Room in Washington D.C.
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 202-942-8090. Reports and other information about the
Fund may be obtained on the Commission's Internet site at http://www.sec.gov.
Copies of this information may be obtained, upon payment of a duplicating fee,
by writing the Public Reference Section of the Commission, Washington, D.C.
20549-0102 or by electronic request at the following e-mail address:
[email protected].
Investment Company Act file no. 811-8416
TOUCHSTONE VARIABLE SERIES TRUST
O TOUCHSTONE SMALL CAP VALUE FUND
O TOUCHSTONE EMERGING GROWTH FUND
O TOUCHSTONE INTERNATIONAL EQUITY FUND
O TOUCHSTONE HIGH YIELD FUND
O TOUCHSTONE VALUE PLUS FUND
O TOUCHSTONE GROWTH & INCOME FUND
O TOUCHSTONE ENHANCED 30 FUND
O TOUCHSTONE BALANCED FUND
O TOUCHSTONE BOND FUND
O TOUCHSTONE STANDBY INCOME FUND
52
Touchstone Variable Series Trust
<PAGE>
TOUCHSTONE VARIABLE SERIES TRUST
Touchstone Income Opportunity Fund
Supplemental Prospectus
May 1, 2000
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>
TABLE OF CONTENTS
PAGE
Information About The Fund 3
Touchstone Income Opportunity Fund 4
Investment Strategies And Risks 7
The Fund's Management 12
Investing With Touchstone 13
Distributions And Taxes 14
Financial Highlights 15
For More Information 16
2
<PAGE>
INFORMATION ABOUT THE FUND
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. This prospectus relates solely
to the Touchstone Income Opportunity Fund.
Shares of the Fund described in this Prospectus can be purchased by insurance
company separate accounts.
You can invest indirectly in the Fund through your purchase of a variable
annuity contract or variable life policy. You should read the prospectus for the
variable annuity contract or variable life policy 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-account and expenses related to purchasing a variable annuity
contract or variable universal life policy.
3
<PAGE>
Touchstone Income Opportunity Fund
The Fund's Investment Goal
The Touchstone 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.
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% of total assets). 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. You could lose money on your investment
in the Fund and 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 debt 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 currency futures and options may reduce the potential gain from an
investment or intensify a loss
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
4
<PAGE>
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
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.
The Fund's Performance
The bar chart shown below indicates the risks of investing in the Touchstone
Income Opportunity Fund.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
TOUCHSTONE INCOME OPPORTUNITY
FUND PERFORMANCE
- --------------------------------------------------------------------------------
YEAR TOTAL RETURN
1995 23.35%
1996 27.37%
1997 12.03%
1998 -12.27%
1999 2.74%
- --------------------------------------------------------------------------------
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
- -16.67% (for the quarter ended September 30, 1998).
5
<PAGE>
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 Index, and the Wiesenberger Global Income-MF
Index. 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 Touchstone Income Opportunity Fund.
<TABLE>
<CAPTION>
For the periods ended December 31, 1999
Past 12 Five Since
Months Years Fund Started
(11/21/94)
<S> <C> <C> <C>
Touchstone Income Opportunity Fund 2.7% 9.7% 8.2%
Lehman Brothers Corporate Bond Index (2.1%) 8.1% 8.2%
Wiesenberger Corp-High Yield-MF 2.9% 8.5% 8.4%
Wiesenberger Global Income-MF (1.9%) 5.7% 5.3%
</TABLE>
6
<PAGE>
INVESTMENT STRATEGIES AND RISKS
Can the Fund Depart from its Normal Strategies?
The Fund may depart from its investment strategies by taking temporary defensive
positions in response to adverse market, economic or political conditions.
During these times, the Fund may not achieve its investment goals.
Does the Fund Engage in Active Trading of Securities?
The Touchstone Income Opportunity Fund may engage in active trading to achieve
its investment goals. Frequent trading increases transaction costs, which would
lower the Fund's performance.
Can the Fund Change its Investment Goals?
The Fund's investment goals 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.
The Fund at a Glance
The following two lists can give you a quick basic understanding of the types
of securities the Touchstone Income Opportunity Fund tends to invest in and some
of the risks associated with the Fund's investments. You should read all of the
information about the Fund and its risks before deciding to invest.
7
<PAGE>
INVESTMENT STRATEGIES AND RISKS
How Can I Tell, at a Glance,Which Types of Securities the Fund Might Invest in?
The following list shows the main types of securities in which the Touchstone
Income Opportunity Fund generally will invest. Some of the Fund's investments
are described in detail below:
FINANCIAL INSTRUMENTS
- 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 mortgage-related securities
INVESTMENT TECHNIQUES
- Invests in securities of emerging markets countries
Additional Information About Fund Investments
FOREIGN COMPANIES. A foreign company is organized under the laws of a foreign
country and:
- Has the principal trading market for its stock in a foreign country
- 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
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.
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:
- The Government National Mortgage Association (GNMA)
- The Federal National Mortgage Association (FNMA)
- The Federal Home Loan Mortgage Corporation (FHLMC)
- Commercial banks
- Savings and loan institutions
- Mortgage bankers
8
<PAGE>
- Private mortgage insurance companies
EMERGING MARKET SECURITIES. Emerging Market securities are issued by a
company that:
- 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)
- Has its principal trading market for its stock in an emerging market
country
- 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
9
<PAGE>
How Can I Tell, at a Glance, the Fund's Key Risks?
The following list shows some of the main risks to which the Touchstone Income
Opportunity Fund is subject. Each risk is described in detail below:
INTEREST RATE RISK
- Mortgage-Related Securities
CREDIT RISK
- Non-Investment Grade Securities
FOREIGN INVESTING RISK
- Emerging Market Risk
- Political Risk
Risks of Investing in the Fund
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.
- 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 the 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.
CREDIT RISK. The debt securities in the Fund's portfolio are subject to credit
risk.
10
<PAGE>
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.
- 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.
- 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.
- 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.
11
<PAGE>
THE FUNDS' MANAGEMENT
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 adviser under the
Investment Advisers Act of 1940, as amended (the Advisers Act) since 1994.
As of December 31, 1999, Touchstone Advisors had $422 million in assets under
management. Touchstone Advisors is responsible for selecting a Fund Sub-Advisor
who has 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 the Fund's Sub-Advisor,
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 the Fund's Sub-Advisor performance
through various analyses and through in-person, telephone and written
consultations with the Fund's Sub-Advisor.
Touchstone discusses its expectations for performance with the Fund Sub-Advisor.
Touchstone provides written evaluations and recommendations to the Board of
Trustees, including whether or not the Fund's Sub-Advisor 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-Advisor, custodian,
transfer agent and administrator.
The fee paid to Touchstone by the Income Opportunity Fund is shown below:
Touchstone Income Opportunity Fund 0.65% (average daily net assets)
Fund Sub-Advisor
The Fund Sub-Advisor makes the day-to-day decisions regarding buying and selling
specific securities for the Fund. The Fund Sub-Advisor manages the investments
held by the Fund according to the Fund's investment goals and strategies.
Fund Sub-Advisor to the Touchstone Income Opportunity Fund
Alliance Capital Management L.P. (Alliance)
1345 Avenue of the Americas, NewYork, NY 10105
Alliance has been registered as an investment advisor under the Advisers Act
since 1971. Alliance provides investment advisory services to individual and
institutional clients. As of December 31, 1999, Alliance had assets under
management of over $368 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.
12
<PAGE>
INVESTING WITH TOUCHSTONE
Purchasing Shares
You cannot buy shares of the Fund directly. You can invest indirectly in the
Fund through your purchase of a variable annuity contract or variable univeral
life policy. You should read this prospectus and the prospectus of the variable
annuity contract or variable univeral life policy carefully before you choose
your investment options.
The Touchstone variable annuity contracts are issued by separate accounts of
Western-Southern Life Assurance Company. The variable universal life insurance
policies are issued by a separate account of Columbus Life Insurance Company.
The separate accounts buy Fund shares based on the instructions that they
receive from the contract owners.
o Investor Alert: If incomplete information is forwarded, Touchstone
reserves the right to 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.
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.
13
<PAGE>
DISTRIBUTIONS AND TAXES
Dividends and Other Distributions
The Fund intends to distribute to its shareholders substantially all of its
income and capital gains. The Fund will declare and pay dividends annually.
Distributions of any net realized long-term and short-term capital gains earned
by the Fund will be made at least annually.
Tax Information
Because you do not own shares of the Fund directly, your tax situation is not
likely to be affected by the Fund's distributions. The separate accounts which
issue your variable annuity contract, or variable universal life policy as the
owner of the Fund's shares, may be affected.
The 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). The Fund's distributions may be subject to federal income tax
whether distributions are reinvested in Fund shares or received as cash.
*** You should consult with your tax advisor to address your own tax situation.
14
<PAGE>
FINANCIAL HIGHLIGHTS
TOUCHSTONE VARIABLE SERIES TRUST
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years or, if shorter, the period of the
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 for the year ended December
31, 1999 has been audited by Ernst & Young LLP, whose report, along with the
Fund's financial statements, are incorporated by reference in the Statement of
Additional Information, which is available upon request. Financial Highlights
for the years prior to 1999 were audited by other auditors.
<TABLE>
<CAPTION>
Year Ended 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.42 $10.09 $11.21 $ 11.02 $8.69
--------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 1.22 1.17 1.20 1.02 1.11
--------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments 0.79 1.45 0.11 (2.30) (0.88)
--------------------------------------------------------------
Total from Investment Operations 2.01 2.62 1.31 (1.28) 0.23
--------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net Investment Income (1.34) (1.17) (1.19) (1.02) (1.22)
--------------------------------------------------------------
Realized Capital Gains -- (0.33) (0.31) -- ----
--------------------------------------------------------------
Return of Capital -- -- -- (0.03) ----
--------------------------------------------------------------
Total Dividends and Distributions (1.34) (1.50) (1.50) (1.05) (1.22)
--------------------------------------------------------------
Net Asset Value, End of Period $10.09 $11.21 $ 11.02 $ 8.69 $7.70
--------------------------------------------------------------
Total Return (a) 23.35% 27.37% 12.03% (12.27)% 2.74%
--------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets at End of Period (000s) $2,602 $8,268 $26,879 $34,494 $25,488
--------------------------------------------------------------
Ratios to Average Net Assets:
Net Expenses 0.85% 0.85% 0.85% 0.85% 0.85%
--------------------------------------------------------------
Net Investment Income (Loss) 12.81% 11.85% 10.93% 10.40% 10.98%
--------------------------------------------------------------
Expenses, without Waiver & Reimburs. 3.54% 2.85% 1.72% 1.25% 1.29%
--------------------------------------------------------------
Portfolio Turnover 104% 213% 189% 175% 176%
--------------------------------------------------------------
</TABLE>
(a) Total Returns would have been lower had certain expenses not been
reimbursed or waived during the periods shown.
15
<PAGE>
FOR MORE INFORMATION
For investors who want more information about the Fund, the following documents
are available free upon request:
Statement of Additional Information
(SAI): The SAI provides more detailed information about the Fund and is legally
a part of this prospectus.
Annual/Semi-Annual Reports: The Fund's annual and semi-annual reports provide
additional information about the Fund's 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 Fund by contacting your financial advisor, or the
Fund at:
Touchstone Variable Annuity
Service Center
400 Broadway
Cincinnati, Ohio 45202
800.669.2796 (Press 2)
http://www.touchstonefunds.com
Information about the Fund (including the SAI) can be reviewed and copied at the
Commission's Public Reference Room in Washington D.C. Information on the
operation of the public reference room may be obtained by calling the Commission
at 202-942-8090. Reports and other information about the Fund may be obtained on
the Commission's Internet site at http://www.sec.gov.
Copies of this information may be obtained, upon payment of a duplicating fee,
by writing the Public Reference Section of the Commission, Washington, D.C.
20549-0102 or by electronic request at the following e-mail address:
[email protected].
16
<PAGE>
TOUCHSTONE VARIABLE SERIES TRUST
Touchstone Small Cap Value Fund
Touchstone Emerging Growth Fund
Touchstone International Equity Fund
Touchstone Income Opportunity Fund
Touchstone High Yield Fund
Touchstone Value Plus Fund
Touchstone Growth & Income Fund
Touchstone Enhanced 30 Fund
Touchstone Balanced Fund
Touchstone Bond Fund
Touchstone Standby Income Fund
Statement of Additional Information
May 1, 2000
This Statement of Additional Information is not a Prospectus,
but it relates to the Prospectus of Touchstone Variable Series
Trust and the Prospectus of the Touchstone Income Opportunity
Fund, (the "Prospectus") dated May 1, 2000.
Financial statements are incorporated by reference into this
Statement of Additional Information from the Funds' most recent
annual report.
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
Mail Station 74
400 Broadway
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. 20549-0102.
Telephone: 202-942-8090.
Free from the Commission's Internet website at
http://www.sec.gov.
<PAGE>
TABLE OF CONTENTS
PAGE
The Trust and the Funds........................................................3
Description of the Funds and Their Investments and Risks.......................4
Fund Policies.................................................................26
Code of Ethics................................................................28
Management of the Trust.......................................................29
Investment Advisory and Other Services........................................31
Brokerage Allocation and Other Practices......................................35
Capital Stock and Other Securities............................................37
Purchase, Redemption and Pricing of Shares....................................38
Taxation of the Funds.........................................................39
Performance Information.......................................................41
Financial Statements..........................................................44
Appendix .....................................................................45
2
<PAGE>
THE TRUST AND THE FUNDS
Touchstone Variable Series Trust (the "Trust") is composed of eleven
funds: Small Cap Value Fund, Emerging Growth Fund, International Equity Fund,
Income Opportunity Fund, High Yield Fund, Value Plus Fund, Growth & Income Fund,
Enhanced 30 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 existing 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 advisers
(collectively, the "Fund Sub-Advisors"). Investors Bank & Trust Company
("Investors Bank" or the "Administrator") serves as administrator, custodian and
fund accounting agent to each Fund.
The Prospectus, dated May 1, 2000, 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>
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 Corp. ("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.
MEDIUM AND LOWER RATED AND UNRATED SECURITIES
4
<PAGE>
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>
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>
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>
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.
The following Funds may invest in Emerging Market Securities:
Emerging Growth Fund - up to 10% of total assets,
International Equity Fund - up to 40% of total assets,
Income Opportunity Fund - up to 65% of total assets,
Growth & Income Fund - up to 5% of total assets, and
Balanced Fund - up to 15% of total assets.
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.
8
<PAGE>
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.
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.
9
<PAGE>
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 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
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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 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-
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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.
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
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the same foreign currency and in the same principal amount as the call written
where the exercise price of the call held (a) is equal to or less than the
exercise price of the call written or (b) is greater than the exercise price of
the call written if the difference is maintained by the 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.
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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 Commodity
Futures Trading Commission ("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.
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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
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, 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
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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.
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
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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.
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
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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 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.
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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 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
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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.
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
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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
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.
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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.
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.
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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
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 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
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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 "Fund Policies" below.
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.
CONVERTIBLE SECURITIES
Convertible securities may offer higher income than the common stocks
into which they are convertible and include fixed-income or zero coupon debt
securities, which may be converted or exchanged at a stated or determinable
exchange ratio into underlying shares of common stock. Prior to their
conversion, convertible securities may have characteristics similar to both
non-convertible debt securities and equity securities.
While convertible securities generally offer lower yields than
non-convertible debt securities of similar quality, their prices may reflect
changes in the value of the underlying common stock. Convertible securities
entail less credit risk than the issuer's common stock.
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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 up to 5% of its total assets 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.
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 Prospectuses is set
forth in the Appendix.
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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
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
26
<PAGE>
(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 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 in accordance with guidelines approved 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 ("NRSRO'S") and the Fund's Board of Trustees
have determined the commercial paper to be liquid in accordance with the
guidelines
27
<PAGE>
approved by the Fund's Board of Trustees; or (ii) if only one NRSRO rates the
security, the security is rated in one of the two highest categories by that
NRSRO and the Fund Advisor has determined that the commercial paper is
equivalent quality and is liquid in accordance with guidelines approved by the
Fund's Board of Trustees;
(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 in accordance with guidelines
approved 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 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.
CODE OF ETHICS
The Trust, the Advisor and the Fund Sub-Advisors have each adopted a Code of
Ethics under Rule 17j-1 of the 1940 Act governing the personal investment
activity by investment company personnel, including portfolio managers, and
other persons affiliated with the Funds who may be in a position to obtain
information regarding investment recommendations or purchases and sales of
securities for a Fund. These Codes permit persons covered by the Codes to invest
in securities for their own accounts, including securities that may be purchased
or held by a Fund, subject to restrictions on investment practices that may
conflict with the interests of the Funds.
28
<PAGE>
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.
TRUSTEES OF THE 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). 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. 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. His address is 105 East Fourth Street,
Cincinnati, OH 45202.
ROBERT E. STAUTBERG (Born: 9/6/34) -- Trustee; Retired Partner and
Director, KPMG LLP, Chairman of the Board of Trustees, Good Samaritan Hospital.
His address is 4815 Drake Road, Cincinnati, OH 45243.
WILLIAM COLEMAN (Born: 4/6/29) -- Trustee; Retired; Director of
LCA-Vision; Trustee, the Procter and Gamble Profit Sharing Trust and Employee
Stock Ownership Plan. His address is 2 Noel Lane Cincinnati, OH 45243.
NELSON SCHWAB, JR. (Born: 7/19/18) -- Trustee; Senior Counsel, Graydon,
Head & Ritchey (since 1947), Director: The Ralph J. Stolle Company, Rotex, Inc.
and Security Rug Cleaning Company. His address is 511 Walnut Street, P.O. Box
6464, Cincinnati, OH 45201.
OFFICERS OF THE TRUST
Unless otherwise specified, each officer listed below holds the same
position with the Trust and each Fund.
JILL T. MCGRUDER (Born: 7/9/55) -- President and Chief Executive
Officer; Director, President and Chief Executive Officer, Touchstone Advisors,
Inc. and Touchstone Securities, Inc. (since February, 1999); Senior Vice
President, Western-Southern Life Insurance Company (since December, 1996);
National Marketing Director, Metropolitan Life Insurance Co. (February, 1996 -
December, 1996); Executive Vice President, Touchstone Advisors, Inc. and
Touchstone Securities, Inc. (1991 - 1996).
JAMES J. VANCE (Born: 7/12/61) -- Treasurer; Treasurer,
Western-Southern Life Insurance Company (since January, 1994). His address is
400 Broadway, Cincinnati, OH 45202.
EDWARD S. HEENAN (Born 12/18/43) - Controller; Vice President and
Controller, Touchstone Advisors, Inc. (since December, 1993); Director,
Controller, Touchstone Securities, Inc. (since October, 1991);
29
<PAGE>
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).
CYNTHIA J. SURPRISE (Born: 7/8/46) - Secretary; Director and Counsel,
Mutual Fund Administration, Investors Bank & Trust Company (since October 1999);
Vice President, State Street Bank (1994-1999); Staff Counsel, Mutual Fund
Service Company (prior to 1994).
TIMOTHY F. OSBORNE (Born: 12/3/66) - Assistant Treasurer; Director,
Mutual Fund Administration, Investors Bank & Trust Company (since May, 1995);
Account Supervisor, Mutual Fund Administration, Chase Global Funds Services
Company (prior to May, 1995).
Ms. Surprise and Mr. Osborne also hold similar positions for 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 pays 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 plus $1,000 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, 1999 by the Trust and the Touchstone Series Trust
(together, the "Fund Complex").
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
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. $ 6,216 $ 9,000
Trustee
Phillip R. Cox $ 7,590 $11,000
Trustee
Robert E. Stautberg $ 7,590 $11,000
Trustee
David Pollak $ 1,363 $ 2,028
Trustee
William O. Coleman $ 3,768 $ 5,442
Trustee
Nelson Schwab, Jr. $ 3,768 $ 5,442
Trustee
</TABLE>
As of April 2, 2000, 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).
30
<PAGE>
CONTROL PERSONS
As of April 3, 2000, (i) Western-Southern Life Assurance Company, 400
Broadway, Cincinnati, Ohio 45202, an Ohio corporation ("WSLAC"), was the record
owner of 99.98% of the outstanding shares of the Emerging Growth Fund, 99.97% of
the International Equity Fund, 99.99% of the Balanced Fund, 99.99% of the Income
Opportunity Fund and 99.97% of the Standby Income Fund; (ii) WSLAC was the
record owner of 86.90% of the outstanding shares of the Value Plus Fund, 64.747%
of the outstanding shares of the Growth & Income Fund and 57.03% of the
outstanding shares of the Bond Fund, and (iii) Western and Southern Life
Insurance Company, 400 Broadway, Cincinnati, Ohio 45202, an Ohio corporation
("WSLIC"), was record owner of 13.05% of the outstanding shares of the Value
Plus Fund, 35.25% of the outstanding shares of the Growth & Income Fund and
42.97% of the outstanding shares of the Bond 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.
31
<PAGE>
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.
<TABLE>
<CAPTION>
For the For the For the
Advisory Fee Year Year Year
Rate Ended Ended Ended
Advisory Fees 12/31/99 12/31/98 12/31/97
---------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
Small Cap Value Fund 0.80% $56,215(a) N/A N/A
Emerging Growth Fund 0.80% $249,804 $204,486 $98,956
International Equity Fund 0.95% $326,334 $270,100 $135,300
Income Opportunity Fund 0.65% $200,285 $217,105 $108,452
High Yield Fund 0.60% $59,450(a) N/A N/A
Value Plus Fund 0.75% $53,453 $9,223(c) N/A
Growth & Income Fund 0.80% $593,584(b) N/A N/A
Enhanced 30 Fund 0.65% $49,247(a) N/A N/A
Balanced Fund 0.80% $323,935 $267,938 $103,999
Bond Fund 0.55% $209,984(b) N/A N/A
Standby Income Fund 0.25% $70,038 $56,841 $34,222
</TABLE>
(a) For the period 5/1/99 (inception) to 12/31/99
(b) The Fund commenced operations on 1/1/99
(c) For the period 5/1/98 (inception) to 12/31/98
The Trust, on behalf of each Fund, has entered into a Sponsor Agreement
with the Advisor under which the Advisor provides oversight of the various
service providers to the Trust. Pursuant to the Sponsor Agreement, the Advisor
is entitled to a fee from each Fund equal on an annual basis to 0.20% of the
average daily net assets of that Fund. The Advisor has agreed to waive its fees
under the Sponsor Agreement or reimburse certain other 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: Small Cap Value Fund - 1.00%,
Emerging Growth Fund - 1.15%; International Equity Fund - 1.25%; Income
Opportunity Fund - 0.85%; High Yield Fund - 0.80%; Value Plus Fund - 1.15%;
Growth & Income Fund - 0.85%; Enhanced 30 Fund - 0.75%; 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. The Advisor waived all fees under
the Sponsor Agreement through December 31, 1999. In addition to waiving its fees
under the Sponsor Agreement, for the periods indicated, the Advisor reimbursed
each Fund the following amounts:
32
<PAGE>
<TABLE>
<CAPTION>
For the For the For the
Year Year Ended Year Ended
Fees Reimbursed 12/31/99 12/31/98 12/31/97
----------------- ------------- -------------
<S> <C> <C> <C>
Small Cap Value Fund $57,768(a) N/A N/A
Emerging Growth Fund $18,047 $35,626 $102,973
International Equity Fund $133,659 $142,709 $247,296
Income Opportunity Fund $73,824 $67,018 $110,959
High Yield Fund $52,269(a) N/A N/A
Value Plus Fund $73,108 $75,538(c) N/A
Growth & Income Fund $169,442(b) N/A N/A
Enhanced 30 Fund $61,666(a) N/A N/A
Balanced Fund $100,004 $92,075 $125,649
Bond Fund $46,273(b) N/A N/A
Standby Income Fund $48,355 $56,515 $107,078
</TABLE>
(a) For the period 5/1/99 (inception) to 12/31/99
(b) The Fund commenced operations on 1/1/99
(c) For the period 5/1/98 (inception) to 12/31/98
FUND SUB-ADVISORS
The Advisor has 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:
<TABLE>
<CAPTION>
EMERGING GROWTH FUND
- ----------------------------------------------------------------------------------------------
<S> <C>
David L. Babson & Company, Inc. 0.50%
Westfield Capital Management Company, Inc. 0.45% on the first $10 million
0.40% on the next $40 million
0.35% thereafter
- ----------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND
- ----------------------------------------------------------------------------------------------
Credit Suisse Asset Management, LLC 0.85% on the first $30 million
0.80% on the next $20 million
0.70% on the next $20 million
0.60% thereafter
- ----------------------------------------------------------------------------------------------
33
<PAGE>
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
- ----------------------------------------------------------------------------------------------
SMALL CAP VALUE FUND
- ----------------------------------------------------------------------------------------------
Todd Investment Advisors, Inc. 0.50%
- ----------------------------------------------------------------------------------------------
HIGH YIELD FUND
- ----------------------------------------------------------------------------------------------
Fort Washington Investment Advisors, Inc. 0.40%
- ----------------------------------------------------------------------------------------------
VALUE PLUS FUND
- ----------------------------------------------------------------------------------------------
Fort Washington Investment Advisors, Inc. 0.45%
- ----------------------------------------------------------------------------------------------
GROWTH & INCOME FUND
- ----------------------------------------------------------------------------------------------
Scudder Kemper Investments, Inc. 0.50% on the first $150 million
0.45% thereafter
- ----------------------------------------------------------------------------------------------
ENHANCED 30 FUND
- ----------------------------------------------------------------------------------------------
Todd Investment Advisors, Inc. 0.40%
- ----------------------------------------------------------------------------------------------
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 Advisors, Inc. 0.30%
- ----------------------------------------------------------------------------------------------
STANDBY INCOME FUND
- ----------------------------------------------------------------------------------------------
Fort Washington Investment Advisors, Inc. 0.15%
- ----------------------------------------------------------------------------------------------
</TABLE>
*Includes assets of the Touchstone Balanced Fund of the Touchstone
Variable Series Trust and the Touchstone Balanced Fund of the Touchstone Series
Trust (for which OpCap Advisors also acts in a subadvisory capacity).
ADMINISTRATOR, FUND ACCOUNTING AGENT, CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company ("Investors Bank"), 200 Clarendon
Street, Boston, Massachusetts 02116, serves as administrator, fund accounting
agent, custodian and transfer agent for the Trust. Investors Bank was organized
in 1969 as a Massachusetts-chartered trust company and is a wholly-owned
subsidiary of Investors Financial Services Corp., a publicly-held corporation
and holding company registered under the Bank Holding Company Act of 1956.
As administrator and fund accounting agent, Investors Bank provides, on
behalf of the Trust and its 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.
34
<PAGE>
The Funds incurred the following administration and fund accounting
fees for the periods indicated:
<TABLE>
<CAPTION>
For the For the For the
Year Year Year
Ended Ended Ended
Administration Fees 12/31/99* 12/31/98* 12/31/97
-------------- ------------- --------------
<S> <C> <C> <C>
Small Cap Value Fund $57,676(a) N/A N/A
Emerging Growth Fund $90,100 $ 93,751 $64,999
International Equity Fund $193,206 $192,611 $80,001
Income Opportunity Fund $92,327 $93,667 $64,999
High Yield Fund $55,339(a) N/A N/A
Value Plus Fund $86,513 $64,925(c) N/A
Growth & Income Fund $126,012(b) N/A N/A
Enhanced 30 Fund $54,990(a) N/A N/A
Balanced Fund $89,865 $94,507 $64,999
Bond Fund $78,266(b) N/A N/A
Standby Income Fund $81,490 $89,474 $64,999
</TABLE>
* Amounts include custody fees
(a) For the period 5/1/99 (inception) to 12/31/99
(b) The Fund commenced operations on 1/1/99
(c) For the period 5/1/98 (inception) to 12/31/98
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 AUDITORS
Frost & Jacobs LLP, 2500 PNC Center, 201 East Fifth Street, Cincinnati,
Ohio 45202-5715, serves as counsel to the Funds. Ernst & Young LLP, 1300
Chiquita Center, 250 East Fifth Street, Cincinnati, OH 45202, serves as
independent auditors 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
35
<PAGE>
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 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
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<PAGE>
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>
For the For the For the
Year Year Year
Ended Ended Ended
Commissions 12/31/99 12/31/98 12/31/97
-------------- -------------- ---------------
<S> <C> <C> <C>
Small Cap Value Fund $53,699(a) N/A N/A
Emerging Growth Fund $65,019 $50,890 $31,847
International Equity Fund $214,599 $187,645 $108,088
Income Opportunity Fund - - -
High Yield Fund - (a) N/A N/A
Value Plus Fund $20,538 $8,777(c) N/A
Growth & Income Fund $100,021(b) N/A N/A
Enhanced 30 Fund $13,850(a) N/A N/A
Balanced Fund $74,011 $49,608 $34,791
Bond Fund $500(b) N/A N/A
Standby Income Fund - - -
</TABLE>
(a) For the period 5/1/99 (inception) to 12/31/99
(b) The Fund commenced operations on 1/1/99
(c) For the period 5/1/98 (inception) to 12/31/98
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.
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PURCHASE, REDEMPTION AND PRICING OF SHARES
OFFERING PRICE
Shares of the Funds are offered at NAV (as defined in the Prospectus).
VALUATION OF SECURITIES
The value of each security for which readily available market
quotations exists is based on a decision as to the broadest and most
representative market for such security. The value of such security is based
either on the last sale price on a national securities exchange, or, in the
absence of recorded sales, at the readily available closing bid price on such
exchanges, or at the quoted bid price in the over-the-counter market. Securities
listed on a foreign exchange are valued at the last quoted sale price available
before the time net assets are valued. Unlisted securities are valued at the
average of the quoted bid and asked prices in the over-the-counter market. Debt
securities are valued by a pricing service which determines valuations based
upon market transactions for normal, institutional-size trading units of similar
securities. Securities or other assets for which market quotations are not
readily available are valued at fair value in accordance with procedures
established by the Board. Such procedures include the use of independent pricing
services, which use prices based upon yields or prices of securities of
comparable quality, coupon, maturity and type; indications as to values from
dealers; and general market conditions. All portfolio securities with a
remaining maturity of less than 60 days are valued at amortized cost, which
approximates market.
The accounting records of the 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 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
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<PAGE>
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 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
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<PAGE>
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:
o qualification as a regulated investment company;
o satisfaction of certain distribution requirements; and
o 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 elect to treat foreign income taxes as income taxes paid by its
shareholders for U.S. federal income tax purposes in most of its taxable years
(but not necessarily all).
o 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.
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<PAGE>
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.
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
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<PAGE>
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, 1999, the Fund's yields were as follows: Income Opportunity Fund
11.84%, Balanced Fund 3.15%, Standby Income Fund 5.82%.
The Standby Income Fund's 7-day yield for the period ended December 31,
1999 was 6.12%.
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 Annual Since Inception
Total Return One Year Five Years Inception Date
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Small Cap Value Fund N/A N/A 17.9% 5/1/99
Emerging Growth Fund 46.8% 21.9% 21.6% 11/21/94
International Equity Fund 36.5% 17.2% 15.7% 11/21/94
Income Opportunity Fund 2.7% 9.7% 8.2% 11/21/94
High Yield Fund N/A N/A -8.1% 5/1/99
Value Plus Fund 15.0% N/A 10.1% 5/1/98
Growth & Income Fund 2.4% N/A 2.4% 1/1/99
Enhanced 30 Fund N/A N/A 6.0% 5/1/99
Balanced Fund 9.6% 14.8% 14.8% 11/21/94
Bond Fund -1.3% N/A -1.3% 1/1/99
Standby Income Fund 4.9% 5.4% 5.4% 11/21/94
</TABLE>
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.
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<PAGE>
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.
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<PAGE>
FINANCIAL STATEMENTS
The following financial statements for the Trust at and for the fiscal
periods indicated are incorporated herein by reference from their current annual
report 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.
TOUCHSTONE VARIABLE SERIES TRUST Schedule of Investments, December 31, 1999
Statement of Assets and Liabilities, December 31, 1999
Statement of Operations, for the year ended December 31, 1999
Statement of Changes in Net Assets for the years ended December 31,
1999 and December 31, 1998
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
44
<PAGE>
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:
1. An application for rating was not received or accepted.
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<PAGE>
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 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
46
<PAGE>
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.
47
<PAGE>
TOUCHSTONE VARIABLE SERIES TRUST
o TOUCHSTONE EMERGING GROWTH FUND
o TOUCHSTONE INTERNATIONAL EQUITY FUND
o TOUCHSTONE INCOME OPPORTUNITY FUND
o TOUCHSTONE SMALL CAP VALUE FUND
o TOUCHSTONE HIGH YIELD FUND
o TOUCHSTONE VALUE PLUS FUND
o TOUCHSTONE GROWTH & INCOME FUND
o TOUCHSTONE ENHANCED 30 FUND
INVESTMENT ADVISOR o TOUCHSTONE BALANCED FUND
o TOUCHSTONE BOND FUND
Touchstone Advisors, Inc. o 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 MAY 1, 2000
INDEPENDENT AUDITORS
Ernst & Young LLP
1300 Chiquita Center
250 East Fifth Street
Cincinnati, Ohio 45202
LEGAL COUNSEL
Frost & Jacobs LLP
2500 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
<PAGE>
LETTER FROM THE PRESIDENT
Dear Fellow Touchstone Contract Owner:
Thank you for owning a Touchstone variable annuity. We are pleased to provide
you with this update of the investment activity and performance of the
Touchstone Variable Series Trust for the year ended December 31, 1999.
LOOKING BACK
Shrugging off three interest rate increases implemented by the Federal Reserve
Board, all major U.S. equity markets indices finished 1999 in record territory.
However, drilling down into the indices reveals widely mixed results. Among
large companies, robust advances in a relatively narrow band of
technology-related sectors overwhelmed middling returns elsewhere. Mid cap and
small cap issues led by technology shares rebounded strongly from the previous
year. The leading international equity market index, the MSCI EAFE Index,
performed better than the S&P 500 Index for the first time in five years. Fixed
income markets meanwhile experienced flat or falling returns. The U.S. fixed
income market, in particular, endured one of the worst years in its history.
Movements in the various financial markets came against an extremely positive
domestic backdrop of continued high employment, modest inflation, fiscal and
monetary restraint and enhanced productivity boosted by advancing technology. As
the current economic expansion neared record length, real economic growth
remained strong and corporate earnings gains impressive.
THE VALUE OF DIVERSIFICATION
Performance disparities among asset classes, industry sectors and types of
stocks are hardly new. Nonetheless, they seldom have been as pronounced as in
recent years. Stocks have outperformed bonds dramatically. Technology stocks
have outdistanced the rest of the market - even those of new companies with
uncertain prospects and no earnings. Large stocks have outperformed small stocks
and growth stocks have outperformed value stocks over the past several years.
Despite this recent experience, historical trends show that performance of
investment sectors and styles runs in cycles. Traditionally, diversification
among asset classes possessing complementary returns has been shown to reduce a
portfolio's overall volatility. If market returns eventually revert to their
mean, as efficient market theory implies they will, then asset classes and
styles that have lagged may be poised to rebound. Now may be an opportune time
to review your asset allocation mix in light of the benefits of diversification.
As you pursue your wealth-building goals in today's investment world,
professional advice is more important than ever. The registered representative
who assisted you in the purchase of your Touchstone variable annuity can help
you assess your situation and options.
LOOKING AHEAD
Consumer confidence is high entering the new year as the U.S. economy continues
to demonstrate vigor. The impact of influences such as widely anticipated
interest rate hikes, rising energy prices and a widening U.S. trade deficit
remains to be determined in the months ahead. Other factors at work will include
a presidential election campaign domestically and generally improving economic
conditions abroad.
Regardless of what the future holds, companies that can perform on their own
merits will most likely be the ones offering the best opportunities. As they
assess the forces that drive the financial markets, our managers will remain
steadfastly focused on identifying the opportunities and the companies capable
of succeeding in any economic environment. Their overriding goal, as well as
ours, is to deliver superior long-term performance across all of our investment
options.
<PAGE>
2
Thank you again for the opportunity to work on your behalf. We appreciate your
continued confidence in Touchstone and, as always, pledge every effort to
continue to merit your trust.
Sincerely,
/s/ Jill T. McGruder
Jill T. McGruder
President and Chief Executive Officer
Touchstone Family of Funds and Variable Annuities
P.S. Please check out our new look and enhanced presence on the web at
www.touchstonefunds.com. We value your comments.
- ------------------------
Touchstone Variable Annuities are underwritten by Western-Southern Life
Assurance Company, Cincinnati, Ohio, and distributed by Touchstone Securities,
Inc.* For a prospectus containing more information, including all fees and
expenses, call 800.669.2796. Please read the prospectus carefully before
investing or sending money.
*Member NASD/SIPC
<PAGE>
3
TOUCHSTONE SMALL CAP VALUE FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
Touchstone Small Cap Value Fund
Since inception on May 1, 1999, the Touchstone Small Cap Value Fund has
outperformed its benchmark index, the small cap-oriented Russell 2000. Through
December 31, 1999, the Fund increased 17.9% while the Russell 2000 increased
17.4%.
Making the greatest positive impact on the Fund's performance was portfolio
holdings in the market-leading technology sector, where many stocks became
bargain-priced in the dramatic decline of 1998 and early 1999. According to Todd
Investment Advisors, the manager of the Touchstone Small Cap Value Fund, the
technology sector's overweighted position within the portfolio reflects both the
growing role that technology plays in the economy and the attractive values in
the group. Strong performance by health care and energy stocks also contributed
to the Fund's gains.
GROWTH OF A $10,000 INVESTMENT
Average Annual Total Return
One Year Ended 12/31/99 N/A
Since Inception 05/01/99 N/A
Cumulative Total Return
Since Inception 05/01/99 17.9%
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Touchstone Small Cap Russell 2000 Russell 2000 Wilshire Small Cap Value
Value Fund (Major Index) Value (Minor Index) (Minor Index 2)
5/99 10000 10000 10000 10000
6/99 10710 10605 10680 10456
9/99 10090 9934 9844 9494
12/99 11790 11735 9995 9650
</TABLE>
Past performance is not indicative of future performance.
Performance information 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 total return figures for all periods.
<PAGE>
4
TOUCHSTONE SMALL CAP VALUE FUND
SCHEDULE OF INVESTMENTS
December 31, 1999
Value
Shares (Note 1)
COMMON STOCKS - 99.1%
AIRLINES - 1.6%
17,000 Frontier Airlines* $ 193,375
- -------------------------------------------------------
APPAREL RETAILERS - 7.2%
13,400 bebe stores* 355,100
32,000 Children's Place Retail
Stores (The)* 511,991
- -------------------------------------------------------
867,091
- -------------------------------------------------------
BANKING - 0.9%
3,500 Eldorado Bancshares* 37,625
1,600 Greater Bay Bancorp 68,200
- -------------------------------------------------------
105,825
- -------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 4.6%
10,000 Hain Food Group (The)* 223,750
32,000 Topps Company (The)* 330,000
- -------------------------------------------------------
553,750
- -------------------------------------------------------
BUILDING MATERIALS - 1.0%
3,000 Centex Construction Products 117,000
- -------------------------------------------------------
COMMERCIAL SERVICES - 6.6%
4,600 Advance Paradigm* 99,188
2,900 ICT Group* 35,525
10,200 StarTek* 369,750
10,000 Workflow Management* 286,250
- -------------------------------------------------------
790,713
- -------------------------------------------------------
COMMUNICATIONS - 13.6%
13,500 Comtech Telecommunications* 199,125
26,000 Corsair Communications* 211,250
10,600 Gilat Communications* 255,063
20,000 InterVoice* 465,000
7,900 PairGain Technologies* 111,588
8,500 Performance Technologies* 147,688
22,000 Premiere Technologies* 154,000
3,200 Tollgrade Communications* 110,400
- -------------------------------------------------------
1,654,114
- -------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING - 11.5%
27,000 Applix* 487,688
6,000 CIBER* 165,000
2,700 CSG Systems International* 107,663
9,500 InfoCure* 296,281
19,200 Take-Two Interactive Software* 248,400
3,900 THQ* 90,431
- -------------------------------------------------------
1,395,463
- -------------------------------------------------------
COMPUTERS & INFORMATION - 8.5%
3,000 Cybex Computer Products* 122,250
6,600 Datalink* 127,050
30,000 Dot Hill Systems* 148,125
5,350 Equinox Systems* 48,150
3,700 Miami Computer Supply* 136,900
4,000 Percon* 59,000
4,600 ScanSource* 186,588
13,000 Troy Group* 195,000
- -------------------------------------------------------
1,023,063
- -------------------------------------------------------
Value
Shares (Note 1)
ELECTRONICS - 5.2%
5,500 Actel* $ 132,000
5,000 American Xtal Technology* 87,188
6,500 Catapult Communications* 64,594
7,500 Genesis Microchip* 158,438
9,000 Hauppauge Digital* 181,688
- -------------------------------------------------------
623,908
- -------------------------------------------------------
ENTERTAINMENT & LEISURE - 0.6%
6,000 Equity Marketing* 77,250
- -------------------------------------------------------
FINANCIAL SERVICES - 3.7%
6,500 Actrade International* 97,094
5,000 Knight/Trimark Group, Class A* 229,688
4,300 Waddell & Reed Financial, Class A 116,638
- -------------------------------------------------------
443,420
- -------------------------------------------------------
HEAVY MACHINERY - 0.9%
4,000 Woodward Governor 109,500
- -------------------------------------------------------
INDUSTRIAL - DIVERSIFIED - 1.9%
5,000 Zomax* 225,938
- -------------------------------------------------------
INSURANCE - 1.2%
27,000 GAINSCO 145,125
- -------------------------------------------------------
MEDICAL SUPPLIES - 8.6%
10,000 Excel Technology* 179,375
10,800 II-VI* 217,350
30,000 LaserSight* 300,000
15,000 PolyMedica* 346,875
- -------------------------------------------------------
1,043,600
- -------------------------------------------------------
METALS - 1.4%
8,000 Mobile Mini 169,000
- -------------------------------------------------------
OIL & GAS - 8.3%
9,000 Marine Drilling Companies* 201,938
12,100 Pride International* 176,963
15,000 Swift Energy* 172,500
8,400 Tidewater 302,400
5,000 WICOR 145,938
- -------------------------------------------------------
999,739
- -------------------------------------------------------
PHARMACEUTICALS - 5.6%
12,500 Guilford Pharmaceuticals* 212,500
3,750 Jones Pharma 162,891
4,300 Protein Design Labs* 301,000
- -------------------------------------------------------
676,391
- -------------------------------------------------------
RETAILERS - 4.1%
11,500 Electronics Boutique Holdings* 207,000
7,000 Funco* 78,313
6,000 PC Connection* 207,000
- -------------------------------------------------------
492,313
- -------------------------------------------------------
TELEPHONE SYSTEMS - 2.1%
7,700 Hector Communications* 107,800
10,000 Hickory Tech 148,125
- -------------------------------------------------------
255,925
- -------------------------------------------------------
TOTAL COMMON STOCKS
(COST $10,159,387) $11,962,503
- -------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
5
TOUCHSTONE SMALL CAP VALUE FUND
Schedule of Investments continued
Value
(Note 1)
TOTAL INVESTMENTS AT VALUE - 99.1%
(COST $10,159,387) (A) $11,962,503
CASH AND OTHER ASSETS
NET OF LIABILITIES - 0.9% 107,426
- -------------------------------------------------------
NET ASSETS - 100.0% $12,069,929
- -------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is
$10,159,387 resulting in gross unrealized appreciation and depreciation of
$2,492,369 and $689,253, respectively, and net unrealized appreciation of
$1,803,116.
The accompanying notes are an integral part of the financial statements.
<PAGE>
6
TOUCHSTONE EMERGING GROWTH FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
Touchstone Emerging Growth Fund
During the annual period ended December 31, 1999, several factors affected the
Touchstone Emerging Growth Fund. After experiencing a difficult period during
the third quarter of 1999, the equity markets surged in the fourth quarter to
finish the year very strongly. In fact, small cap stocks led the surge,
increasing their value by 18% (as measured by the Russell 2000 Index) during the
fourth quarter, eclipsing the performance of large cap stocks (as measured by
the S&P 500 Index) which were up 15%. Indeed, 1999 marked the first full
calendar year that the Russell 2000 outperformed the S&P 500 since 1993, albeit
by a very narrow margin (21.3% for the Russell 2000 versus 21.0% for the S&P
500). The Touchstone Emerging Growth Fund, with a return of 48.8%, exceeded the
Russell 2000, which was its benchmark.
As the growth-style manager of the Touchstone Emerging Growth Fund, Westfield
Capital Management found that good stock selection and an overweight position in
technology, telecommunications, and select health care stocks drove perform ance
in 1999. The growth-style portion of the portfolio was underweight in the
consumer and financial sectors as many companies in those sectors did not meet
the Westfield's minimum earnings growth criteria.
Though the strict valuation discipline eliminated the traditional internet and
dot.com companies, the portfolio invested heavily in internet infrastructure
stocks. Westfield views business-to-business e-commerce as an attractive sector
with outstanding growth prospects. Traditional businesses are developing
e-business models and Westfield invested in chip, software, telecommunications,
and wireless stocks to take advantage of this major shift. In health care,
Westfield focused on a select group of outstanding companies in medical devices,
biotechnology and genomics.
The value-style manager of the Fund, David L. Babson & Company, reported that
1999 was a very difficult year for those small cap managers with a value
discipline. For all of 1999, the Russell 2000 Growth Index was up 43%, while the
Russell 2000 Value Index was down nearly 2% -- the widest differential in
performance ever.
The value portion of the Touchstone Emerging Growth Fund was hurt by increased
weightings in the Materials & Processing and Financial Services sectors -- two
of the worst performing sectors in the Russell 2000 -- due to investors'
concerns of rising interest rates.
Nevertheless, the Fund did benefit from several investments that delivered
strong performance during the year. CommScope, the global leader in manufac tur
ing coaxial cable, saw its stock increase 150% during 1999, and nearly four-fold
from the original investment a couple of years ago. The company is benefiting
from increased spending by AT&T and other cable companies to upgrade their cable
services. Nabors Industries, the leading operator of oil rigs in North America,
saw its stock increase 129% during the year due to increased drilling activity
by its customers seeking to capitalize on the recent improvements in oil prices.
Finally, Scitex, a leading maker of printing equipment, saw its stock increase
43% during the second half of 1999 (+24% for the full year), as the gradual
global economic recovery is encouraging the company's overseas customers to
begin ordering new equipment again.
<PAGE>
7
TOUCHSTONE EMERGING GROWTH FUND
While 1999 was a challenging year for the value side of the small cap market,
the Touchstone Emerging Growth Fund delivered superior results, demonstrating
once again the benefits of having both a value and growth discipline in one
fund. Babson and Westfield look forward to continuing to deliver strong
performance.
GROWTH OF A $10,000 INVESTMENT
Average Annual Total Return
One Year Ended 12/31/99 48.8%
Five Years Ended 12/31/99 21.9%
Since Inception 11/21/94 21.6%
Cumlative Total Return
Since Inception 11/21/94 172.0%
Touchstone Emerging Russell 2000 Wiesenberger Small Cap
Growth Fund (Major Index) (Minor Index)
11/94 10000 10000 10000
12/94 10100 10268 10249
3/95 10330 10741 10850
6/95 10980 11748 12077
9/95 11950 12908 13655
12/95 12077 13187 13492
3/96 12677 13860 14229
6/96 13266 14554 15207
9/96 13011 14603 15499
12/96 13425 15363 15741
3/97 13051 14568 14553
6/97 15482 16930 16872
9/97 17947 19449 19435
12/97 17945 18798 18365
3/98 19634 20689 20406
6/98 18970 19724 19796
9/98 15288 15750 15639
12/98 18533 18319 18622
3/99 17929 17325 17782
6/99 21362 20019 20423
9/99 21350 18754 19772
12/99 27198 22153 24704
Past performance is not indicative of future performance.
Performance information 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 total return figures for all periods.
<PAGE>
8
TOUCHSTONE EMERGING GROWTH FUND
SCHEDULE OF INVESTMENTS
December 31, 1999
Value
Shares (Note 1)
COMMON STOCKS - 97.0%
AUTOMOTIVE - 0.6%
24,500 Exide $ 203,656
- -------------------------------------------------------
BANKING - 1.3%
14,900 Dime Bancorp 225,363
15,300 Golden State Bancorp* 263,925
- -------------------------------------------------------
489,288
- -------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 1.5%
41,300 DiMon 134,225
13,000 Ralcorp Holdings* 259,188
27,800 Vlasic Foods International* 158,113
- -------------------------------------------------------
551,526
- -------------------------------------------------------
BUILDING MATERIALS - 1.5%
28,500 Dal-Tile International* 288,563
6,500 Martin Marietta Materials 266,500
- -------------------------------------------------------
555,063
- -------------------------------------------------------
COMMERCIAL SERVICES - 17.8%
25,300 Administaff* 765,325
27,000 Applied Analytical Industries* 246,375
10,700 A.C. Nielson* 263,488
15,000 Career Education* 575,625
9,000 CDI* 217,125
16,000 DeVry* 298,000
21,000 Diamond Technology Partners* 1,804,688
12,300 Forrester Research* 847,163
6,400 PerkinElmer 266,800
23,300 Safety-Kleen* 263,581
31,300 Stericycle* 588,831
19,500 Unova* 253,500
13,400 Wallace Computer Services 222,775
- -------------------------------------------------------
6,613,276
- -------------------------------------------------------
COMMUNICATIONS - 13.5%
31,100 Advanced Fibre Communications* 1,389,781
21,700 AudioCodes* 1,996,390
5,400 Ditech Communications* 504,900
19,000 Powerwave Technologies* 1,109,125
- -------------------------------------------------------
5,000,196
- -------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING - 12.3%
26,700 CBT Group, ADR* 894,450
28,000 Mail.com* 525,000
33,900 Natural MicroSystems* 1,586,944
26,000 Perot Systems, Class A* 494,000
10,600 Policy Management System* 270,963
21,000 Scientific Learning* 766,500
- -------------------------------------------------------
4,537,857
- -------------------------------------------------------
COMPUTERS & INFORMATION - 1.3%
13,000 Gerber Scientific 285,188
12,400 Scitex* 180,575
- -------------------------------------------------------
465,763
- -------------------------------------------------------
ELECTRICAL EQUIPMENT - 1.0%
23,900 Magnetek* 183,731
10,000 Ucar International* 178,125
- -------------------------------------------------------
361,856
- -------------------------------------------------------
ELECTRONICS - 0.9%
8,500 Dionex* 350,094
- -------------------------------------------------------
Value
Shares (Note 1)
ENTERTAINMENT & LEISURE - 2.5%
17,000 Cinar, Class B* $ 416,500
13,500 SFX Entertainment, Class A* 488,531
- -------------------------------------------------------
905,031
- -------------------------------------------------------
FINANCIAL SERVICES - 1.2%
25,400 First Sierra Financial* 434,975
- -------------------------------------------------------
FOOD RETAILERS - 0.6%
15,100 Pantry (The)* 213,288
- -------------------------------------------------------
HEALTH CARE PROVIDERS - 1.6%
14,000 Syncor International* 407,750
27,000 Total Renal Care Holdings* 180,563
- -------------------------------------------------------
588,313
- -------------------------------------------------------
HEAVY CONSTRUCTION - 0.5%
22,100 Foster Wheeler 196,138
- -------------------------------------------------------
HEAVY MACHINERY - 2.9%
24,100 Helix Technology 1,079,981
- -------------------------------------------------------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 0.3%
6,000 LA-Z-Boy Chair 100,875
- -------------------------------------------------------
HOUSEHOLD PRODUCTS - 0.6%
8,000 Snap-on 212,500
- -------------------------------------------------------
INSURANCE - 1.5%
22,200 HCC Insurance Holdings 292,763
7,650 HSB Group 258,666
- -------------------------------------------------------
551,429
- -------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - 6.2%
16,000 American Tower Systems, Class A* 489,000
7,100 Central Newspapers, Class A 279,563
20,600 Hollinger International 266,513
34,200 Information Holdings* 993,938
7,900 Lee Enterprises 252,306
- -------------------------------------------------------
2,281,320
- -------------------------------------------------------
MEDICAL SUPPLIES - 4.2%
7,900 Arthocare* 481,900
14,600 Novoste* 240,900
7,400 Roper Industries 279,813
24,500 Varian* 551,250
- -------------------------------------------------------
1,553,863
- -------------------------------------------------------
METALS - 2.0%
10,200 Belden 214,200
8,300 Harsco 263,525
13,000 Ryerson Tull 252,688
- -------------------------------------------------------
730,413
- -------------------------------------------------------
OIL & GAS - 6.7%
7,000 Equitable Resources 233,625
9,405 Friede Goldman Halter* 65,247
17,100 Hanover Compressor* 645,525
13,900 Helmerich & Payne 303,194
9,300 Nabors Industries* 287,719
40,100 Santa Fe Snyder* 320,800
23,200 Stolt Comex Seaway* 256,650
54,000 Superior Energy Services* 364,500
- -------------------------------------------------------
2,477,260
- -------------------------------------------------------
PHARMACEUTICALS - 9.2%
16,700 Albany Molecular Research* 509,350
26,000 ILEX Oncology* 627,250
10,000 Millennium Pharmaceuticals* 1,220,000
- -------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
9
TOUCHSTONE EMERGING GROWTH FUND
Schedule of Investments continued
Value
Shares (Note 1)
COMMON STOCKS - Continued
PHARMACEUTICALS - Continued
27,500 Taro Pharmaceutical Industries* $ 398,750
33,800 Titan Pharmaceuticals* 642,200
- -------------------------------------------------------
3,397,550
- -------------------------------------------------------
REAL ESTATE - 0.6%
9,900 Prentiss Properties Trust, REIT 207,900
- -------------------------------------------------------
RETAILERS - 1.5%
17,500 Enesco Group 193,594
10,000 Tweeter Home Entertainment
Group* 355,000
- -------------------------------------------------------
548,594
- -------------------------------------------------------
TEXTILES, CLOTHING & FABRICS - 1.8%
13,716 Albany International 212,597
28,100 Stride Rite 182,650
20,600 Unifi * 253,638
- -------------------------------------------------------
648,885
- -------------------------------------------------------
TRANSPORTATION - 1.4%
23,900 Fritz Companies* 250,950
15,800 Yellow* 265,638
- -------------------------------------------------------
516,588
- -------------------------------------------------------
TOTAL COMMON STOCKS
(COST $26,652,692) $35,773,478
- -------------------------------------------------------
Value
Units (Note 1)
WARRANTS - 0.0%
BANKING - 0.0%
5,700 Golden State Bancorp* $ 4,988
- -------------------------------------------------------
TOTAL WARRANTS
(COST $21,258) $ 4,988
- -------------------------------------------------------
TOTAL INVESTMENTS AT VALUE - 97.0%
(COST $26,673,950) (A) $35,778,466
CASH AND OTHER ASSETS
NET OF LIABILITIES - 3.0% 1,100,995
- -------------------------------------------------------
NET ASSETS - 100.0% $36,879,461
- -------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is
$26,680,804 resulting in gross unrealized appreciation and depreciation of
$12,398,355 and $3,300,693, respectively, and net unrealized appreciation
of $9,097,662
ADR - American Depositary Receipt
REIT - Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
<PAGE>
10
TOUCHSTONE INTERNATIONAL EQUITY FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
Touchstone International Equity Fund
The Touchstone International Equity Fund portfolio finished the year well ahead
of its benchmark, the MSCI EAFE Index. While the MSCI EAFE Index ended 1999 with
a 27.3% return, the Touchstone International Equity Fund had a 36.5% return.
According to the manager of the Touchstone International Equity Fund, Credit
Suisse Asset Management, performance lagged in the first quarter because the
Fund was underweight in Japan and the manager was too defensive in investing in
European and Japanese stocks. Performance was strong in the second half of the
year due to the positive impact of regional allocations and stock selections.
In Japan, the economic recovery appeared to gather momentum in the second half
of 1999 and corporate restructuring activity remained strong. During this
period, Credit Suisse moved from a benchmark neutral weight to overweight. The
most prominent Japanese sector overweights were in consumer finance and telecom
mu ni cations as well as an exposure to smaller companies in consumer and tech
nology related businesses. These decisions helped performance.
In Continental Europe, Credit Suisse moved from a slight underweight to an over
weight position during the fourth quarter in the midst of a favorable economic
environment, strong mergers and acquisition activity and a benign inflation
outlook. The Fund's overweights in Finland and France proved especially
beneficial due to large holdings in technology/telecommunications names like
Nokia and ST Microelectronics.
Elsewhere, regional allocations and stock selection also boosted performance.
The Fund was underweight in the U.K. because Credit Suisse believed there was a
likelihood of further rate increases by the Bank of England. This underweight
had a positive impact on performance as did stock selection in the U.K. which
empha sized companies such as GEC Marconi, an old defense company in the process
of reinventing itself as a telecom equipment manufacturer, and BP Amoco, the
global oil and gas giant.
Finally, the Fund's modest allocation to the Emerging Markets also had a
positive impact on performance; particularly in Brazil, Mexico, Korea, and
Taiwan -- those countries poised to benefit most from a pick-up in global growth
and rebound in commodity prices.
<PAGE>
11
TOUCHSTONE INTERNATIONAL EQUITY FUND
GROWTH OF A $10,000 INVESTMENT
Average Annual Total Return
One Year Ended 12/31/99 36.5%
Five Years Ended 12/31/99 17.2%
Since Inception 11/21/94 15.7%
Cumulative Total Return
Since Inception 11/21/94 110.4%
Touchstone MSCI EAFE Wiesenberger
International Equity Index Non-US Equity Index
Equity Fund (Major Index) (Minor Index)
11/94 10000 10000 10000
12/94 9510 10065 9912
3/95 9140 10260 9770
6/95 9540 10343 10233
9/95 9970 10782 10677
12/95 10028 11228 10840
3/96 10650 11560 11377
6/96 10890 11752 11805
9/96 10790 11746 11753
12/96 11178 11942 12206
3/97 11349 11763 12345
6/97 12632 13299 13615
9/97 13187 13214 13684
12/97 12827 12187 12487
3/98 14974 13990 14017
6/98 15850 14148 13722
9/98 13639 12146 11511
12/98 15419 14666 13448
3/99 15165 14880 13743
6/99 15629 15268 14892
9/99 16424 15949 15191
12/99 21043 18669 19490
Past performance is not indicative of future performance.
Performance information 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 total return figures for all periods.
<PAGE>
12
TOUCHSTONE INTERNATIONAL EQUITY FUND
SCHEDULE OF INVESTMENTS
December 31, 1999
Value
Shares (Note 1)
COMMON STOCKS - 98.7%
AUSTRALIA - 0.0%
175 Southcorp $ 615
- -------------------------------------------------------
BRAZIL - 1.0%
7,400 Petroleo Brasileiro, ADR 189,795
1,535 Telecomunicacoes Brasileiras
(Telebras), ADR 197,248
- -------------------------------------------------------
387,043
- -------------------------------------------------------
CHINA - 0.4%
3,255 China Steel, 144A, ADR 48,176
12,800 China Telecom* 80,026
200 China Telecom, ADR* 25,713
- -------------------------------------------------------
153,915
- -------------------------------------------------------
FINLAND - 3.6%
6,353 Nokia Oyj 1,152,853
8,217 UPM-Kymmene 331,359
- -------------------------------------------------------
1,484,212
- -------------------------------------------------------
FRANCE - 13.1%
2,707 Alcatel Alsthom 622,226
6,264 Alstom 209,028
11 Aventis 640
3,139 AXA 437,978
6,213 Banque Nationale de Paris 573,749
2,824 Carrefour Supermarche 521,289
9,583 Credit Lyonnais* 438,614
1,471 Groupe Danone 347,019
1,737 Pinault-Printemps-Redoute 458,803
6,435 Renault 310,489
4,632 Scor 204,535
5,680 Total Fina S.A., Class B 758,734
5,441 Vivendi 491,761
- -------------------------------------------------------
5,374,865
- -------------------------------------------------------
GERMANY - 11.1%
1,302 Allianz Holdings 437,756
5,927 BASF 304,741
9,464 Deutsche Bank 800,024
4,293 Dresdner Bank 233,062
4,624 Mannesmann 1,116,474
1,469 Muenchener
Rueckversicherungs-Gasellschaft 372,909
6,102 Preussag 340,191
560 SAP 273,814
3,045 Siemens 387,718
4,665 Veba 226,921
- -------------------------------------------------------
4,493,610
- -------------------------------------------------------
GREAT BRITAIN - 9.5%
59,101 BP Amoco 595,693
12,349 British Aerospace 81,176
15,432 British Telecommunications 369,315
13,152 Glaxo Wellcome 373,006
500 Jazztel, ADR* 32,563
45,249 Legal & General Group 123,242
22,847 Lloyds TSB Group 283,762
27,403 Marconi 486,159
11,235 Peninsular and Oriental
Steam Navigation 187,351
10,343 Reuters Group 143,663
Value
Shares (Note 1)
GREAT BRITAIN - Continued
29,895 Sainsbury (J) $ 171,406
17,720 Shell Transport & Trading 147,749
28,325 SmithKline Beecham 360,949
5,926 South African Breweries 60,320
86,758 Vodafone Group 427,417
- -------------------------------------------------------
3,843,771
- -------------------------------------------------------
GREECE - 0.3%
410 Alpha Credit Bank 32,131
761 Intracom 34,862
3,100 National Bank of Greece, GDR 43,594
- -------------------------------------------------------
110,587
- -------------------------------------------------------
HONG KONG - 0.0%
4 Hang Seng Bank 46
- -------------------------------------------------------
INDIA - 0.6%
3,000 Larsen & Toubro, GDR 99,750
5,400 State Bank of India, GDR 55,778
3,800 Videsh Sanchar Nigam, GDR 78,982
- -------------------------------------------------------
234,510
- -------------------------------------------------------
ITALY - 4.1%
11,110 Assicurazione Generali 368,946
20,036 Concessioni e Costruzioni
Autostrade* 136,386
55,039 ENI 302,019
20,590 Istituto Bancario San Paolo
di Torino 279,276
63,603 Istituto Nazionale
delle Assicurazioni 169,409
103,860 Tecnost* 391,812
- -------------------------------------------------------
1,647,848
- -------------------------------------------------------
JAPAN - 34.8%
900 Advantest 237,699
8,000 Alps Electric 121,999
50 Avex 12,472
16,000 Bank of Tokyo 222,870
4,000 Bridgestone 88,037
2,000 Canon 79,429
4,000 Daikin Industries 54,387
15,000 Daiwa Securities 234,618
200 Don Quijote 31,302
3,000 Fanuc
26,000 Fuji Bank Limited (The) 252,548
1,390 Fuji Soft ABC 108,774
9 Fuji Television Network 123,251
4,000 Fujisawa Pharmaceutical 97,036
6,000 Fujitsu 273,501
13,000 Fukuyama Transporting 93,466
9,200 Hitachi Credit 186,736
3,000 Hitachi Maxell 88,330
7,000 House Foods 106,133
7,000 Industrial Bank of Japan 67,446
1,900 ITO Yokado 206,300
7,000 Kaneka 89,494
4,000 Kao 114,057
12,000 Kirin Brewery 126,186
55,000 Kubota 210,359
2,800 Kyocera 725,814
The accompanying notes are an integral part of the financial statements.
<PAGE>
13
TOUCHSTONE INTERNATIONAL EQUITY FUND
Schedule of Investments continued
Value
Shares (Note 1)
COMMON STOCKS - Continued
JAPAN - Continued
1,000 Matsushita Communication
Industrial $ 264,110
11,000 Matsushita Electric 304,509
8,000 Minebea 137,181
19,000 Mitsubishi 146,640
27,500 Mitsui Chemicals 221,388
4,000 Mitsumi Electric 125,208
5,000 Mori Seiki 67,006
1,000 Murata Manufacturing 234,765
9,000 NEC 214,370
500 NIDEC 146,239
11,000 Nikko Securities Co. (The) 139,127
1,300 Nintendo 214,017
9,000 Nippon Meat Packers 116,649
48 Nippon Telegraph & Telephone 821,677
7,000 Nomura Securities 126,333
11 NTT Data 252,861
6 NTT Mobile Communication
Network 230,656
1,800 Orix 405,321
1,000 Rohm Company 410,838
46,000 Sakura Bank 266,380
13,000 Sanwa Bank (The) 158,065
2,000 Secom 220,092
12,000 Sekisui House 106,231
1,000 Seven-Eleven Japan 158,466
Sharp 127,898
4,000 Shin-Etsu Chemical 172,161
197 Softbank 188,463
1,700 Sony 503,864
100 Sony, ADR 28,475
8,000 Sumitomo Bank 109,479
25,000 Sumitomo Chemical 117,382
11,000 Sumitomo Marine & Fire
Insurance Co. (The) 67,788
13,000 Sumitomo Realty & Development 43,236
28,000 Sumitomo Trust & Banking 188,986
3,000 Taisho Pharmaceutical 88,037
4,000 Taiyo Yuden 237,112
4,000 Takeda Chemical Industries 197,594
2,400 TDK 331,253
14,000 Tokyo Broadcasting System 473,834
2,000 Tokyo Electron 273,892
5,000 Tostem 89,749
15,000 Toyota Motor 726,303
1,400 WORLD 171,183
4,000 Yamanouchi Pharmaceutical 139,685
2,000 Yamato Transport 77,472
- -------------------------------------------------------
14,176,005
- -------------------------------------------------------
MEXICO - 1.2%
3,115 Cemex SA de CV, ADR* 86,831
1,700 Grupo Televisa, GDR* 116,025
2,500 Telefonos de Mexico, Class L, ADR 281,250
- -------------------------------------------------------
484,106
- -------------------------------------------------------
Value
Shares (Note 1)
NETHERLANDS - 7.2%
4,697 Akzo Nobel $ 235,817
3,613 Equant* 410,504
6,683 Fortis 240,864
7,597 ING Groep 459,075
4,384 Koninklijke (Royal) Philips
Electronics 596,663
4,965 STMicroelectronics 764,835
4,258 Verenigde Nederlandse 223,993
- -------------------------------------------------------
2,931,751
- -------------------------------------------------------
PORTUGAL - 1.2%
42,418 Portugal Telecom 465,697
363 PT Multimedia - Servicos
de Telecomunicaceous e Multimedia
SGPS* 20,666
- -------------------------------------------------------
486,363
- -------------------------------------------------------
SOUTH AFRICA - 0.1%
8,900 Standard Bank Investment Corp. 36,975
- -------------------------------------------------------
SOUTH KOREA - 0.9%
6,300 Korea Electric Power, ADR 105,525
2,300 Korea Telecom, ADR 171,925
1,146 Pohang Iron & Steel 40,110
272 Samsung Electronics, 144A, GDR 33,252
- -------------------------------------------------------
350,812
- -------------------------------------------------------
SPAIN - 3.1%
29,120 Banco Santander Central Hispano 329,976
38,021 Telefonica 950,606
- -------------------------------------------------------
1,280,582
- -------------------------------------------------------
SWEDEN - 1.4%
6,423 Ericsson 413,680
5,544 Skandia Forsakrings 167,763
- -------------------------------------------------------
581,443
- -------------------------------------------------------
SWITZERLAND - 4.4%
2,304 ABB 281,938
240 Novartis 352,573
36 Roche Holding 427,521
1,364 Union Bank of Switzerland 368,533
600 Zurich Allied 342,319
- -------------------------------------------------------
1,772,884
- -------------------------------------------------------
TAIWAN - 0.7%
6,592 Taiwan Semiconductor
Manufacturing, ADR 296,640
- -------------------------------------------------------
TOTAL COMMON STOCKS
(COST $30,690,496) $40,128,583
- -------------------------------------------------------
INVESTMENT TRUST - 0.2%
TAIWAN - 0.2%
592 Morgan Stanley Taiwan OPALS,
Series B, 144A (b) $ 85,711
- -------------------------------------------------------
TOTAL INVESTMENT TRUST (COST $73,870) $ 85,711
- -------------------------------------------------------
PREFERRED STOCK - 0.8%
GERMANY - 0.8%
531 SAP $ 320,126
- -------------------------------------------------------
TOTAL PREFERRED STOCK (COST $222,303) $ 320,126
- -------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
14
TOUCHSTONE INTERNATIONAL EQUITY FUND
Schedule of Investments continued
Value
Shares (Note 1)
WARRANTS - 0.0%
FRANCE - 0.0%
1,059 Banque Nationale de Paris* $ 4,890
- -------------------------------------------------------
TOTAL WARRANTS (COST $0) $ 4,890
- -------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date (Note 1)
CORPORATE BOND - 0.0%
GREAT BRITAIN - 0.0%
GBP 3,900 British
Aerospace 7.450% 11/30/03 $ 61
- -------------------------------------------------------
TOTAL CORPORATE BOND (COST $138) $ 61
- -------------------------------------------------------
TOTAL INVESTMENTS AT VALUE - 99.7%
(COST $30,986,807) (A) $40,539,371
CASH AND OTHER ASSETS
NET OF LIABILITIES - 0.3% 124,006
- -------------------------------------------------------
NET ASSETS - 100.0% $40,663,377
- -------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is
$31,292,611 resulting in gross unrealized appreciation and depreciation of
$10,240,114 and $993,354, respectively, and net unrealized appreciation of
$9,246,760
(b) Board valued security.
144A - Security exempt from registration under Rule 144A of Securities Act of
1933. This security may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At December
31, 1999, these securities were valued at $167,139, or 0.4% of net
assets.
ADR - American Depositary Receipt
GBP - Great Britain Pound
GDR - Global Depositary Receipt
OPALS - Optimised Portfolios As Listed Securities
Industry sector diversification of the International Equity Fund's investments
as a percentage of net assets as of December 31, 1999 was as follows:
Industry Percentage
Sector Net Assets
Banking 12.80%
Communications 10.35%
Electrical Equipment 9.44%
Telephone Systems 7.74%
Electronics 7.57%
Insurance 5.41%
Pharmaceuticals 5.01%
Heavy Machinery 4.98%
Oil & Gas 4.90%
Commercial Services 4.25%
Financial Services 3.58%
Retailers 3.38%
Chemicals 3.30%
Automotive 2.55%
Computer Software & Processing 2.41%
Media - Broadcasting & Publishing 2.35%
Transportation 2.05%
Beverages, Food & Tobacco 1.86%
Multiple Utilities 1.46%
Forest Products & Paper 0.81%
Entertainment & Leisure 0.56%
Metals 0.44%
Food Retailers 0.42%
Textiles, Clothing & Fabrics 0.42%
Computers & Information 0.36%
Construction 0.26%
Electric Utilities 0.26%
Building Materials 0.21%
Miscellaneous 0.21%
Aerospace & Defense 0.20%
Real Estate 0.11%
Containers & Packaging 0.00%
Other assets in excess of liabilities 0.35%
- -----------------------------------------------------------
100.00%
- -----------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
15
TOUCHSTONE INCOME OPPORTUNITY FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
Touchstone Income Opportunity Fund
For the twelve months ended December 31, 1999, the Touchstone Income Opportunity
Fund performed better than the index. The Fund's benchmark was the Lehman
Brothers Corporate Bond Index, which produced a return of (2.1)%. The Income
Opportunity Fund had a 2.7% return in 1999.
Emerging assets, however, closed the year on a very strong note with the JP
Morgan Emerging Market Bond Plus Mutual Fund Index returning 5.41% in December,
bringing the year-to-date gain to 25.97%. At the end of the year, the emerging
market percentage was 40% of the Fund. The manager of the Touchstone Income
Opportunity Fund, Alliance Capital Management, moved the emphasis of the
portfolio in 1999 from corporate assets to sovereign debt because they believe
that sovereign debt will outperform corporate debt due to its greater liquidity.
During the second half of the year, Alliance increased the weighting in Russia
by about 1.25%, which proved to be positive for the Fund. Russian debt was the
outperforming asset for both the month of December and the year, returning
14.84% and 165.70% respectively. The Touchstone Income Opportunity Fund also
continued to hold a large position in Mexico, which was upgraded this year by
Moody's to Ba1, one notch below investment grade, and performed well, returning
15.30% for the year.
Alliance reduced the position in emerging market corporates from about 10% to
roughly 5.7%. Two defaulted positions, FSW International and NTS Steel, were
sold. During the second half of the year, Alliance also elected to sell the
position in Paging Network Brazil. The com pany, located in Brazil, had been
negatively impacted by the devaluation of the Brazilian currency and the
decreasing demand for paging services due to the popularity of cellular phones.
The high yield market is completing its second straight year of low single-digit
returns. The Merrill Lynch High Yield Index returned 1.573% for the year. This
is the first occurrence in the history of the high yield market of sub-coupon
returns in a non-recessionary economic environment. Alliance believes this poor
perform ance is a function of significant spread widening brought about by
reduced liquidity following the global dislocation of 1998 (i.e., Asia, Russia,
Brazil) and a persistently rising high yield default rate. According to Moody's,
defaults are currently averaging about 6%. During the second half of the year,
Alliance began to actively reduce exposure to possible problem/restructuring
scenarios when credit fundamentals suggested that it was warranted and market
prices repre sented fair value. Alliance elected to sell several assets
including Aqua Chem, Eagle Geophysical, Orion Network and TVN Entertainment.
These securities were sold due to credit concerns and Alliance's belief that the
money could be invested in better performing assets. During the month of
December, two other assets posted large price declines due to poor operating
performance. These securities include Pen Tab and Republic Technologies. Pen Tab
was downgraded in early December to Caa2 by Moody's due to their weaker than
expected operating performance and heightened liquidity concerns. There has been
little support from the underwriter and the bonds moved down in price from the
mid 80s to $25.00. Alliance continues to hold the position.
Another security in the Portfolio which posted a price decline was Republic
Technologies. The company missed earnings expectations and the bonds rapidly
declined in price from the low 90s to its year end price of $65.00.
Alliance has been in contact with both the company and the sponsor, and
continues to hold the credit, believing it will improve.
<PAGE>
16
TOUCHSTONE INCOME OPPORTUNITY FUND
In general for the high yield market, primary activity slowed during 1999 from
1998 levels, although $94.7 billion in new issues came to market. Media and
telecommunications continued to be the dominant suppliers of new issuance,
accounting for 69.6% ($12.1 billion of $17.4 billion issued) of the supply in
the fourth quarter. One big change in the high yield market this year was the
lack of demand from mutual funds, which saw redemptions for most of the year.
This has left structured products, insurance, pension, and crossover accounts as
the major participants in the market, which has in turn led to lower trading
volumes and reduced demand for new issuance.
GROWTH OF A $10,000 INVESTMENT
Average Annual Total Return
One Year Ended 12/31/99 2.7%
Five Years Ended 12/31/99 9.7%
Since Inception 11/21/94 8.2%
Cumulative Total Return
Since Inception 11/21/94 49.5%
CDA/Wiesenberger
Touchstone Lehman Brothers CDA/Wiesenberger Corporate High
Income Corporate Bond Global Income Yield Average
Opportunity Fund (Major Index) (Minor Index) (Minor Index 2)
11/94 10000 10000 10000 10000
12/94 9420 10088 9877 10037
3/95 8990 10666 10235 10523
6/95 10373 11442 10805 11057
9/95 11030 11698 10988 11409
12/95 11620 12276 11387 11769
3/96 12283 11976 11296 12049
6/96 13057 12017 11442 12283
9/96 14087 12259 11797 12822
12/96 14800 12684 12155 13219
3/97 15138 12574 11942 13249
6/97 16189 13078 12303 13966
9/97 16986 13583 12615 14731
12/97 16581 13974 12662 14909
3/98 17478 14209 12855 15492
6/98 16750 14558 12854 15471
9/98 13958 15043 12888 14234
12/98 14547 15169 13262 14678
3/99 14754 15095 13065 15095
6/99 14685 14856 12850 15142
9/99 14498 14912 12958 14781
12/99 14945 14910 13014 15096
Past performance is not indicative of future performance.
Performance information 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 total return figures for all periods.
<PAGE>
17
TOUCHSTONE INCOME OPPORTUNITY FUND
SCHEDULE OF INVESTMENTS
December 31, 1999
Principal Interest Maturity Value
Amount Rate Date (Note 1)
CORPORATE BONDS - 52.2%
AEROSPACE & DEFENSE - 1.2%
$ 500,000 Pacific Aerospace
& Electronics 11.25% 08/01/05 $ 300,000
- -------------------------------------------------------
AUTOMOTIVE - 5.9%
750,000 Sonic Automotive,
Series B 11.00% 08/01/08 742,500
750,000 Tenneco
Automotive,
144A 11.625% 10/15/09 765,000
- -------------------------------------------------------
1,507,500
- -------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 0.9%
400,000 Richmont
Marketing
Specialists 10.125% 12/15/07 240,000
- -------------------------------------------------------
COMMERCIAL SERVICES - 2.8%
500,000 Building One
Services 10.50% 05/01/09 480,000
500,000 Dialog, Series A,
Yankee Dollar 11.00% 11/15/07 240,000
- -------------------------------------------------------
720,000
- -------------------------------------------------------
COMMUNICATIONS - 8.6%
750,000 Netia Holdings,
Series B, 144A 13.125% 06/15/09 772,500
450,000 Northeast Optic
Network 12.75% 08/15/08 481,500
400,000 Turkcell, 144A 12.75% 08/01/05 414,500
500,000 United Pan-Europe
Communications,
144A 11.25% 11/01/09 513,125
- -------------------------------------------------------
2,181,625
- -------------------------------------------------------
ENTERTAINMENT & LEISURE - 1.8%
450,000 Bell Sports,
Series B 11.00% 08/15/08 450,000
- -------------------------------------------------------
HEALTH CARE PROVIDERS - 2.0%
500,000 LifePoint Hospitals
Holdings,
Series B 10.75% 05/15/09 517,500
- -------------------------------------------------------
HEAVY MACHINERY - 5.4%
700,000 Generac Portable
Products 11.25% 07/01/06 714,000
750,000 Pentacon,
Series B 12.25% 04/01/09 675,000
- -------------------------------------------------------
1,389,000
- -------------------------------------------------------
INDUSTRIAL - DIVERSIFIED - 0.9%
880,000 Pen-Tab
Industries,
Series B 10.875% 02/01/07 220,000
- -------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - 3.5%
1,000,000 Innova S. de R.L.,
Yankee-Dollar 12.875% 04/01/07 890,000
- -------------------------------------------------------
MEDICAL SUPPLIES - 2.8%
700,000 Kelso & Company,
144A 12.75% 10/01/09 724,500
- -------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date (Note 1)
METALS - 1.9%
$ 750,000 Republic
Technologies
International,
144A 13.75% 07/15/09 $ 495,000
- -------------------------------------------------------
OIL & GAS - 5.1%
750,000 EOTT Energy
Partners 11.00% 10/01/09 776,250
500,000 Western Gas
Resources 10.00% 06/15/09 512,500
- -------------------------------------------------------
1,288,750
- -------------------------------------------------------
TELEPHONE SYSTEMS - 9.4%
550,000 Exodus
Communications,
144A 10.75% 12/15/09 559,625
550,000 Global Crossing
Holdings, 144A 9.125% 11/15/06 543,813
500,000 Metromedia Fiber
Network 10.00% 12/15/09 512,500
750,000 Worldwide
Fiber, 144A 12.00% 08/01/09 772,500
- -------------------------------------------------------
2,388,438
- -------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $14,597,618) $13,312,313
- -------------------------------------------------------
SOVEREIGN GOVERNMENT OBLIGATIONS - 45.3%
ARGENTINA - 4.1%
$1,144,000 Republic of
Argentina, Brady
Bond(b) 6.813% 03/31/05 $ 1,034,519
- -------------------------------------------------------
BRAZIL - 7.7%
1,200,000 Republic of
Brazil 11.625% 04/15/04 1,200,000
1,000,000 Republic of
Brazil, Brady
Bond(b) 6.938% 04/15/24 758,750
- -------------------------------------------------------
1,958,750
- -------------------------------------------------------
BULGARIA - 6.4%
1,050,000 Government of
Bulgaria, Brady
Bond, IAB,
PDI(b) 6.50% 07/28/11 828,188
1,000,000 Government of
Bulgaria, Brady
Bond, Series A(b) 6.50% 07/28/24 798,750
- -------------------------------------------------------
1,626,938
- -------------------------------------------------------
COLOMBIA - 2.7%
750,000 Republic of
Colombia 9.75% 04/23/09 697,500
- -------------------------------------------------------
MEXICO - 7.3%
1,750,000 United Mexican
States 10.375% 02/17/09 1,863,749
- -------------------------------------------------------
MOROCCO - 2.7%
750,000 Kingdom of
Morocco,
Series A(b) 6.844% 01/01/09 676,875
- -------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
18
TOUCHSTONE INCOME OPPORTUNITY FUND
Schedule of Investments continued
Principal Interest Maturity Value
Amount Rate Date (Note 1)
SOVEREIGN GOVERNMENT OBLIGATIONS - Continued
PERU - 3.6%
$1,500,000 Republic of
Peru, Brady Bond,
FLIRB(b) 3.75% 03/07/17 $ 928,125
- -------------------------------------------------------
PHILIPPINE ISLANDS - 3.1%
800,000 Republic of
Philippines 9.875% 01/15/19 791,000
- -------------------------------------------------------
RUSSIA - 2.6%
1,100,000 Russian Federation,
Euro-Dollar 8.75% 07/24/05 651,750
- -------------------------------------------------------
TURKEY - 3.2%
750,000 Republic of
Turkey 12.375% 06/15/09 804,375
- -------------------------------------------------------
VENEZUELA - 1.9%
750,000 Republic of
Venezuela 9.25% 09/15/27 495,000
- -------------------------------------------------------
TOTAL SOVEREIGN GOVERNMENT
OBLIGATIONS (COST $10,764,664) $11,528,581
- -------------------------------------------------------
Value
Shares (Note 1)
WARRANTS - 0.0%
COMMUNICATIONS - 0.0%
600 Paging do Brazil, Class B*, 144A $ 0
- -------------------------------------------------------
NIGERIA - 0.0%
750 Central Bank of Nigeria* 0
- -------------------------------------------------------
TELEPHONE SYSTEMS - 0.0%
10,125 Conecel Holdings* 0
400 Loral Space & Communications* 3,800
300 Primus Telecommunications* 7,500
- -------------------------------------------------------
11,300
- -------------------------------------------------------
TOTAL WARRANTS (COST $0) $ 11,300
- -------------------------------------------------------
Value
(Note 1)
TOTAL INVESTMENTS AT VALUE - 97.5%
(COST $25,362,282)(A) $24,852,194
CASH AND OTHER ASSETS
NET OF LIABILITIES - 2.5% 635,365
- -------------------------------------------------------
NET ASSETS - 100.0% $25,487,559
- -------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is
$25,401,301 resulting in gross unrealized appreciation and depreciation of
$1,093,596 and $1,642,703 respectively, and net unrealized depreciation of
$549,107
(b) Interest rate shown reflects current rate on instrument with variable or
floating rates.
144A - Security exempt from registration under Rule 144A of Securities Act of
1933. This security may be sold in transactions exempt from registration,
normally to qualified institutional buyers. At December 31, 1999, these
securities were valued at $5,560,563 or 21.8% of net assets.
Brady Bond - U.S. dollar denominated bonds of developing countries that
were exchanged, in a restructuring, for commercial bank loans in
default. The bonds are collateralized by U.S. Treasury zero-coupon
bonds to ensure principal.
Euro-Dollar - Bonds issued offshore that pay interest and principal in U.S.
dollars.
FLIRB - Front-Load Interest Reduction Bonds
IAB - Interest Arrears Bonds
PDI - Past Due Interest Bonds
Yankee Dollar - U.S. dollar denominated bonds issued by non-U.S. companies in
the U.S.
The accompanying notes are an integral part of the financial statements.
<PAGE>
19
TOUCHSTONE HIGH YIELD FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
Touchstone High Yield Fund
The high yield market suffered considerably from the highest default rate seen
since 1990, resulting from a surge in lower-rated, first time issuers that
placed debt in 1997 and 1998. The credit problems were compounded by the
after-effects of the recent Asian liquidity crisis. As a result, there was
considerable principal erosion with the Moody's default rate for 1999 finishing
at 5.5% on an issuer basis and 7.8% on a par-weighted basis. Credit problems
affected all sectors of the market, even the higher quality segment on which the
Touchstone High Yield Fund focuses. This led to the Touchstone High Yield Fund
ending 1999 with a return of (8.1)%, compared to the (1.1)% return of the Fund's
benchmark, the Merrill Lynch High Yield Bond Index.
Although the Touchstone High Yield Fund did not suffer any defaults, Fort
Washington Investment Advisors, the manager of the Touchstone High Yield Fund,
reported that they did sell one security at what would be considered a defaulted
level. Furthermore, other issues did realize material market value losses as
their outlooks became more uncertain. Concentration in these issues compounded
this impact, resulting in performance which trailed the overall market.
Looking forward, the Fund continues to focus on higher quality credits where the
risk return profile appears most attractive. Although the economy remains rather
strong, defaults will likely remain above historical averages as some of the
weaker issues run their course. High default rates, an active Federal Reserve
and increasing interest rates create a difficult environment for high yield
which will likely limit significant capital appreciation in the first half of
the year. However, much of this environment is already reflected in the high
yield market allowing for returns approximating yields. If defaults begin to
ease and the Federal Reserve becomes less restrictive, high yield could perform
well in the second half of 2000. Fort Washington expects that the Fund will be
well-positioned to perform in this environment.
<PAGE>
20
TOUCHSTONE HIGH YIELD FUND
GROWTH OF A $10,000 INVESTMENT
Average Annual Total Return
One Year Ended 12/31/99 N/A
Since Inception 05/01/99 N/A
Cumulative Total Return
Since Inception 05/01/99 (8.1%)
Weisenberger:
Merrill Lynch Corporate - Smith Barney
Touchstone High High Yield Bond High Yield - VA Corporate - BBB
Yield Fund (Major Index) (Minor Index) (Minor Index)
5/99 10000 10000 10000 10000
6/99 9830 9912 9781 9810
9/99 9220 9788 9548 9828
12/99 9189 9894 9751 9847
Past performance is not indicative of future performance.
Performance information 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 total return figures for all periods.
<PAGE>
21
TOUCHSTONE HIGH YIELD FUND
SCHEDULE OF INVESTMENTS
December 31, 1999
Principal Interest Maturity Value
Amount Rate Date (Note 1)
CORPORATE BONDS - 95.6%
AUTOMOTIVE - 4.6%
$ 500,000 Accuride,
Series B 9.25% 02/01/08 $ 455,000
250,000 Federal-Mogul 7.375% 01/15/06 229,065
- -------------------------------------------------------
684,065
- -------------------------------------------------------
CHEMICALS - 3.4%
500,000 Lyondell Chemical,
Series B 9.875% 05/01/07 510,000
- -------------------------------------------------------
COMMERCIAL SERVICES - 8.8%
500,000 Allied Waste
North America,
144A 10.00% 08/01/09 447,500
500,000 Rural/Metro 7.875% 03/15/08 393,750
500,000 United Rentals,
Series B 8.80% 08/15/08 466,875
- -------------------------------------------------------
1,308,125
- -------------------------------------------------------
COMMUNICATIONS - 8.8%
500,000 Charter
Communications
Holdings 8.625% 04/01/09 461,875
500,000 Pinnacle
Holdings(b) 0.00% 03/15/08 327,500
500,000 Williams
Communications
Group 10.875% 10/01/09 522,500
- -------------------------------------------------------
1,311,875
- -------------------------------------------------------
COSMETICS & PERSONAL CARE - 1.3%
250,000 Revlon Consumer
Products 9.00% 11/01/06 187,500
- -------------------------------------------------------
ELECTRIC UTILITIES - 3.1%
500,000 AES 8.50% 11/01/07 467,500
- -------------------------------------------------------
ELECTRICAL EQUIPMENT - 3.3%
500,000 Integrated Electrical
Services, Series B9.375%02/01/09 490,625
- -------------------------------------------------------
ENTERTAINMENT & LEISURE - 2.9%
500,000 Carmike
Cinemas,
Series B 9.375% 02/01/09 433,750
- -------------------------------------------------------
FINANCIAL SERVICES - 0.4%
500,000 ContiFinancial 8.125% 04/01/08 56,250
- -------------------------------------------------------
FOOD RETAILERS - 4.8%
500,000 Marsh
Supermarkets,
Series B 8.875% 08/01/07 460,000
250,000 Stater Brothers
Holdings 10.75% 08/15/06 253,125
- -------------------------------------------------------
713,125
- -------------------------------------------------------
FOREST PRODUCTS & PAPER - 8.9%
500,000 Delta Mills,
Series B 9.625% 09/01/07 350,000
500,000 Republic Group 9.50% 07/15/08 470,000
500,000 Tembec Finance,
Yankee Dollar 9.875% 09/30/05 518,750
- -------------------------------------------------------
1,338,750
- -------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date (Note 1)
HEALTH CARE PROVIDERS - 8.3%
$ 200,000 Columbia/HCA
Healthcare 7.00% 07/01/07 $ 176,539
500,000 Genesis Health
Ventures 9.25% 10/01/06 205,000
500,000 LifePoint
Hospitals
Holdings,
Series B 10.75% 05/15/09 517,500
500,000 Omnicare,
Convertible 5.00% 12/01/07 335,000
- -------------------------------------------------------
1,234,039
- -------------------------------------------------------
HOUSING - 3.0%
500,000 Champion
Enterprises,
144A 7.625% 05/15/09 448,890
- -------------------------------------------------------
INSURANCE - 2.8%
500,000 Willis Corroon 9.00% 02/01/09 416,250
- -------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - 9.9%
500,000 American Lawyer
Media, Series B 9.75% 12/15/07 485,000
500,000 Chancellor
Media 9.00% 10/01/08 520,000
500,000 Susquehanna
Media 8.50% 05/15/09 486,875
- -------------------------------------------------------
1,491,875
- -------------------------------------------------------
METALS - 6.2%
500,000 Algoma Steel 12.375% 07/15/05 470,000
500,000 LTV Corporation
(The) 8.20% 09/15/07 450,000
- -------------------------------------------------------
920,000
- -------------------------------------------------------
OIL & GAS - 6.9%
500,000 HS Resources 9.25% 11/15/06 495,000
500,000 RBF Finance 11.00% 03/15/06 532,499
- -------------------------------------------------------
1,027,499
- -------------------------------------------------------
RESTAURANTS - 2.5%
500,000 Advantica
Restaurant
Group 11.25% 01/15/08 370,000
- -------------------------------------------------------
TELEPHONE SYSTEMS - 2.5%
500,000 Paging
Network 8.875% 02/01/06 145,000
250,000 Sprint Capital 6.875% 11/15/28 222,393
- -------------------------------------------------------
367,393
- -------------------------------------------------------
TRANSPORTATION - 3.2%
500,000 American
Commercial
Lines, Series B 10.25% 06/30/08 480,000
- -------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $16,105,045) $14,257,511
- -------------------------------------------------------
TOTAL INVESTMENTS AT VALUE - 95.6%
(COST $16,105,045)(A) $14,257,511
CASH AND OTHER ASSETS
NET OF LIABILITIES - 4.4% 658,421
- -------------------------------------------------------
NET ASSETS - 100.0% $14,915,932
- -------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
22
TOUCHSTONE HIGH YIELD FUND
Schedule of Investments continued
Notes to the Schedule of Investments:
(a) The aggregate identified cost for federal income tax purposes is
$16,105,045 resulting in gross unrealized appreciation and depreciation of
$70,047 and $1,917,580, respectively, and net unrealized depreciation of
$1,847,533.
(b) Step coupon bond, zero coupon until 03/12/2003, 10.00% thereafter.
144A - Security exempt from registration under Rule 144A of Securities Act of
1933. This security may be sold in transactions exempt from registration,
normally to qualified institutional buyers. At December 31, 1999, these
securities were valued at $896,390 or 6.0% of net assets.
Yankee Dollar - U.S. dollar denominated bonds issued by non-U.S. companies in
the U.S.
The accompanying notes are an integral part of the financial statements.
<PAGE>
23
TOUCHSTONE VALUE PLUS FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
Touchstone Value Plus Fund
Fort Washington Investment Advisors, the manager of the Touchstone Value Plus
Fund, states that they have been in the top quartile of the large value equity
manager universe for 1999. The Fund's return of 15.0% exceeded the 12.0% return
of its benchmark, the S&P/Barra Value Index.
The U.S. stock market finished 1999 with a flourish to record another big year.
Despite the protestations of countless naysayers, stocks recorded their fifth
straight year of twenty plus percent returns, as measured by the S&P 500 Index.
Yet once again this performance was concentrated in a relative handful of large
capitalization, mostly technology stocks. The market's "underbelly" is very
soft; since April of 1998, 70% of the roughly 6,000 U.S. common stocks are down
in price. In fact, over one half of the stocks in the S&P 500 Index had a
negative absolute return for 1999.
The best performing sectors in the portfolio for the last quarter were Consumer
Staples and Communication Services. Leading the performance in these sectors
were Sysco and Frontier Corp (now Global Crossings). Other notable performers in
the quarter were Nortel Networks and Amgen. Consumer Cyclicals was the worst
performing sector with Stewart Enterprises showing the worst underperformance.
GROWTH OF A $10,000 INVESTMENT
Average Annual Total Return
One Year Ended 12/31/99 15.0%
Since Inception 05/01/98 10.1%
Cumulative Total Return
Since Inception 05/01/98 17.4%
Touchstone Wilshire Large
Value Plus S&P 500 S&P/Barra Value Cap Value
Fund (Major Index) (Minor Index) (Minor Index 2)
5/98 10000 10000 10000 10000
6/99 9840 10227 9934 9968
9/98 8810 9210 8651 8853
12/98 10211 11171 10159 10075
3/99 10542 11729 10449 10073
6/99 11344 12556 11577 10862
9/99 10321 11771 10509 9771
12/99 11744 13523 11379 10433
Past performance is not indicative of future performance.
Performance information 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 total return figures for all periods.
<PAGE>
24
TOUCHSTONE VALUE PLUS FUND
SCHEDULE OF INVESTMENTS
December 31, 1999
Value
Shares (Note 1)
COMMON STOCKS - 98.2%
ADVERTISING - 2.3%
2,900 Interpublic Group of
Companies (The) $ 167,294
- --------------------------------------------------------
AEROSPACE & DEFENSE - 2.1%
2,600 Honeywell International 149,988
- --------------------------------------------------------
AUTOMOTIVE - 1.9%
3,150 Magna International, Class A 133,481
- --------------------------------------------------------
BANKING - 3.2%
2,757 Bank One 88,396
1,000 Chase Manhattan 77,688
3,850 North Fork Bancorporation 67,375
- --------------------------------------------------------
233,459
- --------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 3.8%
3,150 McCormick & Company 93,713
5,075 Pepsico 178,894
- --------------------------------------------------------
272,607
- --------------------------------------------------------
COMMUNICATIONS - 3.0%
2,150 Nortel Networks 217,150
- --------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING - 8.1%
6,900 Ceridian* 148,781
2,200 Computer Associates International 153,863
5,570 Compuware* 207,483
1,500 First Data 73,969
- --------------------------------------------------------
584,096
- --------------------------------------------------------
COMPUTERS & INFORMATION - 9.6%
1,550 Hewlett-Packard 176,603
1,550 International Business Machines 167,400
2,250 Lexmark International Group,
Class A* 203,625
1,800 Sun Microsystems* 139,388
- --------------------------------------------------------
687,016
- --------------------------------------------------------
ELECTRIC UTILITIES - 1.4%
3,175 CMS Energy 99,020
- --------------------------------------------------------
ELECTRICAL EQUIPMENT - 0.5%
1,225 Thomas & Betts 39,047
- --------------------------------------------------------
ELECTRONICS - 2.4%
2,050 Intel 168,741
- --------------------------------------------------------
FINANCIAL SERVICES - 7.1%
3,162 Citigroup 175,689
1,350 Federal Home Loan Mortgage
Corporation 63,534
2,675 Federal National Mortgage
Association 167,020
2,400 SLM Holding 101,400
- --------------------------------------------------------
507,643
- --------------------------------------------------------
FOOD RETAILERS - 1.5%
3,277 Albertson's 105,683
- --------------------------------------------------------
FOREST PRODUCTS & PAPER - 5.2%
3,375 Kimberly-Clark 220,214
3,575 Mead 155,289
- --------------------------------------------------------
375,503
- --------------------------------------------------------
HEALTH CARE PROVIDERS - 1.3%
5,850 Manor Care* 93,600
- --------------------------------------------------------
HEAVY MACHINERY - 3.2%
850 Applied Materials* 107,684
Value
Shares (Note 1)
HEAVY MACHINERY - Continued
2,200 Ingersoll-Rand $ 121,138
- --------------------------------------------------------
228,822
- --------------------------------------------------------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 2.1%
975 General Electric 150,881
- --------------------------------------------------------
INSURANCE - 5.0%
1,175 Aetna 65,580
4,700 AXA Financial 159,213
3,375 Reliastar Financial 132,258
- --------------------------------------------------------
357,051
- --------------------------------------------------------
MEDICAL SUPPLIES - 2.2%
1,050 Baxter International 65,953
3,450 Becton Dickinson & Company 92,288
- --------------------------------------------------------
158,241
- --------------------------------------------------------
METALS - 1.9%
5,325 Masco 135,122
- --------------------------------------------------------
OIL & GAS - 8.2%
6,675 Conoco, Class A 165,206
1,773 Exxon Mobil 142,837
1,700 Schlumberger 95,625
3,350 Tosco 91,078
329 Transocean Sedco Forex 11,087
2,700 Williams Companies (The) 82,519
- --------------------------------------------------------
588,352
- --------------------------------------------------------
PHARMACEUTICALS - 7.5%
3,425 Abbott Laboratories 124,370
2,650 Amgen* 159,166
2,800 Cardinal Health 134,050
1,750 Merck 117,359
- --------------------------------------------------------
534,945
- --------------------------------------------------------
RETAILERS - 3.0%
2,075 Federated Department Stores* 104,917
10,325 Office Depot* 112,930
- --------------------------------------------------------
217,847
- --------------------------------------------------------
TELEPHONE SYSTEMS - 10.5%
2,225 Alltel 183,980
1,875 Bell Atlantic 115,430
3,128 Global Crossing* 156,400
2,813 MCI WorldCom* 149,238
2,950 SBC Communications 143,813
- --------------------------------------------------------
748,861
- --------------------------------------------------------
TRANSPORTATION - 1.2%
900 US Freightways 43,088
3,325 Wisconsin Central Transport* 44,680
- --------------------------------------------------------
87,768
- --------------------------------------------------------
TOTAL COMMON STOCKS
(COST $6,704,636) $ 7,042,218
- --------------------------------------------------------
TOTAL INVESTMENTS AT VALUE - 98.2%
(COST $6,704,636) (A) $ 7,042,218
CASH AND OTHER ASSETS
NET OF LIABILITIES - 1.8% 128,575
- --------------------------------------------------------
NET ASSETS - 100.0% $ 7,170,793
- --------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is $6,777,983
resulting in gross unrealized appreciation and depreciation of $868,950 and
$604,715, respectively, and net unrealized appreciation of $264,235.
The accompanying notes are an integral part of the financial statements.
<PAGE>
25
TOUCHSTONE GROWTH & INCOME FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
Touchstone Growth & Income Fund
The S&P 500 Index posted an unprecedented fifth consecutive year of 20+% returns
in 1999 to end a phenomenal decade of U.S. equity market performance. 1999 was
similar to 1998 in that the overall market exceeded even the most opti mis tic
predictions, a narrow group of technology and growth stocks domi nated market
index returns, and the dispersion of returns between growth and value styles has
never been greater. The Touchstone Growth & Income Fund posted a 2.4% return for
1999, compared to 21.1% for the S&P 500 Index.
Despite three interest rate hikes by the Federal Reserve and record valuations
among technology stocks, the broad market posted solid returns in the first half
of the year, declined sharply in the third quarter and fully recovered by year
end to reach new highs. However, only a narrow group of stocks in the broad
market index participated in this record setting performance.
For the second consecutive year, growth managers fully participated in this
narrow market, while value managers generally remained on the sidelines. The
dominance of technology and the underperformance of the finance sector led to
the largest ever performance dispersion between the large cap style indices as
measured by the Russell 1000 Value Index (+7.4%) and the Russell 1000 Growth
Index (+33.2%). For the year, only 31% of the stocks in the S&P 500 outperformed
the index and 50% of the stocks had negative returns. The Russell 1000 Value
Index had similarly poor breadth, with only 35% of its stocks outperforming the
index, and 50% of its stocks declining. The majority of active large cap value
managers underperformed the value benchmark.
The manager of the Touchstone Growth & Income Fund, Scudder Kemper Investments,
observed that the Fund's performance relative to the benchmark and their peer
group suffered in the second half of the year. A number of portfolio holdings
declined sharply after posting negative revenue or earnings surprises. The
market, which typically is more forgiving of disappointments among low
price/earnings stocks, punished these underperformers nonethe less. A handful of
stocks including Xerox, Lockheed Martin, American Home Products, and First Union
were the most significant detractors from perform ance for the fourth quarter
and full year.
The most significant positive contributors to fourth quarter performance were
telecommunication and telecommunication equipment holdings, led by Corning (the
portfolio's largest position), which rallied 80% on continuing positive news
coming out of its fiber and photonics businesses. Global Crossing rose 83%
following its successful closure of the Frontier acquisition. Sprint received a
takeover bid from Worldcom and leapt 27% in the quarter. In the cyclical arena,
the portfolio benefited from its holdings in Georgia Pacific and Weyerhaeuser,
which both rallied 23% on news of a tight supply/demand balance in pulp and
container board. American Airlines (+21%) was the best performing of the major
airlines during the quarter, announcing the spin-off of Sabre Group earlier than
expected. In the technology sector, Philips Electronics posted a 30% gain, as it
benefited from the tight capacity in semiconductor contract manufacturing
(through its ownership of Taiwan Semiconductor). In the financial sector, the
Fund was rewarded by evidence of the turn in the property and casualty insurance
cycle, as Marsh & McLennan (+38%) and St. Paul (+22%) contributed most signifi
cantly. Morgan Stanley Dean Witter (+58%) and Lehman Brothers (+45%) also added
value, as they both posted positive surprises on the heels of strong investment
banking results.
<PAGE>
26
TOUCHSTONE GROWTH & INCOME FUND
As a disciplined value investor, Scudder will adhere to the value process which
they have historically followed. They believe that the portfolio is positioned
to ensure participation when the style shift occurs.
GROWTH OF A $10,000 INVESTMENT
Average Annual Total Return
One Year Ended 12/31/99 2.4%
Since Inception 01/01/99 2.4%
Cumulative Total Return
Since Inception 01/01/99 2.4%
Touchstone S&P 500 Composite Wiesenberger
Growth & Income Total Return Growth & Income
Fund (Major Index) (Minor Index)
1/99 10000 10000 10000
3/99 10105 10500 10166
6/99 11208 11240 11045
9/99 9895 10537 10234
12/99 10268 12105 11264
Past performance is not indicative of future performance.
Performance information does not reflect fees that are paid by the separate
accounts whrough which shares of the fund are sold. Inclusion of those fees
would reduce total return figures for all periods.
<PAGE>
27
TOUCHSTONE GROWTH & INCOME FUND
SCHEDULE OF INVESTMENTS
December 31, 1999
Value
Shares (Note 1)
COMMON STOCKS - 98.6%
AEROSPACE & DEFENSE - 2.9%
31,700 Lockheed Martin $ 693,438
10,500 Northrop Grumman 567,656
12,800 Rockwell International 612,800
- --------------------------------------------------------
1,873,894
- --------------------------------------------------------
AIRLINES - 0.7%
6,500 AMR* 435,500
- --------------------------------------------------------
AUTOMOTIVE - 2.0%
13,100 Ford Motor 700,031
15,966 Meritor Automotive 309,341
6,700 Paccar 296,894
- --------------------------------------------------------
1,306,266
- --------------------------------------------------------
BANKING - 9.0%
21,600 Bank of America 1,084,050
17,300 Chase Manhattan 1,343,994
17,946 First Union 588,853
27,900 FleetBoston Financial 971,269
24,300 PNC Bank 1,081,350
32,800 US Bancorp 781,050
- --------------------------------------------------------
5,850,566
- --------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 3.5%
16,200 Heinz (H. J.) 644,963
37,800 Pepsico 1,332,450
13,700 Philip Morris 317,669
- --------------------------------------------------------
2,295,082
- --------------------------------------------------------
CHEMICALS - 1.4%
11,600 Air Products & Chemicals 389,325
1 Du Pont (E.I.) De Nemours 66
41,700 Lyondell Petro Chemical 531,675
- --------------------------------------------------------
921,066
- --------------------------------------------------------
COMMERCIAL SERVICES - 1.6%
31,000 Unicom 1,038,500
- --------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING - 3.5%
16,100 Cadence Design Systems* 386,400
26,900 Computer Associates International 1,881,319
- --------------------------------------------------------
2,267,719
- --------------------------------------------------------
COSMETICS & PERSONAL CARE - 1.0%
9,900 Colgate-Palmolive 643,500
- --------------------------------------------------------
ELECTRIC UTILITIES - 1.2%
11,200 Cinergy 270,200
18,532 ScottishPower, ADR 518,896
- --------------------------------------------------------
789,096
- --------------------------------------------------------
ELECTRICAL EQUIPMENT - 1.0%
10,900 Emerson Electric 625,388
- --------------------------------------------------------
ELECTRONICS - 2.6%
12,400 Koninklijke (Royal) Philips
Electronics (NY Reg.) 1,674,000
- --------------------------------------------------------
FINANCIAL SERVICES - 9.2%
32,200 Citigroup 1,789,113
17,900 Federal National Mortgage
Association 1,117,631
5,000 J.P. Morgan 633,125
10,200 Lehman Brothers Holdings 863,813
6,400 Morgan Stanley Dean Witter 913,600
16,000 SLM Holding 676,000
- --------------------------------------------------------
5,993,282
- --------------------------------------------------------
Value
Shares (Note 1)
FOOD RETAILERS - 0.8%
15,326 Albertson's $ 494,264
- --------------------------------------------------------
FOREST PRODUCTS & PAPER - 2.2%
8,900 Georgia-Pacific 451,675
13,200 Weyerhaeuser 947,925
- --------------------------------------------------------
1,399,600
- --------------------------------------------------------
HEAVY MACHINERY - 1.8%
22,100 Parker Hannifin 1,134,006
- --------------------------------------------------------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 1.6%
6,800 General Electric 1,052,300
- --------------------------------------------------------
HOUSEHOLD PRODUCTS - 5.5%
27,500 Corning 3,545,776
- --------------------------------------------------------
INSURANCE - 8.0%
36,900 Allstate Corporation (The) 885,600
33,600 Lincoln National 1,344,000
10,700 Marsh & McLennan Companies 1,023,856
26,300 St. Paul Companies (The) 885,981
20,031 XL Capital, Class A 1,039,108
- --------------------------------------------------------
5,178,545
- --------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - 1.7%
17,700 McGraw-Hill Companies (The) 1,090,763
- --------------------------------------------------------
METALS - 0.8%
17,450 Allegheny Technologies 391,534
18,300 Oregon Steel Mills 145,256
- --------------------------------------------------------
536,790
- --------------------------------------------------------
OIL & GAS - 11.4%
18,100 Burlington Resources 598,431
22,200 Conoco, Class A 549,450
22,479 Conoco, Class B 559,165
32,821 Exxon Mobil 2,644,142
12,200 Royal Dutch Petroleum 737,338
17,300 Texaco 939,606
13,044 Total Fina S.A., ADR 903,297
14,100 Williams Companies (The) 430,931
- --------------------------------------------------------
7,362,360
- --------------------------------------------------------
PHARMACEUTICALS - 3.8%
31,900 American Home Products 1,258,056
8,600 Bristol-Myers Squibb 552,013
11,700 Glaxo Wellcome, ADR 653,738
- --------------------------------------------------------
2,463,807
- --------------------------------------------------------
RETAILERS - 1.2%
11,000 Dayton Hudson 807,813
- --------------------------------------------------------
TELEPHONE SYSTEMS - 17.2%
13,100 Alltel 1,083,206
29,600 AT&T 1,502,200
37,800 Bell Atlantic 2,327,063
40,400 Bellsouth 1,891,225
10,045 Global Crossing* 502,250
13,700 GTE 966,706
38,602 SBC Communications 1,881,848
15,500 Sprint 1,043,344
- --------------------------------------------------------
11,197,842
- --------------------------------------------------------
TRANSPORTATION - 3.0%
22,400 Canadian National Railway 589,400
30,500 CSX 956,938
18,800 Norfolk Southern 385,400
- --------------------------------------------------------
1,931,738
- --------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
28
TOUCHSTONE GROWTH & INCOME FUND
Schedule of Investments continued
Value
Shares (Note 1)
COMMON STOCKS - Continued
TOTAL COMMON STOCKS
(COST $62,024,769) $63,909,463
- --------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS - 0.6%
CHEMICALS - 0.6%
11,400 Monsanto, ACES $ 377,625
- --------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $471,268) $ 377,625
- --------------------------------------------------------
Value
Shares (Note 1)
TOTAL INVESTMENTS AT VALUE - 99.2%
(COST $62,496,037) (A) $64,287,088
CASH AND OTHER ASSETS
NET OF LIABILITIES - 0.8% 492,194
- --------------------------------------------------------
NET ASSETS - 100.0% $64,779,282
- --------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is
$62,525,563 resulting in gross unrealized appreciation and depreciation of
$9,388,453 and $7,626,928, respectively, and net unrealized appreciation of
$1,761,525
ACES - Adjustable Conversion-Rate Equity Security
ADR - American Depository Receipt
The accompanying notes are an integral part of the financial statements.
<PAGE>
29
TOUCHSTONE ENHANCED 30 FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
Touchstone Enhanced 30 Fund
At the end of 1999, significant transaction activity contributed to the
Touchstone Enhanced 30 Fund slightly lagging the market. As of December 31,
1999, the Enhanced 30 had a total return of 6.0%, compared to the 6.6% return on
the Dow.
The Touchstone Enhanced 30 is designed to track and/or change with its
benchmark, the Dow Jones Industrial Average. This Fund is always invested in 30
large names, of which 20 must be in the Dow. That gives the opportunity to
enhance the Fund by replacing slower growing companies with more rapid movers.
The Enhanced 30 currently has seven substitutions for more mature Dow
names, which offer expectancy of faster earnings growth than the stocks
replaced, without impairing portfolio quality. These substitutions include Cisco
Systems, Bank of America, Pfizer, Abbott Laboratories, MCI Worldcom, Intel
Corporation, and Lucent Technologies. The stocks replaced include Alcoa, AT&T,
Eastman Kodak, General Motors, International Paper and Philip Morris.
GROWTH OF A $10,000 INVESTMENT
Average Annual Total Return
One Year Ended 12/31/99 N/A
Since Inception 05/01/99 N/A
Cumulative Total Return
Since Inception 05/01/99 6.0%
Touchstone Dow Jones
Enhanced Industrial Average
30 Fund (Major Index)
5/99 10000 10000
6/99 10160 10169
9/99 9600 9581
12/99 10599 10656
Past performance is not indicative of future performance.
Performance information does not reflect fees that are paid by the separate
accounts whrough which shares of the fund are sold. Inclusion of those fees
would reduce total return figures for all periods.
<PAGE>
30
TOUCHSTONE ENHANCED 30 FUND
SCHEDULE OF INVESTMENTS
December 31, 1999
Value
Shares (Note 1)
COMMON STOCKS - 98.4%
AEROSPACE & DEFENSE - 5.4%
8,900 Boeing $ 369,906
6,200 Honeywell International 357,663
- --------------------------------------------------------
727,569
- --------------------------------------------------------
BANKING - 6.3%
2,900 American Express 482,125
7,300 Bank of America 366,369
- --------------------------------------------------------
848,494
- --------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 6.2%
7,700 Coca-Cola 448,525
9,700 McDonald's 391,031
- --------------------------------------------------------
839,556
- --------------------------------------------------------
BUILDING MATERIALS - 3.6%
7,200 Home Depot 493,650
- --------------------------------------------------------
CHEMICALS - 3.2%
6,500 Du Pont (E.I.) de Nemours 428,188
- --------------------------------------------------------
COMMUNICATIONS - 3.7%
6,700 Lucent Technologies 501,244
- --------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING - 4.0%
4,600 Microsoft* 537,050
- --------------------------------------------------------
COMPUTERS & INFORMATION - 13.4%
6,500 Cisco Systems* 696,309
5,700 Hewlett-Packard 649,444
4,500 International Business Machines 486,000
- --------------------------------------------------------
1,831,753
- --------------------------------------------------------
COSMETICS & PERSONAL CARE - 3.2%
4,000 Proctor & Gamble 438,250
- --------------------------------------------------------
ELECTRONICS - 3.6%
5,900 Intel 485,644
- --------------------------------------------------------
ENTERTAINMENT & LEISURE - 3.2%
14,700 Walt Disney Company (The) 429,975
- --------------------------------------------------------
FINANCIAL SERVICES - 7.0%
9,500 Citigroup 527,844
3,300 J.P. Morgan 417,863
- --------------------------------------------------------
945,707
- --------------------------------------------------------
Value
Shares (Note 1)
HEAVY MACHINERY - 5.5%
6,600 Caterpillar $ 310,613
6,600 United Technologies 429,000
- --------------------------------------------------------
739,613
- --------------------------------------------------------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 4.1%
3,600 General Electric 557,100
- --------------------------------------------------------
INDUSTRIAL - DIVERSIFIED - 2.9%
4,000 Minnesota Mining
& Manufacturing (3M) 391,500
- --------------------------------------------------------
MEDICAL SUPPLIES - 2.7%
3,900 Johnson & Johnson 363,188
- --------------------------------------------------------
OIL & GAS - 3.1%
5,148 Exxon Mobil 414,736
- --------------------------------------------------------
PHARMACEUTICALS - 8.5%
9,400 Abbott Laboratories 341,338
6,000 Merck 402,375
12,700 Pfizer 411,956
- --------------------------------------------------------
1,155,669
- --------------------------------------------------------
RETAILERS - 4.2%
8,200 Wal-Mart Stores 566,825
- --------------------------------------------------------
TELEPHONE SYSTEMS - 4.6%
4,950 MCI WorldCom* 262,659
7,400 SBC Communications 360,750
- --------------------------------------------------------
623,409
- --------------------------------------------------------
TOTAL COMMON STOCKS
(COST $12,240,619) $13,319,120
- --------------------------------------------------------
TOTAL INVESTMENTS AT VALUE - 98.4%
(COST $12,240,619) (A) $13,319,120
CASH AND OTHER ASSETS
NET OF LIABILITIES - 1.6% 212,984
- --------------------------------------------------------
NET ASSETS - 100.0% $13,532,104
- --------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is
$12,240,619, resulting in gross unrealized appreciation and depreciation of
$1,673,127 and $594,626, respectively, and net unrealized appreciation of
$1,078,501.
The accompanying notes are an integral part of the financial statements.
<PAGE>
31
TOUCHSTONE BALANCED FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
Touchstone Balanced Fund
The U.S. stock market continued its strong performance in 1999, completing
five consecutive years of sharply rising prices. Meanwhile, it was a rough year
for bonds and, by some measures, it was the worst year ever. At year end, bonds
and fixed income securities represented 40% of the Balanced Fund's assets. The
Touchstone Balanced Fund had a return of 9.6% for 1999. Its benchmark, the
Lehman Brothers Aggregate Index, had a return of (0.8)%.
The U.S. economy remains strong and there are indications of excessive optimism
in the stock market. The three rate increases implemented by the Federal Reserve
since June 1999 have been taken in stride, and even welcomed, by the stock
market. The stock market was characterized throughout 1999 -- and especially in
the fourth quarter -- by two extremely contradictory trends: the rapid
escalation of many technology stocks and the only modest gains or even price
declines for stocks across most other industry sectors. Many technology stocks
did not generate any earnings, yet increased dramatically, driven by the
prospect of continued rapid growth for e-commerce and the Internet. On the other
hand, many "bricks and mortar" stocks with solid earnings and favorable business
prospects declined in price.
The manager of the Touchstone Balanced Fund, OpCap Advisors, observed that as
technology stocks soared, many non-tech issues were left behind. A full
one-third of NYSE stocks declined 20% or more in 1999. Even stocks of
traditional companies with excellent competitive positions and strong earnings
growth tended to fare poorly in this technology-focused market environment.
Perform ance disparities among industry sectors and types of stocks are hardly
new. Nonetheless, few such disparities have been as dramatic as that which
occurred during 1999 between the technology stocks and the rest of the market.
OpCap remained focused on generating excellent long-term results with
below-market risk by investing in companies with superior fundamentals and inex
pensive valuations. At year end, common stocks represented 55% of the Fund's net
assets.
Among the Fund's equity holdings, Oak Industries, a leading manufacturer of
cable TV and telecommunications infrastructure products, was a top contribu tor
to performance. In November, Corning agreed to acquire Oak for approxi mately
$75 per share, a 51% premium to market, confirming OpCap's assessment of the
inherent worth of Oak's valuable franchises. Another major contributor to
performance was Molex, the second largest electronics connector manufac turer in
the world. The company's stock appreciated significantly during the last few
months of the year, reflecting the recovery of Asian markets and the company's
strong position in cell phone components. Emmis, a major broadcasting company
focused on large media markets, continues to be rewarded by the market for
strong performance in radio and television.
The five largest equity holdings at December 31, 1999 were AMFM, representing
3.0% of net assets; Computer Associates International, representing 1.8% of net
assets; Federal Home Loan Mortgage Corporation, representing 1.7% of the Fund's
net assets; Wells Fargo, representing 1.6% of net assets; and Sprint,
representing 1.5% of net assets.
In addition to its holdings of common stocks, bonds, and fixed income
securities, the Fund was invested in cash and cash equivalents. The fixed income
portion of the portfolio lagged along with the bond market at large.
<PAGE>
32
TOUCHSTONE BALANCED FUND
GROWTH OF A $10,000 INVESTMENT
Average Annual Total Return
One Year Ended 12/31/99 9.6%
Five Years Ended 12/31/99 14.8%
Since Inception 11/21/94 14.8%
Cumulative Total Return
Since Inception 11/21/94 102.8%
WIESENBERGER: BALANCED - DOMESTIC - VARIABLE ANNUITY (MINOR INDEX)
Blend: Wiesenberger:
60% S&P 500- Balanced
S&P 500 Lehman 40% Lehman -Domestic-
Touchstone Composite Brothers Brothers Variable
Balanced Total Return Aggregate Bond Aggregate Annuity
Fund (Major Index) (Major Index 2) (Minor Index) (Minor Index)
11/94 10000 10000 10000 10000 10000
12/94 10170 10148 10069 10101 10072
3/95 10780 11136 10577 10851 10575
6/95 11842 12200 11221 11688 11266
9/95 12576 13169 11442 12290 11847
12/95 12668 13962 11929 12898 12275
3/96 13109 14711 11718 13174 12517
6/96 13276 15371 11784 13512 12735
9/96 13737 15846 12002 13820 13013
12/96 14793 17167 12362 14632 13623
3/97 14701 17628 12293 14800 13535
6/97 16183 20705 12745 16500 14924
9/97 17206 22256 13168 17425 15896
12/97 17546 22895 13556 17894 16023
3/98 18750 26089 13767 19445 17273
6/98 18851 26950 14088 19971 17612
9/98 17127 24269 14684 19095 16428
12/98 18500 29437 14733 21455 18516
3/99 18646 30908 14658 22009 18880
6/99 19799 33087 14529 22816 19599
9/99 18924 31019 14629 21973 18798
12/99 20279 35635 14611 23847 20306
Past performance is not indicative of future performance.
Performance information does not reflect fees that are paid by the separate
accounts whrough which shares of the fund are sold. Inclusion of those fees
would reduce total return figures for all periods.
<PAGE>
33
TOUCHSTONE BALANCED FUND
SCHEDULE OF INVESTMENTS
December 31, 1999
Value
Shares (Note 1)
COMMON STOCKS - 56.1%
ADVERTISING - 2.7%
4,000 Lamar Advertising* $ 242,250
4,800 WPP Group 399,000
5,100 Young & Rubicam 360,825
- --------------------------------------------------------
1,002,075
- --------------------------------------------------------
AEROSPACE & DEFENSE - 0.9%
8,000 Boeing 332,500
- --------------------------------------------------------
AIRLINES - 1.3%
7,200 AMR* 482,400
- --------------------------------------------------------
BANKING - 4.3%
3,100 Chase Manhattan 240,831
9,948 FleetBoston Financial 346,315
11,000 Household International 409,750
14,300 Wells Fargo 578,256
- --------------------------------------------------------
1,575,152
- --------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 2.2%
11,216 Diageo, ADR 358,912
11,400 McDonald's 459,563
- --------------------------------------------------------
818,475
- --------------------------------------------------------
BUILDING MATERIALS - 0.1%
5,778 Huttig Building Products* 28,528
- --------------------------------------------------------
CHEMICALS - 2.2%
7,500 Du Pont (E.I.) De Nemours 494,063
8,900 Monsanto 317,063
- --------------------------------------------------------
811,126
- --------------------------------------------------------
COMMERCIAL SERVICES - 1.4%
5,000 PerkinElmer 208,438
17,300 Waste Management 297,344
- --------------------------------------------------------
505,782
- --------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING - 1.8%
9,600 Computer Associates International 671,400
- --------------------------------------------------------
COMPUTERS & INFORMATION - 0.8%
11,100 Compaq Computer 300,394
- --------------------------------------------------------
CONTAINERS & PACKAGING - 0.4%
12,000 American National Can Group 156,000
- --------------------------------------------------------
COSMETICS & PERSONAL CARE - 0.8%
9,000 Avon Products 297,000
- --------------------------------------------------------
ELECTRICAL EQUIPMENT - 1.3%
8,000 Emerson Electric 459,000
- --------------------------------------------------------
ELECTRONICS - 2.5%
10,000 Arrow Electronics* 253,750
6,500 Avnet 393,250
4,700 Molex 266,431
- --------------------------------------------------------
913,431
- --------------------------------------------------------
FINANCIAL SERVICES - 3.8%
9,000 Citigroup 500,063
9,800 Countrywide Credit 247,450
13,600 Federal Home Loan Mortgage
Corporation 640,050
- --------------------------------------------------------
1,387,563
- --------------------------------------------------------
FOOD RETAILERS - 1.1%
21,000 Kroger Company (The)* 396,375
- --------------------------------------------------------
HEAVY MACHINERY - 4.2%
10,000 Applied Power, Class A 367,500
7,000 Caterpillar 329,438
Value
Shares (Note 1)
HEAVY MACHINERY - Continued
6,000 Dover $ 272,250
8,500 Parker Hannifin 436,156
3,000 W.W. Grainger 143,438
- --------------------------------------------------------
1,548,782
- --------------------------------------------------------
INDUSTRIAL - DIVERSIFIED - 2.4%
10,000 Carlisle Companies 360,000
5,500 Minnesota Mining
& Manufacturing (3M) 538,313
- --------------------------------------------------------
898,313
- --------------------------------------------------------
INSURANCE - 4.2%
7,200 AFLAC 339,750
8,729 Conseco 156,031
9,000 Everest Reinsurance Holdings 200,813
7,000 PartnerRe 227,063
9,000 Protective Life 286,313
6,600 XL Capital, Class A 342,375
- --------------------------------------------------------
1,552,345
- --------------------------------------------------------
LODGING - 1.1%
193,200 Homestead Village* 410,550
- --------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - 4.0%
14,100 AMFM* 1,103,314
3,000 Emmis Communications, Class A* 373,922
- --------------------------------------------------------
1,477,236
- --------------------------------------------------------
METALS - 1.6%
3,900 Alcoa 323,700
13,000 Crane 258,375
- --------------------------------------------------------
582,075
- --------------------------------------------------------
OIL & GAS - 0.9%
9,400 Anadarko Petroleum 320,775
- --------------------------------------------------------
PHARMACEUTICALS - 2.2%
8,800 American Home Products 347,050
6,200 Teva Pharmaceutical Industries, ADR 444,463
- --------------------------------------------------------
791,513
- --------------------------------------------------------
REAL ESTATE - 0.9%
17,500 Prologis Trust, REIT 336,875
- --------------------------------------------------------
RESTAURANTS - 0.4%
10,000 Bob Evans Farms 154,375
- --------------------------------------------------------
RETAILERS - 1.3%
6,000 CVS 239,625
7,000 May Department Stores 225,750
- --------------------------------------------------------
465,375
- --------------------------------------------------------
TELEPHONE SYSTEMS - 3.3%
4,500 Bell Atlantic 277,031
7,500 MCI WorldCom* 397,969
8,000 Sprint 538,500
- --------------------------------------------------------
1,213,500
- --------------------------------------------------------
TRANSPORTATION - 2.0%
12,500 Air Express International 403,906
6,600 Sabre Group Holdings* 338,250
- --------------------------------------------------------
742,156
- --------------------------------------------------------
TOTAL COMMON STOCKS
(COST $20,186,733) $20,631,071
- --------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
34
TOUCHSTONE BALANCED FUND
Schedule of Investments continued
Value
Shares (Note 1)
PREFERRED STOCK - 0.9%
ENTERTAINMENT & LEISURE - 0.9%
10,200 News Corporation Limited
(The), ADR $ 341,063
- --------------------------------------------------------
TOTAL PREFERRED STOCK
(COST $250,660) $ 341,063
- --------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date (Note 1)
ASSET-BACKED SECURITIES - 2.0%
ELECTRIC UTILITIES - 2.0%
$ 750,000 Peco Energy
Transition Trust,
Series 1999-A,
Class A2 5.63% 03/01/05 $ 727,823
- --------------------------------------------------------
FINANCIAL SERVICES - 0.0%
4,111 Merrill Lynch
Mortgage
Investors, Series
1991-I, Class A 7.65% 01/15/12 4,113
- --------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(COST $753,735) $ 731,936
- --------------------------------------------------------
CORPORATE BONDS - 16.7%
BANKING - 3.3%
$ 750,000 Associates
Corporation of
North America 5.75% 11/01/03 $ 714,094
250,000 BB&T 7.25% 06/15/07 241,972
250,000 Chase Manhattan 7.25% 06/01/07 245,109
691 Nykredit 6.00% 10/01/26 89
- --------------------------------------------------------
1,201,264
- --------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 0.4%
160,000 Coca-Cola
Femsa 8.95% 11/01/06 160,400
- --------------------------------------------------------
CHEMICALS - 0.3%
100,000 Belo 6.875% 06/01/02 98,505
- --------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING - 1.0%
400,000 Computer
Associates
International 6.375% 04/15/05 372,143
- --------------------------------------------------------
ELECTRIC UTILITIES - 3.9%
215,000 Financiera
Energy 9.375% 06/15/06 181,635
750,000 Tennessee Valley
Authority 5.00% 12/18/03 703,337
550,000 Wisconsin
Electric Power 6.625% 12/01/02 545,182
- --------------------------------------------------------
1,430,154
- --------------------------------------------------------
FINANCIAL SERVICES - 4.5%
20,000 Access Financial 7.10% 05/15/21 19,886
750,000 AT&T Capital 7.50% 11/15/00 753,668
250,000 Ford Credit 5.75% 01/25/01 247,395
500,000 GMAC 7.125% 05/01/01 500,883
120,000 Paine Webber
Group 7.00% 03/01/00 120,086
- --------------------------------------------------------
1,641,918
- --------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date (Note 1)
MEDIA - BROADCASTING & PUBLISHING - 1.3%
$ 500,000 CSC Holdings 7.625% 07/15/18 $ 465,000
- --------------------------------------------------------
METALS - 0.8%
300,000 AK Steel 9.125% 12/15/06 305,250
- --------------------------------------------------------
MULTIPLE UTILITIES - 0.8%
300,000 New Brunswick 7.125% 10/01/02 301,014
- --------------------------------------------------------
OIL & GAS - 0.4%
150,000 Petroleos
Mexicanos 8.85% 09/15/07 143,625
- --------------------------------------------------------
TOTAL CORPORATE BONDS (COST $6,377,189) $ 6,119,273
- --------------------------------------------------------
MORTGAGE-BACKED SECURITIES - 11.5%
$ 35,000 Federal National
Mortgage
Association 6.15% 10/25/07 $ 34,514
500,000 Federal National
Mortgage
Association 6.00% 05/15/08 467,312
750,000 Federal National
Mortgage
Association 6.50% 04/29/09 702,708
633,091 Federal National
Mortgage
Association 6.50% 12/01/12 614,351
695,793 Federal National
Mortgage
Association 6.00% 01/01/14 660,496
500,000 Federal National
Mortgage
Association 6.247% 06/25/16 467,015
564,575 Federal National
Mortgage
Association 6.50% 07/18/28 525,119
40,000 General Electric
Capital Mortgage
Services, Series
1993-14, Class A7 6.50% 11/25/23 34,928
44,500 General Electric
Capital Mortgage
Services, Series
1994-10,
Class A10 6.50% 03/25/24 42,329
665,817 Government
National
Mortgage
Association 4.00% 10/20/25 601,874
40,000 Merrill Lynch
Mortgage
Investors, Series
1995-C3,
Class A3 7.089% 12/26/25 39,333
50,000 Prudential Home
Mortgage
Securities, Series
1994-17,
Class A6 6.25% 04/25/24 41,609
- --------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $4,510,271) $ 4,231,588
- --------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
35
TOUCHSTONE BALANCED FUND
Schedule of Investments continued
Principal Interest Maturity Value
Amount Rate Date (Note 1)
MUNICIPAL BONDS - 0.5%
HOUSING - 0.4%
$ 40,000 Baltimore
Community
Development
Financing 8.20% 08/15/07 $ 41,504
40,000 New York State
Housing Finance
Agency Service 7.50% 09/15/03 40,262
50,000 Ohio Housing
Financial Agency 7.90% 10/01/14 51,051
- --------------------------------------------------------
132,817
- --------------------------------------------------------
TRANSPORTATION - 0.1%
30,000 Oklahoma City
Airport 9.40% 11/01/10 32,908
- --------------------------------------------------------
TOTAL MUNICIPAL BONDS
(COST $161,278) $ 165,725
- --------------------------------------------------------
SOVEREIGN GOVERNMENT OBLIGATIONS - 2.0%
SOUTH AFRICA - 1.4%
ZAR 3,180,000 Republic
of South
Africa 13.00% 08/31/10 $ 496,942
- --------------------------------------------------------
UNITED KINGDOM - 0.6%
GBP 105,000 United
Kingdom
Treasury 8.00% 12/07/15 226,428
- --------------------------------------------------------
TOTAL SOVEREIGN GOVERNMENT
OBLIGATIONS (COST $819,277) $ 723,370
- --------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date (Note 1)
U.S. TREASURY OBLIGATIONS - 9.0%
$ 100,000 U.S. Treasury
Note 5.75% 10/31/00 $ 99,781
550,000 U.S. Treasury
Note 5.625% 05/15/01 545,875
350,000 U.S. Treasury
Note 5.75% 08/15/03 342,672
50,000 U.S. Treasury
Note 7.00% 07/15/06 51,219
505,000 U.S. Treasury
Bond 6.25% 04/30/01 505,474
725,000 U.S. Treasury
Bond 7.25% 08/15/22 764,422
975,000 U.S. Treasury
Bond 6.75% 08/15/26 979,266
- --------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $3,511,444) $ 3,288,709
- --------------------------------------------------------
TOTAL INVESTMENTS AT VALUE - 98.7%
(COST $36,570,587)(A) $36,232,735
CASH AND OTHER ASSETS
NET OF LIABILITIES - 1.3% 483,299
- --------------------------------------------------------
NET ASSETS - 100.0% $36,716,034
- --------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is
$36,577,477, resulting in gross unrealized appreciation and depreciation of
$3,457,291 and $3,802,033, respectively, and net unrealized depreciation of
$344,742.
ADR - American Depository Receipt
REIT - Real Estate Investment Trust
GBP - Great Britain Pound
ZAR - South African Rand
The accompanying notes are an integral part of the financial statements.
<PAGE>
36
TOUCHSTONE BOND FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
Touchstone Bond Fund
The bond market ended its final quarter of the century on a down note, generat
ing a negative return in December and locking in an equally poor return for the
quarter. The Federal Reserve induced sell-off continued and produced only the
second negative total return for bonds in a year since 1975. There are few
places to hide in the fixed income market when the Federal Reserve begins to
tighten the money supply. The benchmark for the Bond Fund, the Lehman Brothers
Aggregate Index, had a (0.8)% return in 1999. The Bond Fund return for the same
period was (1.9)%.
This environment wasn't conducive to an outstanding bond portfolio performance.
While the Touchstone Bond Fund is structured to produce above market income as a
defensive measure, lower prices have offset this tactic causing returns to
closely track the index. Performance for the account gross of fees for the
fourth quarter and the year were -0.21% and -0.97% versus -0.12% and -0.83% for
the Lehman Brothers Aggregate Index.
Fixed income has not been the investment asset of choice for the past several
years when compared to the stellar returns in the equity market. The manager of
the Touchstone Bond Fund, Fort Washington Investment Advisors, believes that
there could continue to be rough sledding in the bond market.
GROWTH OF A $10,000 INVESTMENT
Average Annual Total Return
One Year Ended 12/31/99 (1.3%)
Since Inception 01/01/99 (1.3%)
Cumulative Total Return
Since Inception 01/01/99 (1.3%)
Wiesenberger:
Lehman Corporate -
Brothers Investment
Touchstone Aggregate Bond Grade
Bond Fund (Major Index) (Minor Index)
1/99 10000 10000 10000
3/99 9951 9949 9940
6/99 9862 9861 9803
9/99 9921 9929 9847
12/99 9881 9917 9830
Past performance is not indicative of future performance.
Performance information 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 total return figures for all periods.
<PAGE>
37
TOUCHSTONE BOND FUND
SCHEDULE OF INVESTMENTS
December 31, 1999
Principal Interest Maturity Value
Amount Rate Date (Note 1)
AGENCY FOR INTERNATIONAL DEVELOPMENT BONDS - 1.9%
CENTRAL AMERICA - 1.2%
$ 120,000 Central America
International
Development,
Series F+ 10.00% 12/01/11 $ 132,586
120,000 Central America
International
Development,
Series G+ 10.00% 12/01/11 132,586
120,000 Central America
International
Development,
Series H+ 10.00% 12/01/11 132,586
- --------------------------------------------------------
397,758
- --------------------------------------------------------
HONDURAS - 0.7%
100,000 Republic of Honduras
International
Development,
Series C+ 13.00% 06/01/06 118,494
100,000 Republic of Honduras
International
Development,
Series D+ 13.00% 06/01/11 133,383
- --------------------------------------------------------
251,877
- --------------------------------------------------------
TOTAL AGENCY FOR INTERNATIONAL
DEVELOPMENT BONDS (COST $560,000) $ 649,635
- --------------------------------------------------------
ASSET-BACKED SECURITIES - 8.0%
CREDIT CARD RECEIVABLES - 1.8%
$ 650,000 Discover Card Master
Trust, Series
1998-6, Class A 5.85% 01/17/06 $ 626,730
- --------------------------------------------------------
ELECTRIC UTILITIES - 2.7%
1,000,000 Peco Energy Transition
Trust, Series 1999-A,
Class A4 5.80% 03/01/07 951,730
- --------------------------------------------------------
FINANCIAL SERVICES - 3.5%
28,690 Chase Manhattan
Grantor Trust,
Series 1996-A,
Class A 5.20% 02/15/02 28,595
900,000 Chemical Credit
Card Master Trust,
Series 1996-2,
Class A 5.98% 09/15/08 855,405
72,833 Navistar Financial
Corp. Owner Trust,
Series 1996-A,
Class A2 6.35% 11/15/02 72,795
246,067 World Omni
Auto Lease,
Series 1997-B,
Class A3 6.18% 11/25/03 246,007
- --------------------------------------------------------
1,202,802
- --------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(COST $2,840,733) $ 2,781,262
- --------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date (Note 1)
CORPORATE BONDS - 50.7%
AIRLINES - 4.1%
$1,500,000 Delta Air Lines,
Series C 6.65% 03/15/04 $ 1,432,586
- --------------------------------------------------------
BANKING - 5.3%
1,000,000 American
Express 6.75% 06/23/04 982,550
500,000 Credit Suisse
First Boston -
London 7.90% 05/01/07 475,729
350,000 First Union 6.55% 10/15/35 332,532
49,276 Mercantile Safe
Deposit+ 12.125% 01/02/01 49,399
- --------------------------------------------------------
1,840,210
- --------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 2.5%
1,000,000 Pepsi Bottling, 144A
5.625% 02/17/09 882,956
- --------------------------------------------------------
CHEMICALS - 2.8%
1,000,000 Du Pont (E.I.)
De Nemours 6.875% 10/15/09 967,203
- --------------------------------------------------------
COMMUNICATIONS - 1.4%
500,000 Harris
Corporation 6.65% 08/01/06 497,730
- --------------------------------------------------------
ELECTRIC UTILITIES - 8.2%
1,000,000 Consumers
Energy,
Series B 6.50% 06/15/18 930,469
1,000,000 PSE&G Capital 6.74% 10/23/01 988,668
1,000,000 Tennessee Valley
Authority,
Series G 5.375% 11/13/08 891,177
- --------------------------------------------------------
2,810,314
- --------------------------------------------------------
ELECTRONICS - 2.7%
1,000,000 Raytheon 5.70% 11/01/03 938,371
- --------------------------------------------------------
FINANCIAL SERVICES - 5.1%
750,000 Ford Credit 5.75% 02/23/04 710,515
200,000 Ford Credit 6.75% 05/15/05 194,561
1,000,000 Safeco Capital 8.072% 07/15/37 879,482
- --------------------------------------------------------
1,784,558
- --------------------------------------------------------
FOREST PRODUCTS & PAPER - 0.8%
250,000 Georgia-Pacific 9.50% 05/15/22 264,531
- --------------------------------------------------------
HEALTH CARE PROVIDERS - 2.3%
850,000 Columbia/HCA
Health 6.73% 07/15/45 791,072
- --------------------------------------------------------
HOUSEHOLD PRODUCTS - 2.0%
750,000 Owens-Illinois 7.15% 05/15/05 696,290
- --------------------------------------------------------
HOUSING - 2.6%
1,000,000 Champion
Enterprises,
144A 7.625% 05/15/09 897,780
- --------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - 2.2%
500,000 Cox
Communications 6.375% 06/15/00 500,493
250,000 News America
Holdings 10.125% 10/15/12 275,052
- --------------------------------------------------------
775,545
- --------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
TOUCHSTONE BOND FUND
Schedule of Investments continued
Principal Interest Maturity Value
Amount Rate Date (Note 1)
CORPORATE BONDS - Continued
OIL & GAS - 2.2%
$ 750,000 Husky Oil 8.90% 08/15/28 $ 748,947
- --------------------------------------------------------
RETAILERS - 1.4%
500,000 Wal-Mart Stores 5.85% 06/01/00 499,703
- --------------------------------------------------------
TELEPHONE SYSTEMS - 3.0%
1,000,000 MCI WorldCom 8.875% 01/15/06 1,044,870
- --------------------------------------------------------
TRANSPORTATION - 2.1%
750,000 Norfolk Southern 7.35% 05/15/07 733,254
- --------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $18,477,454) $17,605,920
- --------------------------------------------------------
MORTGAGE-BACKED SECURITIES - 30.2%
$ 236,999 Federal Government
Loan Mortgage
Corporation 7.00% 10/01/25 $ 229,962
278,684 Federal Government
Loan Mortgage
Corporation 7.00% 12/01/25 270,409
1,250,000 Federal National
Mortgage
Association 5.75% 04/15/03 1,213,630
2,937,245 Federal National
Mortgage
Association 6.50% 07/01/28 2,768,540
336,014 Government
National Mortgage
Association 7.00% 02/15/09 335,079
2,077 Government
National Mortgage
Association 7.50% 07/15/23 2,055
325,487 Government
National Mortgage
Association 7.50% 12/15/25 322,096
633,930 Government
National Mortgage
Association 7.50% 12/15/27 627,326
1,204,526 Government
National Mortgage
Association 7.00% 05/15/28 1,163,999
442,152 Government
National Mortgage
Association 7.00% 07/15/28 427,276
457,061 Government
National Mortgage
Association 7.00% 07/15/28 441,683
1,942,951 Government
National Mortgage
Association 6.50% 09/15/28 1,825,159
920,000 Housing
Securities 6.75% 09/25/08 833,778
- --------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $11,069,628) $10,460,992
- --------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date (Note 1)
SOVEREIGN GOVERNMENT OBLIGATIONS - 2.9%
CANADA - 2.9%
$1,000,000 Province
of Ontario 7.375% 01/27/03 $ 1,010,650
- --------------------------------------------------------
TOTAL SOVEREIGN GOVERNMENT
OBLIGATIONS (COST $1,077,440) $ 1,010,650
- --------------------------------------------------------
Value
Shares (Note 1)
PREFERRED STOCKS - 4.1%
ELECTRIC UTILITIES - 2.2%
9,300 Appalachian Power, 8.25%
Cumulative $ 206,925
16,800 Columbus Southern Power,
8.375% Cumulative 374,850
7,500 Virginia Power Capital Trust,
8.05% Cumulative 162,188
- --------------------------------------------------------
743,963
- --------------------------------------------------------
OIL & GAS - 1.9%
29,900 Transcanada Capital, 8.75%
Cumulative 674,619
- --------------------------------------------------------
TOTAL PREFERRED STOCKS
(COST $1,632,493) $ 1,418,582
- --------------------------------------------------------
TOTAL INVESTMENTS AT VALUE - 97.8%
(COST $35,657,748)(A) $33,927,041
CASH AND OTHER ASSETS
NET OF LIABILITIES - 2.2% 773,213
- --------------------------------------------------------
NET ASSETS - 100.0% $34,700,254
- --------------------------------------------------------
Notes to the Schedule of Investments:
+ Restricted and Board valued security (Note 5).
(a) The aggregate identified cost for federal income tax purposes is
$35,657,748 resulting in gross unrealized appreciation and depreciation of
$119,626 and $1,850,332 respectively, and net unrealized depreciation of
$1,730,706
144A - Security exempt from registration under Rule 144A of Securities Act of
1933. This security may be sold in transactions exempt from registration,
normally to qualified institutional buyers. At December 31, 1999, these
securities were valued at $1,780,736 or 5.1% of net assets.
The accompanying notes are an integral part of the financial statements.
<PAGE>
39
TOUCHSTONE STANDBY INCOME FUND
Touchstone Standby Income Fund
The Touchstone Standby Income Fund continued to achieve success in 1999. Ft.
Washington Investment Advisors, the manager of the Touchstone Standby Income
Fund, attributed this to their investment philosophy of sector rotation and
trend analysis. The Fund's benchmark, the Merrill Lynch 91-Day Treasury Index,
posted a 4.8% return for 1999. The Standby Income Fund achieved a 4.9% return
for the year.
Fort Washington began 1999 with a near balanced allocation to the Commercial
Paper, corporate bond and ABS (asset-backed securities) markets and an index
matched average maturity. As the year concluded, the Fund had a significantly
higher Commercial Paper allocation, effectively unwinding the position that had
helped them to achieve success in 1998. ABS and corporate spreads, which had
reached historically wide levels in 1998, began to tighten, adding to the Fund's
total return. This, coupled with the increasing likelihood that the Federal
Reserve was becoming more hostile to the bond market, caused Fort Washington to
shorten duration and seek the liquidity provided by the Commercial Paper market.
Fort Washington's defensive posture allowed the success to continue into 1999,
even as the bond market experienced its second worst year ever. The Fund's 5.4%
return in 1999 again placed the Touchstone Standby Income Fund in the top
quartile of the Morningstar Ultra Short Index.
GROWTH OF A $10,000 INVESTMENT
Average Annual Total Return
One Year Ended 12/31/99 4.9%
Five Years Ended 12/31/99 5.4%
Since Inception 11/21/94 5.4%
Cumulative Total Return
Since Inception 11/21/94 30.9%
Merrill Lynch 30-Day
Touchstone 91-Day Money Market Smith Barney
Standby Treasury Yield Index 3-Month
Income Fund (Major Index) (Minor Index) Treasury Bill
11/94 10000 10000 10000 10000
12/94 10057 10042 10050 10046
3/95 10213 10178 10200 10187
6/95 10369 10319 10354 10326
9/95 10482 10457 10501 10462
12/95 10651 10594 10656 10597
3/96 10777 10725 10787 10725
6/96 10915 10853 10926 10857
9/96 11057 10984 11077 10993
12/96 11203 11118 11221 11127
3/97 11334 11252 11364 11266
6/97 11486 11393 11519 11405
9/97 11657 11536 11673 11546
12/97 11809 11683 11819 11691
3/98 11964 11825 11973 11836
6/98 12129 11974 12127 11980
9/98 12310 12125 12299 12122
12/98 12483 12267 12438 12249
3/99 12643 12401 12570 12382
6/99 12777 12535 12717 12517
9/99 12921 12679 12878 12660
12/99 13089 12834 13039 12819
Past performance is not indicative of future performance.
Performance information 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 total return figures for all periods.
<PAGE>
40
TOUCHSTONE STANDBY INCOME FUND
SCHEDULE OF INVESTMENTS
December 31, 1999
Principal Interest Maturity Value
Amount Rate Date (Note 1)
ASSET-BACKED SECURITIES - 26.3%
$ 607,855 Auto Finance Group
Receivables Trust,
Series 1997-A,
Class A 6.35% 10/15/02 $ 605,983
809,953 Auto Finance Group
Receivables Trust,
Series 1997-B,
Class A 6.20% 02/15/03 805,231
593,494 Capital Asset
Research Funding,
Series 1998-A,
Class A, 144A 5.905% 12/15/05 595,163
1,300,000 Chase Credit Card
Master Trust,
Series 1998-6,
Class B(a) 6.973% 09/15/04 1,303,055
1,400,000 Citibank Credit
Card Master Trust,
Series 1997-3,
Class A 6.839% 02/10/04
988,856 Mellon Auto
Grantor
Trust, Series
1999-1, Class B 5.76% 10/17/05 976,268
48,823 Newcourt
Equipment Trust
Securities,
Series 1998-1,
Class A2 5.17% 09/20/00 48,823
1,081,221 Onyx Acceptance
Auto Trust,
Series 1998-1,
Class A 5.95% 07/15/04 1,071,652
336,721 Summit Acceptance
Auto Trust,
Series 1996-A,
Class A1, 144A 7.01% 07/15/02 337,774
614,016 UCFC Home
Equity Loan,
Series 1998-D,
Class AF1 6.105% 04/15/13 611,707
- --------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(COST $7,793,404) $ 7,753,948
- --------------------------------------------------------
COMMERCIAL PAPER - 27.6%
$ 585,000 Centennial Energy
Holdings,
Sec. 4(2) 7.10% 01/21/00 $ 582,231
435,000 ConAgra 7.00% 01/12/00 433,731
625,000 Conoco,
Sec. 4(2) 6.75% 01/31/00 620,430
1,480,000 Consolidation
Coal 6.43% 01/21/00 1,466,254
995,000 PHH 7.15% 01/21/00 990,060
1,110,000 Popular North
America 6.678% 01/21/00 1,099,705
Principal Interest Maturity Value
Amount Rate Date (Note 1)
COMMERCIAL PAPER - Continued
- --------------------------------------------------------
$1,465,000 South Carolina
Electric & Gas 6.60% 02/01/00 $ 1,454,257
1,500,000 UOP, Sec. 4(2) 6.75% 01/28/00 1,485,375
- --------------------------------------------------------
TOTAL COMMERCIAL PAPER
(COST $8,132,043) $ 8,132,043
- --------------------------------------------------------
CORPORATE BONDS - 27.2%
BANKING - 8.4%
$1,100,000 MBNA, MTN (a) 6.58% 07/07/03 $ 1,089,934
- --------------------------------------------------------
1,400,000 Popular, Series 3,
MTN 6.40% 08/25/00 1,396,266
- --------------------------------------------------------
2,486,200
- --------------------------------------------------------
ELECTRIC UTILITIES - 4.7%
1,400,000 SCANA,
MTN (a) 6.813% 07/14/00 1,399,615
- --------------------------------------------------------
FINANCIAL SERVICES - 4.8%
1,400,000 Potomac Capital
Investment, 144A 7.55% 11/19/01 1,403,520
- --------------------------------------------------------
REAL ESTATE - 4.4%
1,300,000 Federal Realty
Investment
Trust, REIT 8.875% 01/15/00 1,300,658
- --------------------------------------------------------
RETAILERS - 4.9%
1,400,000 Dayton Hudson 10.00% 12/01/00 1,438,408
- --------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $8,091,468) $ 8,028,401
- --------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 13.3%
$2,600,000 Federal Home
Loan Bank 5.73% 01/14/00 $ 2,588,411
1,350,000 Federal Home
Loan Mortgage
Corportation,
Series UB 6.00% 11/15/08 1,331,627
- --------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS (COST $3,947,692) $ 3,920,038
- --------------------------------------------------------
TOTAL INVESTMENTS AT VALUE - 94.4%
(COST $27,964,607)(B) $27,834,430
CASH AND OTHER ASSETS
NET OF LIABILITIES - 5.6% 1,644,646
- --------------------------------------------------------
NET ASSETS - 100.0% $29,479,076
- --------------------------------------------------------
Notes to the Schedule of Investments:
(a) Interest rate shown reflects current rate on instrument with variable rate.
(b) The aggregate identified cost for federal income tax purposes is
$27,964,607, resulting in gross unrealized appreciation and depreciation of
$8,494 and $138,671, respectively, and net unrealized depreciation of
$130,177.
144A - Security exempt from registration under Rule 144A of Securities Act of
1933. This security may be sold in transactions exempt from registration,
normally to qualified institutional buyers. At December 31, 1999, these
securities were valued at $932,937 or 3.2% of net assets.
Sec. 4(2) - Securities offered pursuant to Section 4(2) of the Securities Act
of 1933, as amended. These securities have been determined to be liquid
under guidelines established by the Board of Directors.
MTN - Medium Term Note
REIT - Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
<PAGE>
41
<TABLE>
TOUCHSTONE VARIABLE SERIES TRUST
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1999
TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE
SMALL CAP EMERGING INTERNATIONAL INCOME HIGH
VALUE GROWTH EQUITY OPPORTUNITY YIELD
FUND FUND FUND FUND FUND
ASSETS:
<S> <C> <C> <C> <C> <C>
Investments, at value (Note 1)(a) $11,962,503 $35,778,466 $40,539,371 $24,852,194 $14,257,511
Cash 119,274 1,274,155 337,970 49,078 240,742
Foreign currency(b) -- -- -- -- --
Receivables for:
Investments sold -- 86,301 438,359 -- --
Fund shares sold -- -- -- -- --
Dividends 758 16,953 11,293 -- --
Foreign tax reclaims -- -- 22,088 -- --
Interest 578 5,095 915 763,018 442,269
Reimbursement receivable from
Investment Advisor (Note 4) 1,554 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total assets 12,084,667 37,160,970 41,349,996 25,664,290 14,940,522
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for:
Investments purchased -- 5,190 384,219 -- --
Unrealized depreciation on foreign
forward currency contracts (Note 1) -- -- 2,836 -- --
Fund shares redeemed 130 12,106 15,470 17,051 439
Payable to Investment Advisor (Note 4) -- 231,756 192,676 126,461 7,181
Payable to Custodian -- -- 52,325 -- --
Other accrued expenses 14,608 32,457 39,093 33,219 16,970
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 14,738 281,509 686,619 176,731 24,590
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (C): $12,069,929 $36,879,461 $40,663,377 $25,487,559 $14,915,932
- ------------------------------------------------------------------------------------------------------------------------------
Shares outstanding 1,023,624 1,918,131 2,317,813 3,311,401 1,732,234
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value $ 11.79 $ 19.23 $ 17.54 $ 7.70 $ 8.61
- ------------------------------------------------------------------------------------------------------------------------------
(a) Cost of investments of: $10,159,387 $26,673,950 $30,986,807 $25,362,282 $16,105,045
(b) Cost of foreign currency of: $-- $ -- $ -- $ -- $ --
(c) See the Statements of Changes in Net Assets for components of net assets.
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
42
<TABLE>
<CAPTION>
TOUCHSTONE VARIABLE SERIES TRUST
Statements of Assets and Liabilities continued
TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE
VALUE GROWTH & ENHANCED TOUCHSTONE TOUCHSTONE STANDBY
PLUS INCOME 30 BALANCED BOND INCOME
FUND FUND FUND FUND FUND FUND
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Investments, at value (Note 1)(a) $ 7,042,218 $64,287,088 $13,319,120 $36,232,735 $33,927,041 $27,834,430
Cash 115,838 874,565 202,505 389,415 512,951 1,422,141
Foreign currency(b) -- -- -- 6,785 -- --
Receivables for:
Investments sold -- -- -- 149,510 -- --
Fund shares sold 1,939 -- -- -- -- 70,948
Dividends 7,459 116,758 12,926 9,746 29,626 --
Foreign tax reclaims 92 -- -- -- 1,635 --
Interest 249 2,475 595 210,184 446,635 200,374
Reimbursement receivable from
Investment Advisor (Note 4) 19,656 -- 12,418 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total assets 7,187,451 65,280,886 13,547,564 36,998,375 34,917,888 29,527,893
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for:
Investments purchased -- -- -- -- -- --
Unrealized depreciation on
foreign forward currency
contracts (Note 1) -- -- -- -- -- --
Fund shares redeemed -- 13,832 743 9,153 18,242 --
Payable to Investment Advisor (Note 4) -- 425,142 -- 223,932 163,711 21,684
Other accrued expenses 16,658 62,630 14,717 49,256 35,681 27,133
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 16,658 501,604 15,460 282,341 217,634 48,817
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (C): $ 7,170,793 $64,779,282 $13,532,104 $36,716,034 $34,700,254 $29,479,076
- ------------------------------------------------------------------------------------------------------------------------------
Shares outstanding 639,240 6,048,210 1,282,358 2,661,139 3,475,682 2,971,667
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value 11.22 $ 10.71 $ 10.55 $ 13.80 $ 9.98 $ 9.92
- ------------------------------------------------------------------------------------------------------------------------------
(a) Cost of investments of: $ 6,704,636 $62,496,037 $12,240,619 $36,570,587 $35,657,748 $27,964,607
(b) Cost of foreign currency of: $ -- $ -- $ -- $ 6,718 $ -- $ --
(c) See the Statements of Changes in Net Assets for components of net assets.
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
43
<TABLE>
<CAPTION>
TOUCHSTONE VARIABLE SERIES TRUST
STATEMENTS OF OPERATIONS
For the Period Ended December 31, 1999
TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE
SMALL CAP EMERGING INTERNATIONAL INCOME HIGH
VALUE GROWTH EQUITY OPPORTUNITY YIELD
FUND(A) FUND FUND FUND FUND(A)
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME (NOTE 1):
Interest $ 23,855 $ 62,904 $ 47,478 $3,644,851 $1,011,846
Dividends (c) 13,302 194,679 509,397 --
- ------------------------------------------------------------------------------------------------------------------------------
Total investment income 37,157 257,583 556,875 3,644,851 1,011,846
- ------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 3) 56,215 249,804 326,334 200,285 59,450
Custody, administration and fund accounting fees 57,676 90,100 193,206 92,327 55,339
Sponsor fees (Note 3) 14,054 62,451 68,702 61,626 19,817
Professional fees 6,581 11,956 12,490 12,686 7,004
Printing fees 6,440 17,689 18,883 18,080 7,971
Amortization of organization expenses (Note 1) -- 3,467 3,467 3,467 --
Trustee fees (Note 3) 505 3,391 3,727 3,851 760
Miscellaneous 894 4,569 4,939 5,040 1,340
- ------------------------------------------------------------------------------------------------------------------------------
Total expenses 142,365 443,427 631,748 397,362 151,681
Waiver of Sponsor fee (Note 4) (14,054) (62,451) (68,702) (61,626) (19,817)
Reimbursement from Investment Advisor (Note 4) (57,768) (18,047) (133,659) (73,824) (52,269)
- ------------------------------------------------------------------------------------------------------------------------------
Net expenses 70,543 362,929 429,387 261,912 79,595
- ------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (33,386) (105,346) 127,488 3,382,939 932,251
- ------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on:
Investments 50,549 6,087,461 6,454,159 (6,795,726) (357,539)
Foreign currency -- -- (154,872) -- --
- ------------------------------------------------------------------------------------------------------------------------------
50,549 6,087,461 6,299,287 (6,795,726) (357,539)
- ------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments 1,803,116 6,580,932 4,755,365 4,138,625 (1,847,534)
Foreign currency -- -- (3,238) -- --
- ------------------------------------------------------------------------------------------------------------------------------
1,803,116 6,580,932 4,752,127 4,138,625 (1,847,534)
- ------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS): 1,853,665 12,668,393 11,051,414 (2,657,101) (2,205,073)
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $1,820,279 $12,563,047 $11,178,902 $ 725,838 $(1,272,822)
- ------------------------------------------------------------------------------------------------------------------------------
(a) The Fund commenced operations on May 1, 1999.
(b) The Fund commenced operations on January 1, 1999.
(c) Net of foreign tax withholding of: $ -- $ -- $ 54,612 $ -- $ --
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
44
<TABLE>
<CAPTION>
TOUCHSTONE VARIABLE SERIES TRUST
Statements of Operations continued
TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE
VALUE GROWTH & ENHANCED TOUCHSTONE TOUCHSTONE STANDBY
PLUS INCOME 30 BALANCED BOND INCOME
FUND FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (NOTE 1):
Interest $ 17,729 $ 46,869 $ 16,660 $1,136,909 $2,432,806 $1,723,174
Dividends (c) 82,883 1,687,588 102,944 259,320 158,506 --
- -------------------------------------------------------------------------------------------------------------------------------
Total investment income 100,612 1,734,457 119,604 1,396,229 2,591,312 1,723,174
- -------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 3) 53,453 593,584 49,247 323,935 209,984 70,038
Custody, administration and fund
accounting fees 86,513 126,012 54,990 89,865 78,266 81,490
Sponsor fees (Note 3) 14,254 148,396 15,153 80,984 76,358 56,030
Professional fees 7,524 19,571 6,624 14,156 13,124 11,514
Printing fees 6,528 42,135 6,435 22,818 22,046 15,669
Amortization of organization
expenses (Note 1) -- -- -- 3,467 -- 3,496
Trustee fees (Note 3) 588 8,150 505 4,168 3,749 2,402
Miscellaneous 463 10,673 894 6,021 5,446 3,822
- -------------------------------------------------------------------------------------------------------------------------------
Total expenses 169,323 948,521 133,848 545,414 408,973 244,461
Waiver of Sponsor fee (Note 4) (14,254) (148,396) (15,153) (80,984) (76,358) (56,030)
Reimbursement from Investment
Advisor (Note 4) (73,108) (169,442) (61,666) (100,004) (46,273) (48,355)
- -------------------------------------------------------------------------------------------------------------------------------
Net expenses 81,961 630,683 57,029 364,426 286,342 140,076
- -------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 18,651 1,103,774 62,575 1,031,803 2,304,970 1,583,098
- -------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 835,544 2,473,484 (351,490) 3,104,646 (378,508) (111,349)
Foreign currency -- -- -- (33,666) -- --
- -------------------------------------------------------------------------------------------------------------------------------
835,544 2,473,484 (351,490) 3,070,980 (378,508) (111,349)
- -------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments 81,625 (1,294,188) 1,078,501 (413,041) (2,428,089) (136,309)
Foreign currency -- -- -- 2,121 -- --
- -------------------------------------------------------------------------------------------------------------------------------
81,625 (1,294,188) 1,078,501 (410,920) (2,428,089) (136,309)
- -------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS): 917,169 1,179,296 727,011 2,660,060 (2,806,597) (247,658)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS: $ 935,820 $2,283,070 $ 789,586 $3,691,863 $ (501,627) $1,335,440
- -------------------------------------------------------------------------------------------------------------------------------
(a) The Fund commenced operations on May 1, 1999.
(b) The Fund commenced operations on January 1, 1999.
(c) Net of foreign tax withholding of: $ 532 $ 5,587 $ -- $ 2,284 $ -- $ --
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
45
<TABLE>
<CAPTION>
TOUCHSTONE VARIABLE SERIES TRUST
STATEMENTS OF CHANGES IN NET ASSETS
TOUCHSTONE TOUCHSTONE TOUCHSTONE
SMALL CAP EMERGING GROWTH INTERNATIONAL EQUITY
VALUE FUND FUND FUND
--------------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
PERIOD ENDED(A) YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ (33,386)$ (105,346) $ 35,176 $ 127,488 $ 139,038
Net realized gain (loss ) 50,549 6,087,461 993,434 6,299,287 748,210
Net change in unrealized appreciation (depreciation) 1,803,116 6,580,932 (296,091) 4,752,127 3,381,779
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 1,820,279 12,563,047 732,519 11,178,902 4,269,027
- --------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- (49,174) (150,630) (164,384)
Realized capital gains -- (5,252,284) (1,035,008) (3,011,529) (845,182)
Distribution in excess of net investment income -- -- -- -- (106,570)
Return of capital distributions -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions -- (5,252,284) (1,084,182) (3,162,159) (1,116,136)
- --------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Capital contribution (Note 7) -- -- -- -- --
Proceeds from shares sold 10,268,930 3,035,224 13,916,105 2,925,528 12,081,975
Reinvestment of dividends -- 5,252,284 1,084,183 3,162,159 1,116,136
Cost of shares redeemed (19,280) (9,982,713) (2,801,672) (7,254,079) (2,240,707)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from share transactions 10,249,650 (1,695,205) 12,198,616 (1,166,392) 10,957,404
- --------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 12,069,929 5,615,558 11,846,953 6,850,351 14,110,295
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period -- 31,263,903 19,416,950 33,813,026 19,702,731
- --------------------------------------------------------------------------------------------------------------------------
End of period $12,069,929 $36,879,461 $31,263,903 $40,663,377 $33,813,026
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid-in capital $10,249,650 $26,889,174 $28,584,379 $28,074,667 $29,242,515
Undistributed (distributions in excess of) net
investment income -- -- -- 32,278 (186,882)
Accumulated net realized gain (loss) on investments 17,163 885,771 155,940 3,007,124 (39,788)
Net unrealized appreciation (depreciation)
on investments 1,803,116 9,104,516 2,523,584 9,549,308 4,797,181
- --------------------------------------------------------------------------------------------------------------------------
Net assets applicable to shares outstanding $12,069,929 $36,879,461 $31,263,903 $40,663,377 $33,813,026
- --------------------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING (NOTE 1):
Share contribution (Note 7) -- -- -- -- --
Shares sold 1,025,510 187,027 892,493 206,084 869,535
Reinvestment of dividends -- 280,421 73,504 184,168 79,724
- --------------------------------------------------------------------------------------------------------------------------
1,025,510 467,448 965,997 390,252 949,259
Shares redeemed (1,886) (588,054) (188,219) (494,330) (168,341)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) 1,023,624 (120,606) 777,778 (104,078) 780,918
Beginning of period -- 2,038,737 1,260,959 2,421,891 1,640,973
- --------------------------------------------------------------------------------------------------------------------------
End of period 1,023,624 1,918,131 2,038,737 2,317,813 2,421,891
- --------------------------------------------------------------------------------------------------------------------------
(a) The Fund commenced operations on May 1, 1999.
(b) The Fund commenced operations on May 1, 1998.
(c) The Fund commenced operations on January 1, 1999.
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
46
<TABLE>
<CAPTION>
TOUCHSTONE VARIABLE SERIES TRUST
Statements of Changes in Net Assets continued
Touchstone Touchstone Touchstone Touchstone
Income Opportunity High Yield Value Plus Growth &
Fund Fund Fund Income Fund
----------------------- -------------- ------------------------- -------------
For the For the For the For the For the For the
Year Ended Year Ended Period Ended(a) Year Ended Period Ended(b) Year Ended(c)
December 31, December 31, December 31, December 31, December 31, December 31,
1999 1998 1999 1999 1998 1999
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ 3,382,939 $ 3,478,291 $ 932,251 $ 18,651 $ 7,993 $ 1,103,774
Net realized gain (loss ) (6,795,726) (4,004,977) (357,539) 835,544 (239,885) 2,473,484
Net change in unrealized
appreciation (depreciation) 4,138,625 (4,418,973) (1,847,534) 81,625 255,957 (1,294,188)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations 725,838 (4,945,659) (1,272,822) 935,820 24,065 2,283,070
- -----------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (3,721,950) (3,478,834) (936,630) (18,567) (8,332) --
Realized capital gains -- -- -- (278,688) -- --
Distribution in excess of net
investment income -- -- -- -- -- --
Return of capital distributions -- (96,964) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (3,721,950) (3,575,798) (936,630) (297,255) (8,332) --
- -----------------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Capital contribution (Note 7) -- -- -- -- -- 74,660,781
Proceeds from shares sold 3,201,943 17,222,143 16,270,006 7,276,057 5,347,995 6,044,998
Reinvestment of dividends 3,721,950 3,575,798 936,630 297,255 8,332 --
Cost of shares redeemed (12,934,235) (4,661,882) (81,252) (4,208,758) (2,204,386) (18,209,567)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
from share transactions (6,010,342) 16,136,059 17,125,384 3,364,554 3,151,941 62,496,212
- -----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease)
in net assets (9,006,454) 7,614,602 14,915,932 4,003,119 3,167,674 64,779,282
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of period 34,494,013 26,879,411 -- 3,167,674 -- --
End of period $25,487,559 $34,494,013 $14,915,932 $7,170,793 $3,167,674 $64,779,282
===================================================================================================================================
NET ASSETS CONSIST OF:
Paid-in capital $37,601,057 $43,631,963 $17,121,005 $6,516,138 $3,151,602 $59,440,499
Undistributed (distributions in
excess of) net investment income (290,740) -- -- 103 -- 1,103,774
Accumulated net realized gain
(loss) on investments (11,312,434) (4,489,001) (357,539) 316,970 (239,885) 2,443,958
Net unrealized appreciation
(depreciation)on investments (510,324) (4,648,949) (1,847,534) 337,582 255,957 1,791,051
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to
shares outstanding $25,487,559 $34,494,013 $14,915,932 $7,170,793 $3,167,674 $64,779,282
===================================================================================================================================
SHARES OUTSTANDING (NOTE 1):
Share contribution (Note 7) -- -- -- -- -- 7,140,970
Shares sold 371,494 1,636,452 1,632,166 686,215 563,284 568,148
Reinvestment of dividends 477,283 369,671 108,784 26,780 852 --
- -----------------------------------------------------------------------------------------------------------------------------------
848,777 2,006,123 1,740,950 712,995 564,136 7,709,118
Shares redeemed (1,508,551) (474,021) (8,716) (385,059) (252,832) (1,660,908)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) (659,774) 1,532,102 1,732,234 327,936 311,304 6,048,210
Beginning of period 3,971,175 2,439,073 -- 311,304 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
End of period 3,311,401 3,971,175 1,732,234 639,240 311,304 6,048,210
===================================================================================================================================
</TABLE>
(a) The Fund commenced operations on May 1, 1999.
(b) The Fund commenced operations on May 1, 1998.
(c) The Fund commenced operations on January 1, 1999.
<TABLE>
<CAPTION>
Statements of Changes in Net Assets continued
Touchstone Touchstone Touchstone Touchstone
Enhanced Balanced Bond Standby Income
Fund Fund Fund Fund
----------- ----------------------- -------------- -----------------------
For the For the For the For the For the For the
Period Ended(a) Year Ended Year Ended Year Ended(c) Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31, December 31,
1999 1999 1998 1999 1999 1998
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ 62,575 $ 1,031,803 $ 897,150 $ 2,304,970 $ 1,583,098 $ 1,244,839
Net realized gain (loss ) (351,490) 3,070,980 1,451,424 (378,508) (111,349) 12,585
Net change in unrealized
appreciation (depreciation) 1,078,501 (410,920) (1,134,565) (2,428,089) (136,309) 6,334
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations 789,586 3,691,863 1,214,009 (501,627) 1,335,440 1,263,758
- -------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (62,549) (1,026,659) (922,633) (346,319) (1,586,807) (1,244,085)
Realized capital gains -- (2,545,689) (1,163,140) -- -- --
Distribution in excess of net
investment income -- -- (10,746) -- -- --
Return of capital distributions -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (62,549) (3,572,348) (2,096,519) (346,319) (1,586,807) (1,244,085)
- -------------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Capital contribution (Note 7) -- -- -- 38,450,838 -- --
Proceeds from shares sold 13,036,977 4,531,602 21,290,408 5,043,015 13,250,461 22,250,007
Reinvestment of dividends 62,549 3,572,348 2,096,506 346,319 1,586,054 1,246,263
Cost of shares redeemed (294,459) (12,757,150) (3,541,752) (8,291,972) (11,556,012) (14,628,204)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from
share transactions 12,805,067 (4,653,200) 19,845,162 35,548,200 3,280,503 8,868,066
- -------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in
net assets 13,532,104 (4,533,685) 18,962,652 34,700,254 3,029,136 8,887,739
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of period -- 41,249,719 22,287,067 -- 26,449,940 17,562,201
- -------------------------------------------------------------------------------------------------------------------------------
End of period $13,532,104 $36,716,034 $41,249,719 $34,700,254 $29,479,076 $26,449,940
===============================================================================================================================
NET ASSETS CONSIST OF:
Paid-in capital $12,805,067 $36,113,876 $40,767,171 $34,867,068 $29,720,531 $26,440,029
Undistributed (distributions in
excess of) net investment income 26 (4,602) 20,627 1,963,484 70 3,709
Accumulated net realized gain (loss)
on investments (351,490) 950,042 394,283 (399,591) (111,348) 70
Net unrealized appreciation
(depreciation)on investments 1,078,501 (343,282) 67,638 (1,730,707) (130,177) 6,132
- -------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to
shares outstanding $13,532,104 $36,716,034 $41,249,719 $34,700,254 $29,479,076 $26,449,940
===============================================================================================================================
SHARES OUTSTANDING (NOTE 1):
Share contribution (Note 7) -- -- -- 3,770,359 -- --
Shares sold 1,306,360 314,596 1,468,902 500,745 1,331,119 2,223,752
Reinvestment of dividends 5,918 262,287 150,809 34,280 159,259 124,567
- -------------------------------------------------------------------------------------------------------------------------------
1,312,278 576,883 1,619,711 4,305,384 1,490,378 2,348,319
Shares redeemed (29,920) (870,844) (257,510) (829,702) (1,161,048) (1,461,706)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) 1,282,358 (293,961) 1,362,201 3,475,682 329,330 886,613
Beginning of period -- 2,955,100 1,592,899 -- 2,642,337 1,755,724
- -------------------------------------------------------------------------------------------------------------------------------
End of period 1,282,358 2,661,139 2,955,100 3,475,682 2,971,667 2,642,337
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
Touchstone Variable Series Trust
<PAGE>
48
Touchstone Variable Series Trust
<TABLE>
<CAPTION>
Financial Highlights
Selected data for a share outstanding:
Touchstone Small Touchstone Emerging Growth
Cap Value Fund Fund
---------------- -------------------------------------------------------------
For the For the For the For the For the For the
Period Year Year Year Year Year
Ended (a) Ended Ended Ended Ended Ended
December December December December December December
31, 1999 31, 1999 31, 1998 31, 1997 31, 1996 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 15.33 $ 15.40 $ 12.20 $ 11.27 $ 10.10
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (0.03) (0.05) 0.02 0.03 0.04 0.11
Net realized and unrealized gain (loss) on investments 1.82 7.13 0.46 4.06 1.22 1.87
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.79 7.08 0.48 4.09 1.26 1.98
- ----------------------------------------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- (0.03) (0.03) (0.04) (0.15)
Realized capital gains -- (3.18) (0.52) (0.86) (0.29) (0.66)
Return of capital -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions -- (3.18) (0.55) (0.89) (0.33) (0.81)
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.79 $ 19.23 $ 15.33 $ 15.40 $ 12.20 $11.27
==================================================================================================================================
Total return (b) 17.90% 46.75% 3.28% 33.67% 11.16% 19.57%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $12,070 $36,879 $31,264 $19,417 $ 5,771 $2,615
Ratios to average net assets:
Net expenses 1.00%(c) 1.15% 1.15% 1.15% 1.15% 1.15%
Net investment income (loss) (0.48)%(c) (0.34)% 0.14% 0.27% 0.50% 1.09%
Expenses, without waiver and reimbursement 2.03%(c) 1.42% 1.49% 2.19% 3.22% 3.73%
Portfolio turnover 86% 89% 66% 88% 89% 101%
==================================================================================================================================
<CAPTION>
Touchstone International Equity
Fund
--------------------------------------------------------------
For the For the For the For the For the
Year Year Year Year Year
Ended Ended Ended Ended Ended
December December December December December
31, 1999 31, 1998 31, 1997 31, 1996 31, 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.96 $ 12.01 $ 11.07 $ 10.00 $ 9.51
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.06 0.06 0.07 0.06 0.04
Net realized and unrealized gain (loss)
on investments 5.00 2.37 1.56 1.08 0.48
- -------------------------------------------------------------------------------------------------------------------
Total from investment operations 5.06 2.43 1.63 1.14 0.52
- -------------------------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (0.07) (0.10) (0.05) (0.07) (0.03)
Realized capital gains (1.41) (0.38) (0.64) -- --
Return of capital -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.48) (0.48) (0.69) (0.07) (0.03)
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 17.54 $ 13.96 $ 12.01 $ 11.07 $ 10.00
===================================================================================================================
Total return (b) 36.47% 20.21% 14.76% 11.47% 5.45%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $40,663 $33,813 $19,703 $ 8,758 $ 5,215
Ratios to average net assets:
Net expenses 1.25% 1.25% 1.25% 1.25% 1.25%
Net investment income (loss) 0.37% 0.49% 0.71% 0.86% 0.46%
Expenses, without waiver and reimbursement 1.84% 1.95% 3.19% 3.03% 3.69%
Portfolio turnover 156% 141% 149% 90% 86%
===================================================================================================================
(a) The Fund commenced operations on May 1, 1999.
(b) Total returns would have been lower had certain expenses not been
reimbursed or waived during the periods shown. (Note 4)
(c) Ratios are annualized.
</TABLE>
The accompanying notes are an integral part of the financial statements.
49
Touchstone Variable Series Trust
<PAGE>
50
Touchstone Variable Series Trust
<TABLE>
Financial Highlights continued
Selected data for a share outstanding:
<CAPTION>
Touchstone Touchstone Touchstone
Income Opportunity High Yield Value Plus
Fund Fund Fund
----------------------------------------------------- -------- ------------------
For the For the For the For the For the For the For the For the
Year Year Year Year Year Period Year Period
Ended Ended Ended Ended Ended Ended(a) Ended Ended(b)
December December December December December December December December
31, 1999 31, 1998 31, 1997 31, 1996 31, 1995 31, 1999 31, 1999 31, 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.69 $ 11.02 $ 11.21 $ 10.09 $ 9.42 $ 10.00 $10.18 $10.00
- ----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 1.11 1.02 1.20 1.17 1.22 0.58 0.03 0.03
Net realized and unrealized gain
(loss) on investments (0.88) (2.30) 0.11 1.45 0.79 (1.39) 1.49 0.18
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.23 (1.28) 1.31 2.62 2.01 (0.81) 1.52 0.21
- ----------------------------------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (1.22) (1.02) (1.19) (1.17) (1.34) (0.58) (0.03) (0.03)
Realized capital gains -- -- (0.31) (0.33) -- -- (0.45) --
Return of capital -- (0.03) -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.22) (1.05) (1.50) (1.50) (1.34) (0.58) (0.48) (0.03)
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 7.70 $ 8.69 $ 11.02 $11.21 $10.09 $ 8.61 $11.22 $10.18
============================================================================================================================
Total return (d) 2.74% (12.27)% 12.03% 27.37% 23.35% (8.11)% 15.02% 2.11%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $25,488 $34,494 $26,879 $8,268 $2,602 $14,916 $7,171 $3,168
Ratios to average net assets:
Net expenses 0.85% 0.85% 0.85% 0.85% 0.85% 0.80%(e) 1.15% 1.15%(e)
Net investment income (loss) 10.98% 10.40% 10.93% 11.85% 12.81% 9.41%(e) 0.26% 0.65%(e)
Expenses, without waiver
and reimbursement 1.29% 1.25% 1.72% 2.85% 3.54% 1.53%(e) 2.37% 7.49%(e)
Portfolio turnover 176% 175% 189% 213% 104% 42% 101% 100%
=============================================================================================================================
<CAPTION>
Touchstone Touchstone Touchstone
Growth & Enhanced Balanced
Income Fund 30 Fund Fund
-------- -------- ---------------------------------------------------
For the For the For the For the For the For the For the
Year Period Year Year Year Year Year
Ended(c) Ended(a) Ended Ended Ended Ended Ended
December December December December December December December
31, 1999 31, 1999 31, 1999 31, 1998 31, 1997 31, 1996 31, 1995
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.46 $ 10.00 $ 13.96 $ 13.99 $ 12.84 $ 11.48 $ 10.17
- ----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.23 0.05 0.43 0.35 0.31 0.30 0.32
Net realized and unrealized gain
(loss) on investments 0.02 0.55 0.90 0.40 2.05 1.60 2.15
- ----------------------------------------------------------------------------------------------------------------------
Total from investment
operations 0.25 0.60 1.33 0.75 2.36 1.90 2.47
- ----------------------------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income -- (0.05) (0.43) (0.37) (0.32) (0.30) (0.37)
Realized capital gains -- -- (1.06) (0.41) (0.89) (0.24) (0.79)
Return of capital -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Total dividends and distributions -- (0.05) (1.49) (0.78) (1.21) (0.54) (1.16)
- ----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 10.71 $ 10.55 $ 13.80 $ 13.96 $ 13.99 $12.84 $ 11.48
======================================================================================================================
Total return (d) 2.39% 5.99% 9.62% 5.44% 18.61% 16.78% 24.56%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $64,779 $13,532 $ 36,716 $ 41,250 $22,287 $6,695 $ 2,895
Ratios to average net assets:
Net expenses 0.85% 0.75%(e) 0.90% 0.90% 0.90% 0.90% 0.90%
Net investment income (loss) 1.49% 0.83%(e) 2.55% 2.67% 2.61% 2.76% 2.87%
Expenses, without waiver and
reimbursement 1.28% 1.77%(e) 1.35% 1.37% 2.04% 2.72% 3.46%
Portfolio turnover 65% 9% 73% 51% 86% 75% 124%
======================================================================================================================
(a) The Fund commenced operations on May 1, 1999.
(b) The Fund commenced operations on May 1, 1998.
(c) The Fund commenced operations on January 1, 1999.
(d) Total returns would have been lower had certain expenses not been
reimbursed or waived during the periods shown. (Note 4)
(e) Ratios are annualized.
The accompanying notes are an integral part of the financial statements.
51
Touchstone Variable Series Trust
</TABLE>
<PAGE>
<TABLE>
52
TOUCHSTONE VARIABLE SERIES TRUST
Financial Highlights continued
Selected data for a share outstanding:
<CAPTION>
TOUCHSTONE TOUCHSTONE STANDBY INCOME
BOND FUND FUND
------------ -----------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED(A) YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER
31, 1999 31, 1999 31, 1995 31, 1996 31, 1997 31, 1998
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.20 $ 10.01 $ 10.00 $ 10.01 $ 10.02 $ 10.03
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.76 0.56 0.55 0.54 0.52 0.56
Net realized and unrealized gain (loss) on investments (0.89) (0.09) 0.01 (0.01) (0.01) (0.01)
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.13) 0.47 0.56 0.53 0.51 0.55
- -----------------------------------------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.09) (0.56) (0.55) (0.54) (0.52) (0.56)
Realized capital gains -- -- -- -- -- --
Return of capital -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.09) (0.56) (0.55) (0.54) (0.52) (0.56)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.98 $ 9.92 $ 10.01 $ 10.00 $ 10.01 $ 10.02
===================================================================================================================================
Total return (b) (1.28)% 4.86% 5.71% 5.41% 5.18% 5.90%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $34,700 $29,479 $26,450 $17,562 $ 9,105 $ 5,790
Ratios to average net assets:
Net expenses 0.75% 0.50% 0.50% 0.50% 0.50% 0.50%
Net investment income 6.04% 5.65% 5.47% 5.42% 5.15% 5.59%
Expenses, without waiver and reimbursement 1.07% 0.87% 0.95% 1.48% 1.54% 1.73%
Portfolio turnover 45% 56% 328% 251% 143% 159%
===================================================================================================================================
(a) The Fund commenced operations on January 1, 1999.
(b) Total returns would have been lower had certain expenses not been
reimbursed or waived during the periods shown. (Note 4)
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
53
TOUCHSTONE VARIABLE SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Touchstone Variable Series Trust (the "Trust") is registered under the
Investment Company Act of 1940 (the "Act"), as amended, as an open-end
management investment company, and was organized as a Massachusetts business
trust on February 7, 1994. The Trust consists of eleven Funds: Touchstone Small
Cap Value Fund, Touchstone Emerging Growth Fund, Touchstone International Equity
Fund, Touchstone Income Opportunity Fund, Touchstone High Yield Fund, Touchstone
Value Plus Fund, Touchstone Growth & Income Fund, Touchstone Enhanced 30 Fund,
Touchstone Balanced Fund, Touchstone Bond Fund and Touchstone Standby Income
Fund (collectively, the "Funds"). The Touchstone Value Plus Fund commenced
operations on May 1, 1998. The Touchstone Growth & Income Fund and the
Touchstone Bond Fund commenced operations on January 1, 1999. The Touchstone
Small Cap Value Fund, Touchstone High Yield Fund and Touchstone Enhanced 30 Fund
commenced operations on May 1, 1999. Prior to January 1999, the Trust was called
Select Advisors Variable Insurance Trust and each existing Fund available at
that time was referred to as a "Portfolio".
The Declaration of Trust permits the Trust to issue an unlimited number of
shares of beneficial interest. The Trust offers shares of beneficial interest of
each Fund to separate accounts of Western-Southern Life Assurance Company
("Western-Southern") as a funding vehicle for certain variable annuity contracts
issued by Western-Southern through its separate accounts and to a separate
account of Columbus Life Insurance Company ("Columbus Life") as a funding
vehicle for certain variable universal life insurance policies issued by
Columbus Life through the separate account.
As of December 31, 1999, Western-Southern, its direct subsidiary, Columbus Life,
and its indirect subsidiary, Touchstone Advisors, Inc., collectively owned 100%
of the outstanding shares of the Trust.
The accounting policies are in conformity with generally accepted accounting
principles ("GAAP") for investment companies. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the related amounts and disclosures in the financial
statements. Actual results could differ from these estimates.
The following is a summary of the significant accounting policies of the Funds:
INVESTMENT VALUATION. Securities for which market quotations are readily
available are valued at 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 quoted in foreign currencies are translated into U.S. dollars at the
current exchange rate. 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 good faith under consistently applied procedures in accordance with
procedures established by the Trustees of 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 debt
securities with a remaining maturity of less than 60 days are valued at
amortized cost, which approximates market.
<PAGE>
54
TOUCHSTONE VARIABLE SERIES TRUST
Notes to Financial Statements continued
FOREIGN CURRENCY VALUE TRANSLATION. The accounting records of the Funds are
maintained in U.S. dollars. The market value of investment securities, other
assets and liabilities and forward currency 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 effects of changes in foreign currency exchange rates on investments in
securities are not segregated in the statements of operations from the effects
of changes in market prices of these securities, but are included with the net
realized and unrealized gain or loss on investments.
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date except
that certain dividends from foreign securities where the ex-dividend date has
passed are recorded as soon as the Trust is informed of the ex-dividend date.
Interest income, which includes the amortization of premium and accretion of
discount, if any, is recorded on an accrual basis. Dividend and interest income
is recorded net of foreign taxes where recovery of such taxes is not assured.
DIVIDENDS AND DISTRIBUTIONS. Distributions to shareholders for all Funds in the
Trust, except the Touchstone Standby Income Fund, are recorded by each Fund
annually. It is the policy of the Touchstone Standby Income Fund to record
income dividends daily and distribute them monthly. Distributions to
shareholders of net realized capital gains, if any, are declared and paid
annually.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from GAAP. These differences, which may result
in distribution reclassifications, are primarily due to non-deductible
organization costs, passive foreign investment companies (PFIC), foreign
currency transactions, losses deferred due to wash sales, and excise tax
regulations.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassifications to paid-in capital. Undistributed net
investment income and accumulated net realized gains and losses may include
temporary book and tax basis differences which will reverse in a subsequent
period. Any taxable income or gain remaining at fiscal year end is distributed
in the following year.
FEDERAL TAXES. Each Fund of the Trust is treated as a separate entity for
federal income tax purposes. Each Fund's policy is to comply with the provisions
of the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all its income, including
net realized capital gains, if any, within the prescribed time periods.
Accordingly, no provision for a federal income tax is necessary.
<PAGE>
55
TOUCHSTONE VARIABLE SERIES TRUST
WRITTEN OPTIONS. Each Fund may enter into written option agreements. The premium
received for a written option is recorded as an asset with an equivalent
liability. The liability is marked-to-market based on the option's quoted daily
settlement price. When an option expires or the Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of the
closing purchase transaction exceeds the premium received when the option was
sold) without regard to any unrealized gain or loss on the underlying security
and the liability related to such option is eliminated. When a written call
option is exercised, the Fund realizes a gain or loss from the sale of the
underlying security and the proceeds from such sale are increased by the premium
originally received. If a written put option is exercised, the amount of the
premium originally received will reduce the cost of the security which the Fund
purchased.
FORWARD FOREIGN CURRENCY AND SPOT CONTRACTS. Each Fund may enter into forward
foreign currency and spot contracts to protect securities and related
receivables and payables against fluctuations in foreign currency rates. A
forward foreign currency contract is an agreement to buy or sell currencies of
different countries on a specified future date at a specified rate.
Risks associated with such contracts include the movement in the value of the
foreign currency relative to the U.S. dollar and the ability of the counterparty
to perform. The market value of the contract will fluctuate with changes in
currency exchange rates. Contracts are valued daily based on procedures
established by and under the general supervision of the Trustees of the Trust
and the change in the market value is recorded by the Funds as unrealized
appreciation or depreciation of forward foreign currency contracts. As of
December 31, 1999, the following Funds had the following open forward foreign
currency and spot contracts:
<TABLE>
<CAPTION>
Unrealized
Contracts To In Exchange Appreciation/
Fund Name Maturity Deliver/Receive For Value (Depreciation)
Touchstone Balanced Fund
<S> <C> <C> <C> <C> <C> <C>
Sales 02/01/00 GBP 117,800 $193,281 $190,287 $ 2,994
03/13/00 ZAR 2,321,000 374,403 377,398 (2,995)
- --------------------------------------------------------------------------------------
(1)
======================================================================================
GBP -- Great British Pound
ZAR -- South African Rand
<CAPTION>
Touchstone International Equity Fund
<S> <C> <C> <C> <C> <C> <C>
Purchases 01/04/00 EUR 381,112 $387,019 $384,335 $(2,684)
Sales 01/04/00 GBP 238,777 $385,506 $385,657 $ (151)
01/04/00 ZAR 2,366 384 385 (1)
- --------------------------------------------------------------------------------------
(152)
======================================================================================
EUR-- European Monetary Unit (Euro)
GBP-- Great British Pound
ZAR-- South African Rand
</TABLE>
<PAGE>
56
TOUCHSTONE VARIABLE SERIES TRUST
Notes to Financial Statements continued
ORGANIZATION EXPENSE. Organization expenses were deferred and are being
amortized by each Fund except the Touchstone Small Cap Value Fund, Touchstone
High Yield Fund, Touchstone Value Plus Fund, Touchstone Growth & Income Fund,
Touchstone Enhanced 30 Fund and Touchstone Bond Fund on a straight-line basis
over a five year period from commencement of operations. The amount paid by the
Trust on any redemption by Touchstone Advisors, Inc. or, any other then-current
holder of the organizational seed capital shares ("Initial Shares") of the Fund,
will be reduced by a portion of any unamortized organization expenses of the
Fund determined by the proportion of the number of the Initial Shares of the
Fund redeemed to the number of the Initial Shares of the Fund outstanding after
taking into account any prior redemptions of the Initial Shares of the Fund.
REPURCHASE AGREEMENTS. Each Fund may invest in repurchase agreements, which are
agreements pursuant to which securities are acquired by the Fund from a third
party with the commitment that they will be repurchased by the seller at a fixed
price on an agreed upon date. Each Fund may enter into repurchase agreements
with banks or lenders meeting the creditworthiness standards established by the
Trustees of the Fund Trust. The Fund, through its custodian, receives as
collateral, delivery of the underlying securities, whose market value is
required to be at least 102% of the resale price at the time of purchase. The
resale price reflects the purchase price plus an agreed upon rate of interest.
In the event of counterparty default, the Fund has the right to use the
collateral to offset losses incurred.
SECURITIES TRANSACTIONS. Securities transactions are recorded on a trade date
basis. For financial and tax reporting purposes, realized gains and losses are
determined on the basis of specific lot identification.
EXPENSES. Expenses incurred by the Trust with respect to any two or more Funds
in the Trust are prorated to each Fund in the Trust, except where allocations of
direct expenses to each Fund can otherwise be made fairly. Expenses directly
attributable to a Fund are charged to that Fund.
2. Risks Associated with Foreign Investments
Some of the Funds may invest in the securities of foreign issuers. Investing in
securities issued by companies whose principal business activities are outside
the U.S. may involve significant risks not present in domestic investments. For
example, there is generally less publicly available information about foreign
companies, particularly those not subject to the disclosure and reporting
requirements of the U.S. securities laws. Foreign issuers are generally not
bound by uniform accounting, auditing, and financial reporting requirements and
standards of practice comparable to those applicable to domestic issuers.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of
the Fund, political or financial instability or diplomatic and other
developments which could affect such investments. Foreign stock markets, while
growing in volume and sophistication, are generally not as developed as those in
the U.S., and securities of some foreign issuers (particularly those located in
developing countries) may be less liquid and more volatile than securities of
comparable U.S. companies. In general, there is less overall governmental
supervision and regulation of foreign securities markets, broker-dealers, and
issuers than in the U.S.
<PAGE>
57
TOUCHSTONE VARIABLE SERIES TRUST
3. Transactions with Affiliates
INVESTMENT ADVISOR. The Trust has an investment advisory agreement with
Touchstone Advisors, Inc. (the "Advisor"), a subsidiary of Western-Southern Life
Assurance Company ("Western-Southern"). Under the terms of the investment
agreement, each Fund pays an investment advisory fee that is computed daily and
paid monthly. For the year ended December 31, 1999, each Fund incurred
investment advisory fees equal on an annual basis to the following percentages
of the daily net assets of the Fund:
<TABLE>
<CAPTION>
Touchstone
Touchstone Touchstone Touchstone Income Touchstone Touchstone
Small Cap Emerging International Opportunity High Yield Value Plus
Value Fund Growth Fund Equity Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C> <C>
Rate 0.80% 0.80% 0.95% 0.65% 0.60% 0.75%
=================================================================================================
<CAPTION>
Touchstone Touchstone Touchstone Touchstone Touchstone
Growth & Enhanced Balanced Bond Standby
Income Fund 30 Fund Fund Fund Income Fund
<S> <C> <C> <C> <C> <C>
Rate 0.80% 0.65% 0.80% 0.55% 0.25%
=================================================================================================
</TABLE>
Subject to review and approval by the Board of Trustees, the Advisor has entered
into certain sub-advisory agreements for the investment advisory services in
connection with the management of each of the Funds. The Advisor pays each
sub-advisor a fee for services provided using an annual rate, as specified
below, that is computed daily and paid monthly based on average daily net
assets. As of December 31, 1999, the following sub-advisory agreements were in
place:
TOUCHSTONE SMALL CAP VALUE FUND
Todd Investment Advisors, Inc. 0.50%
TOUCHSTONE EMERGING GROWTH FUND
David L. Babson & Company, Inc. 0.50%
Westfield Capital Management Company, Inc. 0.45% on the first $10 million
0.40% on the next $40 million
0.35% thereafter
TOUCHSTONE INTERNATIONAL EQUITY FUND
Credit Suisse Asset Management 0.85% on the first $30 million
0.80% on the next $20 million
0.70% on the next $20 million
0.60% thereafter
TOUCHSTONE INCOME OPPORTUNITY FUND
Alliance Capital Management LP 0.40% on the first $50 million
0.35% on the next $20 million
0.30% on the next $20 million
0.25% thereafter
TOUCHSTONE HIGH YIELD FUND
Fort Washington Investment Advisors, Inc. 0.40%
TOUCHSTONE VALUE PLUS FUND
Fort Washington Investment Advisors, Inc. 0.45%
TOUCHSTONE GROWTH & INCOME FUND
Scudder Kemper Investments, Inc. 0.50% on the first $150 million
0.45% thereafter
TOUCHSTONE ENHANCED 30 FUND
Todd Investment Advisors, Inc. 0.40%
TOUCHSTONE BALANCED FUND
OpCap Advisors, Inc. 0.60% on the first $20 million*
0.50% on the next $30 million*
0.40% thereafter*
<PAGE>
58
TOUCHSTONE VARIABLE SERIES TRUST
Notes to Financial Statements continued
TOUCHSTONE BOND FUND
Fort Washington Investment Advisors, Inc. 0.30%
TOUCHSTONE STANDBY INCOME FUND
Fort Washington Investment Advisors, Inc. 0.15%
* Includes assets of the Touchstone Balanced Fund of the Touchstone Variable
Series Trust and the Touchstone Balanced Fund of the Touchstone Series Trust
(for which OpCap Advisors also acts in a sub-advisory capacity).
Fort Washington Investment Advisors, Inc., and Todd Investment Advisors, Inc.
are affiliates of the Sponsor and of Western-Southern.
SPONSOR. The Trust, on behalf of each Fund, has entered into a Sponsor Agreement
with the Advisor. The Advisor provides oversight of the various service
providers to the Trust, including the Trust's administrator, custodian and
transfer agent. The Advisor receives a fee from each Fund equal on an annual
basis to 0.20% of the average daily net assets of that Fund. The Advisor waived
all fees under the Sponsor Agreement through December 31, 1999. In the last
Sponsor Agreement, the Advisor agreed to continue to waive all fees through
April 30, 2000. The Sponsor Agreement may be terminated by the Sponsor or by the
Trust on not less than 30 days prior written notice.
TRUSTEES. Each Trustee who is not an "interested person" (as defined in the Act)
of the Trust, receives an aggregate of $5,000 annually, plus $1,000 per meeting
attended, as well as reimbursement for reasonable out-of-pocket expenses, from
the Trust and from Touchstone Variable Series Trust (included in a separate
report). For the year ended December 31, 1999, the Trust incurred $31,796 in
Trustee fees which was prorated to each fund.
4. Expense Reimbursements
The Advisor has agreed to waive fees and reimburse each Fund so that, following
such waiver of fees and reimbursement, the aggregate total operating expenses
(excluding interest, taxes, brokerage commissions and extraordinary expenses) of
each Fund are not greater, on an annualized basis, than the percentage of
average daily net assets of the Fund listed below:
<TABLE>
<CAPTION>
Touchstone
Touchstone Touchstone Touchstone Income Touchstone Touchstone
Small Cap Emerging International Opportunity High Yield Value Plus
Value Fund Growth Fund Equity Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C> <C>
Voluntary
expense limit 1.00% 1.15% 1.25% 0.85% 0.80% 1.15%
Amount of
reimbursement $71,822 $80,498 $202,361 $135,450 $72,086 $87,362
===================================================================================================
Touchstone Touchstone Touchstone Touchstone Touchstone
Growth & Enhanced Balanced Bond Standby
Income Fund 30 Fund Fund Fund Income Fund
<S> <C> <C> <C> <C> <C>
Voluntary
expense limit 0.85% 0.75% 0.90% 0.75% 0.50%
Amount of
reimbursement $317,838 $76,819 $180,988 $122,631 $104,385
=====================================================================================
</TABLE>
The Advisor waived fees and reimbursed each Fund as described above through
December 31, 1999.
<PAGE>
59
TOUCHSTONE VARIABLE SERIES TRUST
5. Purchases and Sales of Investment Securities
Investment transactions (excluding purchases and sales of U.S. government
obligations, U.S. government agency obligations and short-term investments) for
the year ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Touchstone
Touchstone Touchstone Touchstone Income Touchstone Touchstone
Small Cap Emerging International Opportunity High Yield Value Plus
Value Fund Growth Fund Equity Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C> <C>
Cost of
purchases $19,235,229 $26,679,002 $52,346,854 $51,436,002 $22,208,640 $ 9,625,305
Proceeds from
sales $ 8,975,191 $31,806,025 $54,600,383 $57,752,661 $ 5,968,219 $ 6,514,469
=================================================================================================
<CAPTION>
Touchstone Touchstone Touchstone Touchstone Touchstone
Growth & Enhanced Balanced Bond Standby
Income Fund 30 Fund Fund Fund Income Fund
<S> <C> <C> <C> <C> <C>
Cost of
purchases $46,390,476 $13,571,829 $25,379,577 $12,621,736 $24,985,143
Proceeds from
sales $56,075,097 $ 979,721 $30,347,779 $ 7,063,516 $ 8,326,156
====================================================================================
</TABLE>
Purchases and sales of U.S. government obligations (excluding short-term
investments) for the year ended December 31, 1999 were as follows:
Touchstone Touchstone Touchstone Touchstone Touchstone
Value Plus Growth & Balanced Bond Standby
Fund Income Fund Fund Fund Income Fund
Cost of
purchases $233,283 $871,375 $3,213,094 $5,412,327 $ --
Proceeds from
sales $ 49,716 $950,727 $3,805,094 $9,210,829 $2,631,099
6. Restricted Securities
Restricted securities may be difficult to dispose of and involve time-consuming
negotiation and expense. Prompt sale of these securities may involve the seller
taking a discount to the security's stated market value. As of December 31,
1999, the Touchstone Bond Fund held restricted securities valued at $699,034 by
the Trustees, representing 2.01% of net assets. Acquisition date and cost of
each are as follows:
Acquisition Date Cost
Mercantile Safe Deposit 3/28/85 $ 49,269
Central America, Series F 8/1/86 120,000
Central America, Series G 8/1/86 120,000
Central America, Series H 8/1/86 120,000
Republic of Honduras, Series C 5/1/88 100,000
Republic of Honduras, Series D 5/1/88 100,000
The Bond II Portfolio of Select Advisors Portfolios received these securities
from The Western and Southern Life Insurance Company Separate Account A on
November 21, 1994, in exchange for a proportionate interest in the Bond II
Portfolio. As part of a subsequent reorganization, these securities were
redeemed in kind and acquired by the Touchstone Bond Fund. (Note 7)
<PAGE>
60
TOUCHSTONE VARIABLE SERIES TRUST
Notes to Financial Statements continued
7. Capital Contribution
The Touchstone Growth & Income Fund and the Touchstone Bond Fund were newly
established Funds, effective immediately after the close of business on December
31, 1998. At that time, shares of the newly established Touchstone Growth &
Income Fund and Touchstone Bond Fund were substituted, in a tax-free exchange,
for shares of the Select Advisors Portfolios: Growth & Income II Portfolio and
Select Advisors Portfolios: Bond II Portfolio, respectively. Thus, an initial
capital contribution equal to the amount of each respective Portfolio's net
assets was made at that time.
The following is a summary by Fund of the unrealized appreciation and
undistributed net investment income acquired from each series of Select Advisors
Portfolios as of the substitution date, as well as the number of shares issued
from each Portfolio from the substitution:
Undistributed
Touchstone Variable Series Unrealized Net Investment Shares
Trust Fund (New Fund) Appreciation Income Issued
Growth & Income $3,085,239 $1,995,493 7,140,970
Bond 697,382 4,714,604 3,770,359
<PAGE>
61
TOUCHSTONE VARIABLE SERIES TRUST
Federal Tax Information (unaudited)
At December 31, 1999, the following Funds had available, for Federal income tax
purposes, unused capital losses which may be applied against any realized net
taxable capital gains of each succeeding year until fully utilized or until
expiration dates noted:
Expiration
Amount Date
Income Opportunity Fund $3,801,099 12/31/2006
7,148,242 12/31/2007
High Yield Bond Fund 357,539 12/31/2007
Enhanced 30 Fund 210,997 12/31/2007
Bond Fund 367,446 12/31/2007
Standby Income Fund 104,320 12/31/2007
From November 1, 1999 to December 31, 1999, the following Funds incurred the
following net losses. The Funds intend to elect to defer these losses and treat
them as arising on January 1, 2000:
Amount
International Equity Fund $ 12,452
Income Opportunity Fund 324,074
Enhanced 30 Fund 140,493
Balanced Fund 10,564
Bond Fund 32,145
Standby Income Fund 7,028
For corporate shareholders, a portion of the ordinary dividends paid during the
Fund's year ended December 31, 1999 qualified for the dividends received
deduction, as follows:
Amount
International Equity Fund 0.43%
Value Plus Fund 23.97%
Enhanced 30 Fund 100.00%
Balanced Fund 12.50%
Pursuant to Section 852 of the Internal Revenue Code, the Funds designate the
following as capital gain dividends for the year ended December 31, 1999, of
which 100% represents 20% rate gains:
Capital Gains
Dividend
Emerging Growth Fund $ 905,259
International Equity Fund 1,464,635
Balanced Fund 1,862,053
The Touchstone International Equity Fund paid foreign taxes of $24,659 or $0.01
per share, and the Fund recognized $344,230 or $0.15 per share of foreign source
income during the year ended December 31, 1999.
<PAGE>
62
TOUCHSTONE VARIABLE SERIES TRUST
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Touchstone Variable Series Trust
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments of Touchstone Variable Series Trust (comprised of
Small Cap Value Fund, Emerging Growth Fund, International Equity Fund, Income
Opportunity Fund, High Yield Fund, Value Plus Fund, Growth & Income Fund,
Enhanced 30 Fund, Balanced Fund, Bond Fund, and Standby Income Fund) (the Funds)
as of December 31, 1999, and the related statements of operations, the
statements of changes in net assets, and the financial highlights presented
herein for the year or period ended December 31, 1999. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits. The statements of
changes in net assets presented herein for the years or periods ended December
31, 1998 and the financial highlights presented herein for each of the
respective years or periods ended December 31, 1998 were audited by other
auditors whose report dated February 18, 1999 expressed an unqualified opinion.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1999, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective Funds constituting the Touchstone Variable Series Trust as of
December 31, 1999, the results of their operations, the changes in their net
assets and financial highlights for the year or period then ended, in conformity
with accounting principles generally accepted in the United States.
Ernst & Young LLP
Cincinnati, Ohio
February 16, 2000
<PAGE>
63
TOUCHSTONE VARIABLE SERIES TRUST
Supplementary Data
A special meeting of the shareholders of Touchstone Growth & Income Fund (the
"Fund") of Touchstone Variable Series Trust was held on January 28, 1999. At the
meeting, the sole shareholder of the Fund, Western-Southern Life Assurance
Company ("Western-Southern"), voted on a proposal to approve a new portfolio
advisory agreement between Touchstone Advisors, Inc., the investment advisor to
the Fund (the "Advisor"), and Scudder Kemper Investments, Inc. ("Scudder
Kemper"), pursuant to which Scudder Kemper would act as sub-advisor with respect
to the assets of the Fund. Western-Southern voted in favor of the proposal.
The new agreement replaced the portfolio advisory agreement dated September 7,
1998 and is identical in all substantive respects to that portfolio advisory
agreement, except for different effective and termination dates.
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS:
(a)(1) Amended Declaration of Trust of the Trust.(1)
(a)(2) Amendment to the Amended Declaration of Trust of the Trust.(3)
(a)(3) Amendment No. 5 to Amended Declaration of Trust of the Trust.(8)
(a)(4) Amendment No. 6 to Amended Declaration of Trust of the Trust.(9)
(b) Amended By-Laws of the Trust.(1)
(c) Inapplicable.
(d)(1) Amended and Restated Investment Advisory Agreement.(8)
(d)(2) Amended and Restated Sub-Advisory Agreement with respect to Value Plus
Fund.(9)
(d)(3) Amended and Restated Sub-Advisory Agreement with respect to Emerging
Growth Fund (David L. Babson & Company, Inc.).(9)
(d)(4) Amended and Restated Sub-Advisory Agreement with respect to
International Equity Fund.(9)
(d)(5) Amended and Restated Sub-Advisory Agreement with respect to Balanced
Fund.(9)
(d)(6) Amended and Restated Sub-Advisory Agreement with respect to Income
Opportunity Fund.(9)
(d)(7) Amended and Restated Sub-Advisory Agreement with respect to Standby
Income Fund.(9)
(d)(8) Sub-Advisory Agreement with respect to the Bond Fund.(9)
(d)(9) Sub-Advisory Agreement with respect to the Growth & Income Fund.(9)
(d)(10) Amended and Restated Sub-Advisory Agreement with respect to Emerging
Growth Fund (Westfield Capital Management).(9)
(d)(11) Sub-Advisory Agreement with respect to the High Yield Fund.(9)
(d)(12) Sub-Advisory Agreement with respect to the Small Cap Value Fund.(9)
(d)(13) Sub-Advisory Agreement with respect to the Enhanced Index Fund.(9)
(d)(14) Amendment to the Amended and Restated Investment Advisory Agreement
adding the High Yield Fund, Small Cap Value Fund, and Enhanced 30 Fund.(9)
(d)(15) Form of Sub-Advisory Agreement with respect to Balanced Fund.(10)
<PAGE>
(e) Inapplicable.
(f) Inapplicable.
(g) Custodian Agreement.(5)
(h)(1) Administration Agreement.(2)
(h)(2) Sponsor Agreement.(5)
(h)(3) Transfer Agency Agreement.(2)
(h)(4) Fund Accounting Agreement.(2)
(h)(5) Amendment No. 2 to the Sponsor Agreement.(9)
(h)(6) Amendment No. 3 to the Sponsor Agreement.(9)
(i)(1) Opinion of counsel.(5)
(i)(2) Opinion of counsel regarding Growth & Income Fund and Bond Fund by
Bingham Dana, LLP.(7)
(i)(3) Opinion of counsel regarding Value Plus Fund by Bingham Dana, LLP.(7)
(i)(4) Opinion of counsel regarding the High Yield Fund, Small Cap Value Fund,
and Enhanced 30 Fund by Bingham Dana, LLP.(9)
(j)(1) Consent of PriceWaterhouseCoopers LLP, independent accountants.(10)
(j)(2) Consent of Ernst & Young LLP, independent accountants.(10)
(k) Inapplicable.
(l) Investment letter of initial shareholders.(5)
(m) Inapplicable.
(n) Financial Data Schedules.(9)
(o) Inapplicable.
(p)(1) Code of Ethics of Touchstone Variable Series Trust.(10)
(p)(2) Code of Ethics of Touchstone Advisors, Inc.(10)
(p)(3) Code of Ethics of Todd Investment Advisors, Inc. (10)
(p)(4) Code of Ethics of David L. Babson & Company, Inc. (10)
(p)(5) Code of Ethics of Westfield Capital Management Company, Inc. (10)
<PAGE>
(p)(6) Code of Ethics of Credit Suisse Asset Management, LLC. (10)
(p)(7) Code of Ethics of Fort Washington Investment Advisors, Inc. (10)
(p)(8) Code of Ethics of Scudder Kemper Investments, Inc. (10)
(p)(9) Code of Ethics of OpCap Advisors. (10)
(p)(10) Code of Ethics of Alliance Capital Management L.P. (10)
(q)(1) Power of Attorney for Phillip R. Cox.(10)
(q)(2) Power of Attorney for Nelson Schwab, Jr.(10)
(q)(3) Power of Attorney for Robert E. Stautberg.(10)
(q)(4) Power of Attorney for Joseph S. Stern, Jr.(10)
(q)(5) Power of Attorney for William J. Williams.(10)
(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) Incorporated by reference from Post-Effective Amendment No. 9 to the
Registration Statement as filed with the SEC via Edgar on December 30,
1998.
(8) Incorporated by reference from Post-Effective Amendment No. 10 to the
Registration Statement as filed with the SEC via Edgar on February 12,
1999.
(9) Incorporated by reference from Post-Effective Amendment No. 11 as filed
with the SEC via Edgar on April 29, 1999.
(10) Filed herein.
<PAGE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE TRUST.
Inapplicable.
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 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
<PAGE>
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.
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.
<PAGE>
<TABLE>
<CAPTION>
NAME POSITIONS AND OFFICES POSITION AND OFFICES
WITH TOUCHSTONE ADVISORS WITH THE REGISTRANT
<S> <C> <C>
James N. Clark* Director none
Jill T. McGruder Director, President and Trustee, President and
Chief Executive Officer Chief Executive Officer
William F. Ledwin* Director none
Donald J. Wuebbling* Director, Secretary and none
Chief Legal Officer
James J. Vance* Treasurer Treasurer
Edward S. Heenan* Vice President and Controller Controller
J. Thomas Lancaster* Vice President 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
</TABLE>
* Principal business address is 311 Pike Street, Cincinnati, Ohio 45202
ITEM 27. PRINCIPAL UNDERWRITERS.
Inapplicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
Touchstone Variable Series 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, custodian, fund accounting agent and transfer agent)
<PAGE>
ITEM 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS.
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, as amended, the Registrant certifies that it meets all of
the requirements for effectiveness of this amendment to its Registration
Statement under Rule 485(b) under the Securities Act of 1933 and has duly caused
this amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Cincinnatti, Ohio on April
28, 2000.
TOUCHSTONE VARIABLE SERIES TRUST
By: /s/ Jill McGruder
-----------------------------
President and Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on April 28, 2000.
SIGNATURE TITLE
/s/ William J. Williams Trustee
- - -------------------------------
*William J. Williams
/s/ Joseph S. Stern Trustee
- - -------------------------------
*Joseph S. Stern, Jr.
/s/ Phillip R. Cox Trustee
- - -------------------------------
*Phillip R. Cox
/s/ Robert E. Stautberg Trustee
- - -------------------------------
*Robert E. Stautberg
/s/ Nelson Schwab, Jr. Trustee
- - -------------------------------
*Nelson Schwab, Jr.
/s/ James J. Vance Treasurer (Principal Financial
- - ------------------------------- Officer and Principal Accounting
James J. Vance Officer)
/s/ Jill McGruder *Attorney-in-fact
- - -------------------------------
Jill McGruder
<PAGE>
TOUCHSTONE VARIABLE SERIES TRUST
EXHIBITS TO
REGISTRATION STATEMENT ON
FORM N-1A
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
(d)(15) Form of Sub-Advisory Agreement for the Balanced Fund.
(j)(1) Consent of PriceWaterhouseCoopers LLP.
(j)(2) Consent of Ernst & Young LLP.
(p)(1) Code of Ethics of Touchstone Variable Series Trust.
(p)(2) Code of Ethics of Touchstone Advisors, Inc.
(p)(3) Code of Ethics of Todd Investment Advisors, Inc.
(p)(4) Code of Ethics of David L. Babson & Company, Inc.
(p)(5) Code of Ethics of Westfield Capital Management Company, Inc.
(p)(6) Code of Ethics of Credit Suisse Asset Management, LLC.
(p)(7) Code of Ethics of Fort Washington Investment Advisors, Inc.
(p)(8) Code of Ethics of Scudder Kemper Investments, Inc.
(p)(9) Code of Ethics of OpCap Advisors.
(p)(10) Code of Ethics of Alliance Capital Management L.P.
(q)(1) Power of Attorney for Phillip R. Cox.
(q)(2) Power of Attorney for Nelson Schwab, Jr.
(q)(3) Power of Attorney for Robert E. Stautberg.
(q)(4) Power of Attorney for Joseph S. Stern, Jr.
(q)(5) Power of Attorney for William J. Williams.
SUB-ADVISORY AGREEMENT
TOUCHSTONE BALANCED FUND
TOUCHSTONE VARIABLE SERIES TRUST
This SUB-ADVISORY AGREEMENT is made as of __________, 2000, 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] [REVISE REFERENCE TO REFLECT NEW STRUCTURE].
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), 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.
<PAGE>
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, (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 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
<PAGE>
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 connection with comparable 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 to 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
3
<PAGE>
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.
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.
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 shares thereof.
4
<PAGE>
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 a shareholder 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 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
<PAGE>
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 shareholder 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 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, 2000; 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
6
<PAGE>
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 225 Liberty Street, 16th Floor, New York,
New York 10281. [CONFIRM OPCAP ADDRESS]
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.
7
<PAGE>
TOUCHSTONE ADVISORS, INC.
Attest:
BY
- ----------------------------- -----------------------------
Name: Name:
----------------------- -----------------------
Title: Title:
----------------------- -----------------------
OPCAP ADVISORS
Attest:
BY
- ----------------------------- -----------------------------
Name: Name:
----------------------- -----------------------
Title: Title:
----------------------- -----------------------
8
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Post-Effective
Amendment No. 12 to the Registration Statement under the Securities Act of 1933
and Amendment No. 13 to the Registration Statement under the Investment Company
Act of 1940 of Touchstone Variable Series Trust on Form N-1A of our report dated
February 18, 1999, on our audits of the financial statements and financial
highlights of the Touchstone Emerging Growth Fund, Touchstone International
Equity Fund, Touchstone Income Opportunity Fund, Touchstone Value Plus Fund,
Touchstone Balanced Fund, and Touchstone Standby Income Fund, which report is
included in the Annual Report for Touchstone Variable Series Trust for the year
ended December 31, 1998, which is incorporated by reference in the Registration
Statement.
We also consent to the references to our Firm under the captions "Financial
Highlights" and "Financial Statements" in such Registration Statement.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 28, 2000
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" in the Prospectus and "Counsel and Independent Auditors" in the
Statement of Additional Information, both included in Post-Effective Amendment
Number 12 to the Registration Statement (Form N-1A, No. 33-76566) of Touchstone
Variable Series Trust and to the use of our report dated February 16, 2000,
incorporated by reference therein.
ERNST & YOUNG LLP
Cincinnati, Ohio
April 25, 2000
Draft 2/6/95
CODE OF ETHICS
Select Advisors Trust A
Select Advisors Trust C
Select Advisors Portfolios
Select Advisors Variable Insurance Trust
(each a "Trust" or together the "Trusts")
Each Trust has adopted this Code of Ethics (the "Code") effective as of
January 1, 1995 to specify and prohibit certain types of personal securities
transactions deemed to create a conflict of interest and to establish reporting
requirements and preventive procedures pursuant to the provisions of Rule
17j-1(b)(1) under the Investment Company Act of 1940 (the "1940 Act").
I. GENERAL STANDARDS OF ETHICAL CONDUCT
Trustees, officers and access persons shall have the duty at all times
to place the interests of the Trust and its shareholders ahead of their own
interests. All personal securities transactions of such individuals and certain
other types of actions shall be conducted consistent with this Code and in such
a manner as to avoid any actual or potential conflict of interest or any abuse
of such individual's position of trust and responsibility to the Trust. All
activities of personnel associated with the Trust shall be conducted in
accordance with the fundamental standard that they shall not take any
inappropriate advantage of their positions with the Trust.
II. RULES APPLICABLE TO TRUSTEES, OFFICERS AND OTHER ACCESS PERSONS OF THE
TRUST
A. Definitions
1. "Access Person" means (i) any owner, trustee, director, officer,
partner, principal or Advisory Person (as defined below) of a Trust or of
any Advisor (as defined below) thereof, or (ii) any owner, partner,
trustee, principal, [employee,] director or officer of a principal
underwriter of a Trust who, in the ordinary course of his or her business,
makes, participates in or obtains information regarding the purchase or
sale of securities for the Trust for which the principal underwriter so
acts or whose functions or duties as part of the ordinary course of his or
her business relate to the making of any recommendation to the Trust
regarding the purchase or sale of securities. Notwithstanding the
provisions of clause (i) above, with respect to any Advisor to a Trust that
is primarily engaged in a business or businesses other than advising
registered investment companies or other advisory clients, the term shall
be limited to any owner, trustee, director, officer, partner or principal
of such Advisor who makes any recommendation regarding the purchase or sale
of securities by the Trust, or who participates in the determination of
which recommendation shall be made to the Trust, or whose principal
function or duties relate to the determination of which recommendation
shall be made to the Trust or who in connection with his or her duties,
obtains any information concerning securities recommendations being made by
such Advisor to the Trust.
<PAGE>
2. "Advisor" means any investment advisor or sub-advisor to a Trust.
3. "Advisory Person" means any employee, of a Trust or of an Advisor
(or of any entity in a control relationship to such Advisor) to such Trust
who, in connection with his or her regular functions or duties, makes,
participates in or obtains information regarding the purchase or sale of
securities by the Trust or whose functions relate to any recommendations
with respect to such purchases or sales, and any natural person in a
control relationship with such Trust or such Advisor who obtains
information regarding the purchase or sale of securities by the Trust.
4. "Beneficial Ownership" shall be interpreted subject to the
provisions of Rule 16a-1(a) (exclusive of Section (a) (1) of such Rule) of
the Securities Exchange Act of 1934, a copy of which is attached hereto.
5. "Control" shall have the same meaning as set forth in Section
2(a)(9) of the 1940 Act.
6. "Disinterested Trustee" means a trustee of a Trust who is not an
"interested person" within the meaning of Section 2(a)(19) of the 1940 Act.
An "Interested Person" includes any person who is a trustee, director,
officer, employee or owner of 5% or more of the outstanding stock of any
Advisor. Affiliates of brokers or dealers are also "Interested Persons",
except as provided in Rule 2(a)(19)(1) under the 1940 Act.
7. "Purchase or sale of a security" includes, among other things, the
writing of an option to purchase or sell a security or the purchase or sale
of a future or index on a security or option thereon.
8. "Security" shall have the meaning as set forth in Section 2(a)(36)
of the 1940 Act (in effect, all securities). The term shall not include
securities issued by the U.S. Government (or any other "government
security" as that term is defined in the 1940 Act), bankers' acceptances,
bank certificates of deposit, commercial paper, such other money market
instruments as may be designated by the Trustees of a Trust, and shares of
registered open-end investment companies ("Exempt Securities").
9. A security is "being considered for purchase or sale" when a
recommendation to purchase or sell the security has been made and
communicated and, with respect to the person making the recommendation,
when such person seriously considers making such a recommendation.
B. Prohibited Purchases and Sales
1. No Access Person of a Trust shall purchase or sell, directly or
indirectly, any security in which he or she has, or by reason of such
transaction acquires, any direct or indirect beneficial ownership on a day
during which the Trust has a pending "buy" or "sell" order in that same
security (until the order is executed or withdrawn), if such person knows
or should have known of such pending order at the time of such person's
purchase or sale.
2
<PAGE>
2. No Access Person of a Trust shall purchase or sell, directly or
indirectly, any security in which he or she has, or by reason of such
transaction acquires, any direct or indirect beneficial ownership and which
he or she knows or should have known, at the time of such purchase or sale,
is being considered for purchase or sale by the Trust.
3. No Advisory Person of a Trust shall purchase or sell, directly or
indirectly, any security in which he or she has, or by reason of such
transaction acquires, any direct or indirect beneficial ownership within
seven calendar days before or after the execution of a trade in the same
securities by the portfolio of the Trust as to which he or she is an
Advisory Person. In the event of any trading within such period, any
profits realized on trades is required to be disgorged to the Trust.
4. No Advisory Person may profit from the purchase and sale, or sale
and purchase, of the same or equivalent securities within sixty calendar
days ("short-term trade"). This restriction does not apply to short-term
trades:
a) involving Exempt Securities,
b) for which express prior approval has been received from the
Trust,
c) involving de minimis shares (which in any event shall mean shares
having a value of $5,000 or less at the time of both their
purchase and their sale),
d) involving any account over which the Advisory Person has no
direct or indirect influence or control,
e) that are nonvolitional on the part of the Advisory Person, and
f) resulting from an automatic dividend reinvestment plan or an
automatic withdrawal plan.
5. No Advisory Person may acquire any securities in an initial public
offering without express prior approval from the Trust.
6. No Advisory Person may acquire any security of any issuer in a
private placement without express prior approval from the Trust. Such
individual must disclose his or her investment in such security if he or
she takes part in the Trust's subsequent decision to invest in any security
of the issuer.
C. Exempted Transactions
The prohibition of Section II.B.1., 2. and 3. above shall not apply to:
1. purchases or sales effected in any account over which the person
has no direct or indirect influence or control;
2. purchases or sales which are nonvolitional on the part of the
person;
3
<PAGE>
3. purchases which are part of an automatic dividend reinvestment plan
or an automatic withdrawal plan;
4. purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its securities, to the extent such
rights were acquired from such issuer, and sales of such rights so
acquired; and
5. purchases and sales which receive prior approval in writing by any
designated review officer or, in the absence of any such designation, the
Treasurer or an Assistant Treasurer of the Trust (the "Review Officer") (a)
as only remotely potentially harmful to the Trust because they would be
very unlikely to affect a highly institutional market or because they
clearly are not economically related to the securities to be purchased or
sold or held by the Trust or client or (b) as not representing any danger
of the abuses proscribed by Rule 17j-1, but only if in each case the
prospective purchaser has identified to the Review Officer all factors of
which he or she is aware which are potentially relevant to a conflict of
interest analysis, including the existence of any substantial economic
relationship between his or her transaction and securities held or to be
held by the Trust.
D. Restrictions on Serving on Boards of Directors
No Advisory Person may serve on the board of directors of a
publicly-traded company without prior approval from the Trust.
E. Restrictions Involving Gifts
No Advisory Person shall accept in any calendar year gifts with a
value of more than $100 from any person that does business with or on
behalf of the Trust. This restriction includes gifts in the form of meals,
tickets to sporting events or similar entertainment or invitations to play
golf or participate in similar sporting activities.
F. Preclearance of Securities Transactions
Each Access Person (other than a Disinterested Trustee) who is
required to file reports with the Review Officer pursuant to Section III
hereof must obtain approval from the Review Officer for the Trust prior to
purchasing or selling any securities in a Pre-Clearance Transaction.
"Pre-Clearance Transaction" means (i) any transaction in a given Security
which, when combined with all previous transactions by the Access Person in
such security during the preceding three months, would represent a total
transaction value exceeding $15,000, (ii) any transaction in a Security
that is neither listed on a national securities exchange nor acquired by
such Access Person in an offering made pursuant to a then-effective
registration statement under the Securities Act of 1933, and (iii) any
transaction in the Security of a company whose total market capitalization
is less than $200 million. Any approval given by the Review Officer shall
be valid for a period of five trading days.
4
<PAGE>
G. Exceptions
1. The restrictions of Sections B.3, B.4., B.5., B.6. and F shall not
apply to an Advisory Person if (i) such person is principally employed by,
or is an owner, partner, director, officer, principal or trustee of, an
Advisor, (ii) that Advisor has duly adopted a code of ethics (an "Advisor
Code of Ethics"), (iii) the trustees of the affected Trust have reviewed
such Advisor Code of Ethics and have, by action at a meeting of such
trustees duly called and held, determined that such Advisor Code of Ethics,
as in effect at the time of the relevant activity, event or circumstance,
either -
(x) includes restrictions that are substantially similar to the
above referenced sections (and the related reporting
requirements) of this Code or
(y) complies in all material respects with the 1940 Act and the
rules and regulations promulgated thereunder and is
otherwise satisfactory to such trustees,
and (iv) such Advisory Person is not then in violation of the Advisor Code
of Ethics and has not been in violation thereof during the twelve months
immediately preceding the transaction, event or circumstance in question.
2. The restrictions of Section F shall not apply to an Access Person
of a principal underwriter if (i) such person is principally employed by,
or is an owner, partner, director, officer, principal or trustee of, a
Principal Underwriter, (ii) that Principal Underwriter has duly adopted a
code of ethics (a "Principal Underwriter Code of Ethics"), (iii) the
trustees of the affected Trust have reviewed such Principal Underwriter
Code of Ethics and have, by action at a meeting of such trustees duly
called and held, determined that such Principal Underwriter Code of Ethics,
as in effect at the time of the relevant activity, event or circumstance,
either -
(x) includes restrictions that are substantially similar to the
above referenced sections (and the related reporting
requirements) of this Code or
(y) complies in all material respects with the 1940 Act and the
rules and regulations promulgated thereunder and is
otherwise satisfactory to such trustees,
and (iv) such Access Person of the Principal Underwriter is not then in
violation of the Underwriter Code of Ethics and has not been in violation
thereof during the twelve months immediately preceding the transaction,
event or circumstance in question.
5
<PAGE>
III. REPORTING
A. Requirements for all Trustees, Officers and Other Access Persons
1. Coverage: Each Access Person, other than the Disinterested
Trustees, shall file with the review officer for the relevant Trust (the
"Review Officer") confidential quarterly reports containing the information
required in Section III.A.2. of this Code with respect to all transactions
during the preceding quarter in any securities in which such person has, or
by reason of such transaction acquires, any direct or indirect beneficial
ownership, provided that (i) no Access Persons shall be required to report
transactions effected for any account over which such Access Person has no
direct or indirect influence or control (except that such an Access Person
must file a written certification stating that he or she has no direct or
indirect influence or control over the account in question), (ii) a person
who is an Access Person of the Advisor of a Trust shall file such Access
Person's reports with the Advisor, unless, as to each such report at the
time of its scheduled filing, such Access Person is (or has been during the
period covered by such report) in violation of [this Code] or the
applicable Advisor Code of Ethics, in which event such report shall be
filed with the Review Officer, (iii) a person who is an Access Person of
the principal underwriter of the Trust shall file such Access Person's
reports with the principal underwriter, unless such person, as to each such
report, is in violation of the applicable Underwriter Code of Ethics, in
which event such report shall be filed with the Review Officer. The Access
Persons who are required by the preceding sentence to file such quarterly
reports with the Review Officer are herein called "Reporting Persons". All
Reporting Persons shall file reports; if no transactions have been effected
by an Access Person during the relevant period, that person shall represent
in the report that no transactions subject to reporting requirements were
effected.
2. Filings: Every report shall be made no later than 10 days after the
end of the calendar quarter in which the transaction to which the report
relates was effected, and shall contain the following information:
a) the date of the transaction, the title and the number of
shares and the principal amount of each security involved;
b) the nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
c) the price at which the transaction was effected; and
d) the name of the broker, dealer or bank with or through whom
the transaction was effected;
and a certification by such Access Person that he or she has complied,
during such calendar quarter, with the requirements of Sections II B, II D,
II E, and II F of this Code.
3. Any report may contain a statement that it shall not be construed
as an admission by the person making the report that he or she has any
direct or indirect beneficial ownership in the security to which the report
relates.
6
<PAGE>
4. Each Advisory Person (other than the Disinterested Trustees) who is
a Reporting Person shall file with the Review Officer a confidential annual
report containing information as of the end of the fiscal year identifying
the title, the number of shares and the principal amount of each security
held. Such report shall be filed no later than 30 days after the end of the
fiscal year to which the report relates. A report containing similar
information must be furnished by each Advisory Person upon the commencement
of employment.
5. Each Reporting Person (other than Disinterested Trustees) must
arrange for duplicate copies of trade confirmations and periodic statements
of his or her brokerage accounts to be sent to the Review Officer for the
Trust.
B. Requirements for Disinterested Trustees
1. Every Disinterested Trustee shall file with the Review Officer a
report containing the information required in Section III.A. of this Code
with respect to transactions (other than exempted transactions listed under
Section II.C) in any securities in which such person has, or by reason of
such transactions acquires, any direct or indirect beneficial ownership, if
such trustee, at the time of that transaction, knew or should have known,
in the ordinary course of pursuing his or her official duties as trustee,
that during the 15-day period immediately preceding or after the
transaction by the trustee:
a) such security was being purchased or sold by the Trust; or
b) such security was being considered for purchase or sale for
the portfolio of the Trust.
2. Notwithstanding the preceding section, any Disinterested Trustee
may, at his or her option, report the information described in Section
III.A.2. with respect to any one or more transactions and may include a
statement that the report shall not be construed as an admission that the
person knew or should have known of portfolio transactions by the Trust in
such securities.
C. Certification
All Reporting Persons and all Disinterested Trustees shall certify
annually that they have read and understand the Code and recognize that
they are subject to its requirements. All Reporting Persons and all
Disinterested Trustees further are required to certify that they have
complied with the requirements of the Code and that they have disclosed or
reported all personal securities transactions that are required to be
disclosed or reported pursuant to the requirements of the Code. Such
certification shall be furnished to the Trust no later than 30 days after
the end of the fiscal year.
IV. REVIEW
In reviewing transactions, the Review Officer shall take into account
the exemptions allowed under Section II.C. Before making a determination
that a violation has been committed,
7
<PAGE>
the Review Officer shall give such person an opportunity to supply
additional information regarding the transaction in question.
V. SANCTIONS
A. Sanctions for Violations by Access Persons (except Disinterested
Trustees) and Advisory Persons
If the Review Officer determines that a violation of this Code has
occurred, he or she shall so advise the respective Board of Trustees and
that Board may impose such sanctions as it deems appropriate, including,
inter alia, a letter of censure or suspension or termination of the
employment of the violator. All material violations of the Code and any
sanctions imposed as a result thereto shall be reported periodically to the
respective Board of Trustees.
B. Sanctions for Violations by Disinterested Trustees
If the Review Officer determines that any Disinterested Trustee has
violated this Code, he or she shall so advise the President of the Trust
and also a committee consisting of the Disinterested Trustees (other than
the person whose transaction is at issue) and shall provide the committee
with the report, the record of pertinent actual or contemplated portfolio
transactions of the Trust and any additional information supplied by such
person. The committee, at its option, shall either impose such sanctions as
it deems appropriate or refer the matter to the full Board of Trustees of
the Trust, which shall impose such sanctions as it deems appropriate.
VI. MISCELLANEOUS
A. Access Persons
The Secretary or Assistant Secretary of the Trust will identify all
Access Persons who are under a duty to make reports to the Trust and will
inform such persons of such duty. Any failure by the Secretary or Assistant
Secretary to notify any person of his or her duties under this Code shall
not relieve such person of his or her obligations hereunder.
B. Records
The Trust, or a designee appointed by the Trust, shall maintain
records in the manner and to the extent set forth below, which records may
be maintained on microfilm under the conditions described in Rule 31a-2(f)
under the 1940 Act, and shall be available for examination by
representatives of the Securities and Exchange Commission ("SEC"):
1. a copy of this Code and any other code which is, or at any time
within the past five years has been, in effect shall be preserved
in an easily accessible place;
8
<PAGE>
2. a record of any violation of this Code and of any action taken as
a result of such violation shall be preserved in an easily
accessible place for a period of not less than five years
following the end of the fiscal year in which the violation
occurs;
3. a copy of each report made pursuant to this Code shall be
preserved for a period of not less than five years from the end
of the fiscal year in which it is made, the first two years in an
easily accessible place; and
4. a list of all persons who are required, or within the past five
years have been required, to make reports pursuant to this Code
shall be maintained in an easily accessible place.
C. Confidentiality
All reports of securities transactions and any other information filed
pursuant to this Code shall be treated as confidential.
D. Interpretation of Provisions
The Board of Trustees of the Trust may from time to time adopt such
interpretations of this Code as it deems appropriate.
9
<PAGE>
TRANSACTIONS REPORT
Select Advisors Trust A
Select Advisors Trust C
Select Advisors Portfolios
Select Advisors Variable Insurance Trust
(the "Investment Companies")
To: [Review Officer]
From:____________________________________
(Your Name)
This Transaction Report (the "Report") is submitted pursuant to Section
III of the Code of Ethics of the Investment Companies and supplies (on the
attached table) information with respect to transactions in any security in
which I may be deemed to have, or by reason of such transaction acquire, any
direct or indirect beneficial ownership interest (whether or not such security
is a security held or to be acquired by the Investment Companies) for the
calendar quarter ended Unless the context otherwise requires, all terms used in
the Report shall have the same meaning as set forth in the Code of Ethics.
For purposes of the Report beneficial ownership shall be interpreted
subject to the provisions of the Code of Ethics and Rule 16a-1(a) (exclusive of
Section (a)(1) of such Rule) of the Securities Exchange Act of 1934.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Nature of
Transaction Name of the
(Whether Principal Broker, Dealer
Purchase, Sale, Amount of Or Bank With
or Other Type Securities Price at Which Whom The Nature of
Title of Date of of Disposition Acquired or the Transaction Transaction Ownership of
Securities Transaction or Acquisition) Disposed of Was Effected Was Effected Securities*
</TABLE>
* If appropriate, you may disclaim beneficial ownership of any security
listed in this report.
I CERTIFY THAT (a) I AM FULLY FAMILIAR WITH THE CODE OF ETHICS OF THE
INVESTMENT COMPANIES, (b) TO THE BEST OF MY KNOWLEDGE THE INFORMATION FURNISHED
IN THIS REPORT IS TRUE AND CORRECT, AND (c) DURING THE QUARTER THAT IS THE
SUBJECT OF THIS REPORT I HAVE COMPLIED WITH THE PROVISIONS OF SECTIONS II B, II
D, II E AND II F OF THE CODE OF ETHICS.
Name (Print) _____________________________
Title/Position _____________________________
Signature _____________________________
Date _____________________________
10
CODE OF ETHICS
Touchstone Advisors, Inc.
Touchstone Advisors, Inc. ("Adviser") has determined to adopt this Code
of Ethics (the "Code") as of October 3, 1994 to specify and prohibit certain
types of personal securities transactions deemed to create a conflict of
interest and to establish reporting requirements and preventive procedures
pursuant to the provisions of Rule 17j-l(b)(1) under the Investment Company Act
of 1940 (the "1940 Act").
I. RULES APPLICABLE TO ACCESS PERSONS OF THE ADVISER
A. Definitions
1 An "Access Person" means any director, officer or advisory person (as
defined below) of the Adviser.
2 An "Advisory Person" means any employee of the Adviser (or of any
company in a control relationship to the Adviser) who, in connection with his or
her regular functions or duties, makes, participates in or obtains information
regarding the purchase or sale of securities by an Investment Company or whose
functions relate to any recommendations with respect to such purchases or sales
and any natural person in a control relationship with the Adviser who obtains
information regarding the purchase or sale of securities.
3 "Beneficiary Ownership" shall be interpreted subject to the
provisions of Rule 16a-l(a) (exclusive of Section (a)(1) of such Rule) of the
Securities Exchange Act of 1934.
4 "Control" shall have the same meaning as set forth in Section
2(a)(19) of the 1940 Act.
5 "Investment Company" means a company registered as such under the
1940 Act and for which the Adviser is the investment adviser.
6 "Purchase or sale of a security" includes, among other things, the
writing of an option to purchase or sell a security or the purchase or sale of a
future or index on a security or option thereon.
7 "Security" shall have the meaning as set forth in Section 2(a)(36) of
the 1940 Act (in effect, all securities), except that it shall not include
securities issued by the U.S. Government (or any other "government security" as
that term is defined in the 1940 Act), bankers' acceptances, bank certificates
of deposit, commercial paper, such other money market instruments as may be
designated by the Adviser, and shares of registered open-end investment
companies.
8 A security is "being considered for purchase or sale" when a
recommendation to purchase or sell the security has been made and communicated
and, with respect to the person making the recommendation, when such person
seriously considers making such a recommendation.
<PAGE>
B. Avoiding Conflicts of Interest
NO ACCESS PERSON SHALL ENTER INTO OR ENGAGE IN A SECURITY TRANSACTION
OR BUSINESS ACTIVITY OR RELATIONSHIP WHICH, MAY RESULT IN ANY FINANCIAL OR OTHER
CONFLICT OF INTEREST BETWEEN SUCH PERSON AND AN INVESTMENT COMPANY AND EACH SUCH
PERSON SHALL AT ALL TIMES AND IN ALL MATTERS ENDEAVOR TO PLACE THE INTERESTS OF
THE INVESTMENT COMPANY BEFORE HIS OR HER PERSONAL INTERESTS.
C. Prohibited Purchases and Sales
NO ACCESS PERSON SHALL PURCHASE OR SELL, DIRECTLY OR INDIRECTLY, ANY
SECURITY IN WHICH HE OR SHE HAS, OR BY REASON OF SUCH TRANSACTION ACQUIRES, ANY
DIRECT OR INDIRECT BENEFICIAL OWNERSHIP AND WHICH HE OR SHE KNOWS OR SHOULD HAVE
KNOWN AT THE TIME OF SUCH PURCHASE OR SALE:
1 IS BEING CONSIDERED FOR PURCHASE OR SALE BY AN INVESTMENT COMPANY; OR
2 IS BEING PURCHASED OR SOLD BY AN INVESTMENT COMPANY.
D. Exempted Transactions
The prohibition of Section I-C above shall not apply to:
1 purchases or sales effected in any account over which such person has
no direct or indirect influence or control;
2 purchases or sales which are nonvolitional on the part of the person
or the Investment Company;
3 purchases which are part of an automatic dividend reinvestment plan;
4 purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its securities, to the extent such rights
were acquired from such issuer, and sales or such rights so acquired; and
5 purchases and sales which receive prior approval in writing by any
designated review officer or the Treasurer, Secretary, Assistant Treasurer or
Assistant Secretary of the Adviser (the "Review Officer") (a) as only remotely
potentially harmful to the Investment Company because they would be very
unlikely to affect a highly institutional market or because they clearly are not
economically related to the securities to be purchased or sold or held by the
Investment Company or (b) as not representing any danger of the abuses
prescribed by Rule 17j-1, but only if in each case the prospective purchaser has
identified to the Review Officer all factors of which he or she is aware which
are potentially relevant to a conflict of interest
2
<PAGE>
analysis, including the existence of any substantial economic relationship
between his or her transaction and securities held or to be held by the
Investment Company.
II. REPORTING
A. Coverage: Each Access Person shall file with the Review Officer
confidential quarterly reports containing the information required in Section
II-A (2) of this Code with respect to all transactions during the preceding
quarter in any securities in which such person has, or by reason of such
transaction acquires, any direct or indirect beneficial ownership, provided that
(i) no Access Person shall be required to report transactions effected for any
account over which such Access Person has no direct or indirect influence or
control (except that such an Access Person must file a written certification
stating that he or she has no direct or indirect influence or control over the
account in question and (H) an Access Person need not make a report where the
report would duplicate information recorded pursuant to Rules 2042(a)(12) or
204-2(a)(13) of the Investment Advisers Act of 1940.
B. Filings: Every report shall be made no later than 10 days after the
end of the calendar quarter in which the transaction to which the report relates
was effected, and shall contain the following information:
1 the date of the transaction, the title and the number of shares and
the principal amount of each security involved;
2 the nature of the transaction (i.e., purchase, sale or any other type
of acquisition or disposition);
3 the price at which the transaction was effected; and
4 the name of the broker, dealer or bank with or through whom the
transaction was effected.
C. Any report may contain a statement that it shall not be construed as
an admission by the person making the report that he or she has any direct or
indirect beneficial ownership in the security to which the report relates.
III. REVIEW
In reviewing transactions, the Review Officer shall take into account
the exemptions allowed under Section I-D. Before making a determination that a
violation has been committed by a director, the Review Officer shall give such
person an opportunity to supply additional information regarding the transaction
in question.
IV. SANCTIONS
If the Review Officer determines that a violation of this Code has
occurred, the Adviser may impose such sanctions as it deems appropriate,
including, inter alia, a letter of censure or suspension or termination of the
employment of the violator. All material violations of the Code
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and any sanctions imposed as a result thereto shall be reported periodically to
the board of directors of the Investment Company with respect to whose
securities the violation occurred.
V. MISCELLANEOUS
A. Access Persons
The Secretary or Assistant Secretary of the Adviser will identify all
Access Persons who are under a duty to make reports to the Adviser and will
inform such persons of such duty. Any failure by the Secretary or Assistant
Secretary to notify any person of his or her duties under this Code shall not
relieve such person of his or her obligations hereunder.
B. Records
The Adviser shall maintain records in the manner and to the extent set
forth below, which records may be maintained on microfilm under the conditions
described in Rule 3la-2(f) under the 1940 Act, and shall be available for
examination by representatives of the Securities and Exchange Commission
("SEC"):
1 a copy of this Code and any other code which is, or at any time
within the past five years has been, in effect shall be preserved in an easily
accessible place;
2 a record of any violation of this Code and of any action taken as a
result of such violation shall be preserved in an easily accessible place for a
period of not less than five years following the end of the fiscal year in which
the violation occurs;
3 a copy of each report made pursuant to this Code shall be preserved
for a period of not less than five years from the end of the fiscal year in
which it is made, the first two years in an easily accessible place; and
4 a list of all persons who are required, or within the past five years
have been required, to make reports pursuant to this Code shall be maintained in
an easily accessible place.
C. Confidentiality
All reports of securities transactions and any other information filed
pursuant to this Code shall be treated as confidential.
D. Interpretation of Provision
The Board of Directors of the Adviser may from time to time adopt such
interpretations of this Code as it deems appropriate.
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TODD INVESTMENT ADVISORS, INC.
CODE OF ETHICS REGARDING PERSONAL
SECURITIES TRANSACTIONS
I. INTRODUCTION
It is expected that all officers, directors, and employees will observe
the highest possible standards of ethics and will so conduct their personal
affairs to avoid any conflict, or appearance of conflict, with their duties for
Todd Investment Advisors, Inc. In any situation where the potential for conflict
exists, transactions for clients must take precedence over personal
transactions. Recommendations to clients that have been made, or are under
consideration, are confidential. In addition, the officers, directors, and
employees of Todd Investment Advisors, Inc. must not use, or appear to use,
their position as such to obtain any personal benefit from brokers or others
seeking to do business with Todd Investment Advisors, Inc. Should any situation
arise not specifically governed by this Code of Ethics, the general principles
stated in this paragraph shall govern the resolution of the matter.
Rules set forth herein are applicable to all officers, directors, and
employees of Todd Investment Advisors, Inc., except that the requirements under
the heading "Special Rules for Persons in Certain Sensitive Positions" apply
only to the persons designated in that section.
All rules apply to transactions in such person's own accounts and in
accounts that such person "beneficially owns." A person is deemed to
"beneficially own" accounts from which he or she derives economic benefit,
including accounts of his or her spouse, minor children, family members sharing
such person's home, and all other accounts over which such person exercises
investment discretion or control, such as accounts that he or she is a trustee,
custodian, or guardian.
Violation of the Code of Ethics may result in civil and criminal
liability, or both, under the federal security laws. In addition, any
transaction that is considered to have been improper, or that appears improper
in light of subsequent developments, even though proper when made, is subject to
reversal. Compliance with the Code of Ethics is a condition of employment, and
willful violation of this Code may be cause for termination of employment.
Questions regarding this Code of Ethics, other than questions concerning
particular personal transactions, should be directed to the President of Todd
Investment Advisors, Inc. Questions concerning particular personal transactions
should be directed as follows.
<PAGE>
This Code of Ethics must be read, acknowledged, and returned to the
President of Todd Investment Advisors, Inc., by each officer, director, and
employee of Todd Investment Advisors, Inc., and any other individuals covered
hereby. A duplicate copy is included and should be retained for your reference.
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II. GENERAL RULES
Transactions and reporting requirements apply to all publicly traded
equity related securities, such as common stocks, convertible or participating
debentures, and preferred stocks and options - except for shares in registered
open-end investment companies. Reporting is also required with respect to
transactions in bonds and transactions in commodity interests. The transaction
and reporting requirements do not apply to U.S. government obligations, bankers'
acceptances, banks' certificates of deposit, commercial paper, or options of
futures on bond or stock market indices.
"Hot New Issues" - Persons subject to this Code of Ethics may not
purchase on the initial underwriting of new issues of securities for which the
demand exceeds supply.
Persons subject to this Code of Ethics may not purchase or hold, at any
time, any security or other interest in any privately owned broker or dealer in
securities. In addition, no person will be allowed to own more than 1% of any
publicly traded broker or dealer in securities.
Trading on "inside information" of any sort, whether obtained in the
course of research activities, through a client relationship, or otherwise, is
prohibited. (This would include trading in a security with respect to which
either Todd Investment Advisors, Inc., or the person subject to the Code of
Ethics who is trading has inside information.)
Affiliation with investment clubs is prohibited.
III. TRANSACTION RULES
-----------------
A. Applicable to all stocks (and related convertibles and options):
Purchases or sales for Company personnel will be approved only if
there are no conflicting orders pending for client accounts. A
conflicting order is deemed to be any order for the same security
or an option thereon that has not been fully executed.
B. Applicable to Todd Investment Advisors, Inc., equity model
portfolio stocks.
1. No purchase of a stock added to the Todd Investment
Advisors, Inc., equity model portfolio will be allowed for
ten (10) business days following the addition.
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2. No sale of a Todd Investment Advisors, Inc., equity model
portfolio stock down-rated to the point where it is intended
to be sold promptly by a client's account will normally be
allowed for ten (10) business days following the
down-rating. (Exceptions may be allowed on a case-by-case
basis in the event that client and fund sales have been
completed prior to the expiration of the ten-day period.)
IV. SPECIAL RULES FOR PERSONS IN SENSITIVE POSITIONS
In addition to the results stated above, certain additional
restrictions are applicable to all employees who are in a position to recommend
and/or approve the purchase of a security by a client.
Each such person owning a stock that he or she has recommended or
approved for purchase by a client, or having an option position in such stock,
must disclose the fact of his or her ownership or position to the President of
Todd Investment Advisors, Inc. The President may require additional information
as to any such ownership or position and may, in consultation with members of
the Investment Committee, require sale of the stock or closure of the option
position by such person to avoid the appearance of any impropriety. The Company
shall maintain a written record of such disclosures and any actions taken in
response to them.
V. PRE-CLEARANCE REQUIREMENT
Prior to executing personal transactions, each employee must get
clearance from the trading department.
The trading department will maintain a list of securities that have
been added to or down-rated on the Todd Investment Advisors, Inc., equity model
portfolio within the last ten (10) business days. The equity portfolio managers
are responsible for prompt revision of the list to reflect changes as they
occur. Personal securities transactions of each trader must be cleared with
another member of the trading department. Persons engaging in securities
transactions shall keep a personal record of the person pre-clearing each
transaction, the date of such pre-clearance, the time, and nature of such
transaction.
VI. REPORTING
All securities transactions must be reported to the President
quarterly, based upon the following schedule:
First Quarter - April 10
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Second Quarter - July 10
Third Quarter - October 10
Fourth Quarter - January 10
Each report shall be in the form of the quarterly securities report
(attached) and must be received by the president by the date indicated above. A
report must be filed for each quarter, regardless of whether any security
transactions have occurred. The reporting person must sign the report, which
must include all transactions and accounts that such reporting persons
"beneficially own." The reporting person may seek to disclaim beneficial
ownership in a particular transaction on the report, stating in the report the
reason for such disclaimer.
In addition, all reporting persons are required to file, with the
President, an initial ownership report in the form of the statement of ownership
report attached to the Code of Ethics. This report shall be a statement of the
issuer and title of securities owned by the employee (and the nature of such
ownership) as of May 1, 1990, and must be filed with the President no later than
May 30, 1990. Each new officer, director, employee of Todd Investment Advisors,
Inc., hereinafter shall be required to file such statement of ownership report
upon employment with the Company as of the date of such employment.
VII. ACKNOWLEDGEMENT
---------------
I acknowledge that I have read and understand this Code of Ethics, and
I agree to comply with its requirements.
- ------------------------------------------- ------------------------
Signature Date
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TODD INVESTMENT ADVISORS, INC.
SUPPLEMENT TO CODE OF ETHICS
November 30, 1999
I. MUTUAL FUNDS
CODE OF ETHICS REGARDING TODD INVESTMENT ADVISORS ROLE AS A SUB-ADVISOR TO THE
INVESTMENT ADVISOR OF A MUTUAL FUND
- ------------------------------------------------------------------------------
As a sub-advisor to one or more investment advisors of mutual funds, we at Todd
Investment Advisors are regulated in the same manner as advisory relationships
directly between a fund and its primary investment advisor. Thus, we are
included in the definition of "Investment Advisor" under Section 2(a) (20)(b) of
the 1940 Act.
Under Section 15(a) of the Act, any advisory agreement we have must describe all
compensation to be paid to us as sub-advisor. The agreement must also provide it
will continue for more than two years after its initial execution only if such
continuance is proved annually by the Fund's Board. The contract must also
provide that the Fund's Board or its shareholders may terminate it at anytime,
without penalty on 60 days written notice to the advisor. Finally, the contact
must provide for its automatic termination in the event of an assignment of the
contract.
Under Section 36(a) of the Act, we, as sub-advisor, are deemed to have a
fiduciary relationship with respect to the Fund and its shareholders.
As a sub-advisor, we are also considered an "affiliated person" with respect to
transaction restrictions.
It is important that any agreement we have as sub-advisor clearly set forth the
responsibilities we have with respect to the particular mutual fund. For
example, the agreement should state that we will manage the portfolio in
compliance with the restrictions set forth in the Fund's prospectus; any
instructions received from the primary advisor; the requirements of applicable
laws; and the terms of any forms of regulatory relief on which the Fund is
relying. The agreement should also state that we have a responsibility to
maintain certain records under the 1940 Act. In the agreement, we as
sub-advisors should also agree to make periodic reports to the advisor regarding
compliance and performance issues. We should also agree to cooperate with the
Fund's auditors and also with preparation and execution of any SEC filings.
It is important that, as a sub-advisor, we should be very familiar with
investment policies and restrictions of the particular Fund, as well as
applicable provisions of
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the Federal Securities Laws that may affect the manner in which we can manage
the Fund assets. Where possible, whenever we act as sub-advisor, we should try
to make sure that an in-person presentation will be periodically made to the
Fund's Board, at which time we as sub-advisor would discuss our investment
methodology and our experience in advising other clients, including any other
registered funds. This meeting should also provide the Fund' Board with
opportunity to ask us about our compliance capabilities.
While it is not necessary for us as sub-advisor to follow the same Code of
Ethics used by the primary advisor, henceforth, we will seek approval of the
Code followed by us as sub-advisor, by the Fund's Board and material personal
trading issues should be reported to the primary Advisor and the Fund's Board on
an on-going basis. This should include a statement furnished by us to the
primary advisor that there has been no "front running" by any employees of Todd
in any securities held by the Fund.
We should also make sure that scheduled periodic meetings take place between our
investment people and those employed by the primary advisor to review the
responsibility of each of us and discuss operational issues that may have
arisen. It is vital that we keep open lines of communication between us.
In most circumstances, it is advisable for us to fill out, each month, a
compliance checklist (See Exhibit A), which indicates whether or not the Fund's
investment objectives, or any of its investment restrictions and policies were
violated in the preceding months. It should also note the steps that were taken
in response to such violations. The checklist should also include
representations that we as a sub-advisor have not caused the Fund to violate
applicable provisions of the 1940 Act and other Federal Securities Laws. When a
violation of a Fund's policy or applicable has occurred as a result of an
investment that we have made, we should describe the violation and the measures
that have been taken to reasonably ensure that such a violation does not occur
again. These checklists should be provided to the Fund's Board at its quarterly
meetings.
We should make sure that the compliance department of the primary advisor
clearly understands their role in overseeing the day-to-day operation of us as
sub-advisor, as such operations relate to our management of their Fund. It is
essential that open lines of communication be established and maintained between
the primary advisor and us. These policies are necessary to ensure compliance
with the Securities Laws related to mutual funds. It is particularly important
because of the fact that the primary advisor will invariably be located in a
distant city.
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II. PERSONAL TRANSACTIONS
SUPPLEMENT TO TODD INVESTMENT ADVISORS CODE OF ETHICS REGARDING PERSONAL
SECURITIES TRANSACTIONS (NOVEMBER 30, 1999)
The following is a supplement to our original Code of Ethics on this subject,
which was prepared in May, 1990.
The SEC, in August 1999, issued a regulation that further restricts personal
trading by mutual fund portfolio managers and investment advisors. Since we have
recently become sub-advisor of several such mutual funds, these rules apply to
us. The SEC stated: "These amendments will help ensure that the personal trading
of mutual fund insiders does not compromise the interest of mutual fund
shareholders. If we, nonetheless discover abusive trading, it can be expected
that the Commission will take enforcement actions where necessary to protect
investors."
ALL TODD EMPLOYEES AFFECTED
The new amendments to the personal trading rule apply to all employees of Todd
Investment Advisors forthwith and cover the following four areas.
FOUR AREAS COVERED
Increased Oversight by Fund Board of Directors - Henceforth, the Fund's board of
directors must (1) approve the fund's code of ethics, as well as the codes of
any investment adviser or principal underwriter to the fund, and (2) review
annual reports from the fund, and any investment adviser or principal
underwriter to the fund, regarding issues that have arisen under the codes
during the past year.
Improved Reporting Requirements - "Access persons" must provide an initial
report of their securities holdings to their employers when they become access
persons and annual reports thereafter (in addition to the transaction reports
currently required.)
Pre-clearance Required for and Private Placements - Portfolio managers and
others who participate in the fund's investment decisions must obtain advance
approval for any investment in private placement.
Public Disclosure - Funds must disclose, as part of their registration
statements: (1) the fund's policy on employees' personal investment activities,
as well as the policies of any investment adviser or principal underwriter to
the fund; and (2) a copy of the fund's code of ethics and the codes of any
investment adviser or principal underwriter to the fund.
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INITIAL PUBLIC OFFERINGS
Historically, we have stated that Todd Investment Advisors personnel may not
purchase IPOs for which demand exceeds supply ("hot issues"). Todd Investment
Advisors hereby modifies this restriction to state that no Todd employee can
purchase any security in an Initial Public Offering, in order to preclude any
possibility of their profiting improperly from their positions with an advisor.
The rare exception to this restriction would be circumstances whereby Todd
personnel cannot profit improperly from their position, such as depositor in a
savings and loan association, which is converting from a mutual to a stock form
of ownership. In those circumstances, such a transaction requires prior written
approval of the CEO of Todd.
PRIVATE PLACEMENTS
Todd hereby requires prior written approval of the CEO of any acquisition of
securities by Todd personnel in a private placement. Such prior approval will
take into account, among other factors, whether the investment opportunity
should be reserved for clients, and whether the opportunity is being offered to
an individual by virtue of his or her position with the advisor. Todd personnel
who have been authorized to acquire securities in a private placement are
required to disclose that investment when they play a part in any client's
subsequent consideration of an investment in the issuer. In such circumstances,
the decision to purchase securities of the issuer for the client is subject to
an independent review and written approval by senior personnel of Todd, who have
no personal interest in the issuer.
BLACKOUT PERIODS
In the past, purchases or sales for Todd personnel have been approved only if
there are no conflicting orders pending for client accounts. This rule is hereby
tightened up to specify that no Todd personnel can execute personal transactions
for a security within 24 hours in which any client has a pending "buy" or "sale"
order in that same security until that order is executed or withdrawn. At this
time, we do not consider it necessary to install a more lengthy blackout period
(a prescribed number of calendar days before and after client trades). At some
future point, we may decide to install a longer blackout period if the growth or
administrative complexity of the firm makes the limitations of the current rule
difficult to administer without benefit of a lengthy blackout.
TRANSACTION REPORTING
In the past, all security transactions and pre-clearance statements have been
required from all employees to the President quarterly by the 10th of the month
following quarter end. Henceforth, such transaction reports should instead be
submitted monthly by the 10th of the following month, commencing January 1,
2000. Any employee who fails to return the transaction report by the 10th of the
month following the month in question will be required to pay a $50 late fee.
RECORDS OF SECURITIES TRANSACTIONS
In addition to the securities report, we now require the following each month:
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All employees will submit by the 20th of the month following the month
in question, to Jennifer Doss, duplicate copies of confirmations of all
personal securities transactions and copies of periodic statements for
all securities accounts. Those who fail to supply these statements by
the 20th of the month will be charged a $50 late fee. The asset
statement can instead be furnished quarterly in those instances where
the Todd employee does not receive such statements monthly.
RESTRICTIONS ON POLITICAL CONTRIBUTIONS
Todd Investment Advisors condemns "pay-to-play" practices and therefore, neither
Todd Investment Advisors nor any of its employees or family members are to make
political contributions to candidates for political office who could influence
the selection of investment advisors by public funds. In August, 1999, the SEC
proposed a rule that would prohibit an advisor from providing his services to a
government client for two years after contributions are made to State and Local
officials (and candidates for their positions) who are able to influence the
selection of an advisor. We concur with the De minimis exception which states
that the two-year timeout does not apply to contributions of $250 or less made
to a candidate for whom the person making the contribution can vote. Todd
employees are also prohibited from soliciting campaign contributions for those
elected officials able to influence the selection of an advisor.
All employees of Todd are required to keep records of their political
contributions and to submit this information monthly to Jennie Doss, Compliance
Officer.
COMPLIANCE OFFICER
Jennifer Doss, as Compliance Officer, is responsible for receiving the required
reports monthly from each Todd employee. She is expected to report such
compliance to the CEO of Todd by the 30th of the month.
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III. MISCELLANEOUS
GIFTS
All investment personnel of Todd are prohibited from accepting any gifts or
other thing of more than de minimis value from any person or entity that does
business with or on behalf of Todd.
SERVICES AS A DIRECTOR
Because of the high potential for conflict of interest and insider trading
problems, Board membership by Todd personnel should be carefully scrutinized and
subject to prior approval. In a relatively small number of instances in which
Board service is authorized, investment personnel serving as Directors are
prohibited from making recommendations for purchase or sale of that security for
clients or for Todd personnel. No opinion as to the attraction, or lack there
of, of that security should be given; in other words, a "Chinese Wall" should
exist.
PROHIBITION AGAINST USE OF MATERIAL NON-PUBLIC INFORMATION
No employee, nor any member of his/her family is allowed to trade in a security
while in possession of, nor communicate, material non-public information. Such a
practice is a serious violation of the rules of AIMR, the CFA, and Rule 10(b) of
the Securities and Exchange Commission.
IV. ANNUAL CERTIFICATION
--------------------
CERTIFICATION OF COMPLIANCE WITH CODES OF ETHICS:
Access persons, namely all Todd personnel, should annually certify that they
have read, understood, and complied with the Code of Ethics. This statement
should be submitted to the Compliance Officer in writing by the 10th of January
each year.
ACKNOWLEDGEMENT
I acknowledge that I have read and understand this Supplement to Our
Code of Ethics, and I agree to comply with its requirements.
- ------------------------------------------- ------------------------
Signature Date
6
INSIDE INFORMATION STATEMENT
AND
CODE OF ETHICS RELATING TO PERSONAL SECURITIES TRANSACTIONS
PART ONE - INTRODUCTION
This Inside Information Statement and Code of Ethics Relating to Personal
Securities Transactions (the "Code") establishes policies and procedures that
are reasonably necessary to detect and prevent insider trading and activities
that are, or might be, an abuse of fiduciary duties or create conflicts of
interest. Any person having questions as to the meaning or applicability of
these policies and procedures should contact the designated Compliance Director.
This Code of Ethics applies to:
1. all employees, officers, directors, general partners and trustees
("Associates") of (a) David L. Babson and Company Incorporated, Babson
Securities Corporation and any additional subsidiaries which may be
subsequently organized and that adopt this Code (collectively, "DLB"); and
(b) The DLB Fund Group.
2. all employees, officers, directors, and general partners of any DLB
affiliate (together with Associates, "DLB Associates") to the extent that
such individuals participate in the selection of, regularly obtain or have
ready access to information regarding, the Securities being purchased, sold
or considered for purchase or sale by DLB or by DLB investment clients,
including, without limitation, the DLB Fund Group ("Advisory Clients").
This Code of Ethics shall not apply to the extent that any such affiliate
has adopted policies that are substantially similar to this Code of Ethics,
as determined by the Compliance Director1.
DLB expects all of those associated with it to conduct business in accordance
with the highest ethical standards and in full accordance with the letter and
spirit of all applicable laws and regulations.
Capitalized terms used in this Code that are not otherwise defined have the
meanings contained in PART FIVE, Article V: Definitions.
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1 As of this printing, no subsidiaries have been determined to be exempt from
maintaining this or a substantially similar Code.
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PART TWO - INSIDE INFORMATION STATEMENT
ARTICLE I: GENERAL POLICIES ON THE USE OF INSIDE INFORMATION
From time-to-time DLB Associates may, either on or off the job, come into
possession of Inside Information. It is important for all DLB Associates to
understand that anytime they come into possession of Inside Information, that
same information may become attributable to DLB as a whole. The mere possession
of Inside Information is not illegal, unethical or against DLB policy; however,
misuse of it is against the law and this Code. The following procedures and
guidelines apply to all DLB Associates.
A. NO TRADING
Except as (1) permitted below, or (2) with prior written approval from the
Compliance Director, no DLB Associate, may directly or indirectly trade
Securities either for his or her personal account or for DLB and/or
Advisory Client accounts while:
o they are in possession of Inside Information regarding the issuer
of such Securities; or
o the issuer of such Securities appears on the Restricted List.
Notwithstanding the above, a DLB Associate, on behalf of DLB and/or its
Advisory Clients, may purchase private placement Securities of an issuer
even if the issuer has provided DLB and/or its Advisory Clients with Inside
Information as part of DLB and/or its Advisory Client's consideration as to
whether it will invest in such Securities.
B. NO COMMUNICATION OF INSIDE INFORMATION
No DLB Associate may communicate Inside Information or the content of the
Restricted List to others who do not have a clear need to know. Any DLB
Associate having Inside Information as the result of a fiduciary
relationship they might have by reason of a position as an officer or
director of another corporation or entity, should not disclose such
information to anyone, including the Compliance Director.
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ARTICLE II: GUIDELINES FOR IDENTIFYING INSIDE INFORMATION
The following guidelines have been established to assist DLB Associates in
avoiding illegal Insider Trading and to aid DLB in preventing, detecting and
imposing sanctions against Insider Trading.
A. IDENTIFYING INSIDE INFORMATION
Before trading for yourself or for others (including DLB and its Advisory
Clients) in the Securities of a company about which you may have Inside
Information, you should ask yourself the following questions:
1. IS THE INFORMATION MATERIAL INFORMATION? "Material Information" in
this context means information for which there is a substantial
likelihood that a reasonable investor would consider it important in
making an investment decision, or information that is reasonably
certain to have a significant effect on the price of a company's
Securities. Information that officers, directors and employees should
consider material includes, but is not limited to: dividend changes,
earnings estimates, changes in previously released earnings estimates,
merger, acquisition or divestiture proposals or agreements, major
litigation, liquidity problems, significant management developments,
expansion or curtailment of operations, significant increases or
decreases in purchase orders, new products or discoveries,
extraordinary borrowing, purchase or sale of substantial assets,
fraud, accounting errors and irregularities, and capital restructuring
(including issue of rights, warrants or convertible Securities).
Material Information about a company does not have to originate from
such company. For example, information about the contents of a
forthcoming newspaper column or "leaks" from an insider of the issuer
that may be expected to affect the market price of a Security can be
considered material information.
2. IS THE INFORMATION NON-PUBLIC INFORMATION? Non-Public Information in
this context means information that has not been effectively
communicated to the market place. In order for information to be
considered "public", one must be able to point to some fact to show
that the information is generally available to the public and the
Securities markets have had a reasonable time to respond. For example,
the following information would be considered public information: (a)
information found in a public filing with the SEC or a stock exchange;
(b) information disseminated by the issuer or Securities analysts to
the investment community through written reports or public meetings;
or (c) information appearing in Bloomberg, Dow Jones News Service,
Reuters Economic Services, The Wall Street Journal or other
publications of general circulation.
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Information has not been effectively communicated to the public if
there has been: (a) selective disclosure to DLB or other institutional
investors or to select groups of analysts or brokers; (b) partial
disclosure as long as a material component of the Inside Information
remains undisclosed; or (c) insufficient time for the relevant
Securities market(s) to trade on the information.
B. ACTION TO TAKE
No simple tests exist to determine if information is Material Information
or Non-Public Information. If after consideration of the above, you believe
that there is any possibility that the information is Material Information
and Non-Public Information or if you have any questions whatsoever as to
whether the information is Inside Information:
1. Report the matter immediately to the Compliance Director;
2. Do not purchase or sell the Securities on behalf of yourself or
others, including Advisory Clients;
3. Do not communicate the information inside or outside DLB, other than
to the Compliance Director or legal counsel;
4. After the Compliance Director has reviewed the issue, you will be
instructed to continue the prohibitions against trading and
communication, or you will be allowed to trade and communicate the
information; and
5. Keep such information secure. For example, files containing Inside
Information should be locked in filing cabinets or desks and access to
computer files containing Inside Information should be restricted.
C. RESPONSIBILITY TO UPDATE RESTRICTED LIST
Each analyst, trader or portfolio manager is individually responsible for
ensuring that all issuers, (1) about or whom they have Inside Information
or (2) that are Being Considered For Purchase or Sale, are reflected on the
Restricted List. A publicly traded equity Security is deemed to be under
Consideration for Purchase or Sale when a recommendation has been conveyed
by an analyst to a portfolio manager and should be placed on the Restricted
List at that time. The restriction will remain in place for the lesser of
48 hours or until a trade in the Security is executed or canceled.
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ARTICLE III: "FIREWALL" PROCEDURES
Certain members of the DLB Organization have established "Firewalls" between
their respective organizations. The Firewalls exist so that, to the extent
practicable, Inside Information that DLB Associates have will not be passed or
imputed from one member of the DLB Organization to another member without clear
need to know. The Firewalls also exist to ensure, to the extent practicable,
that the voting and investment powers over Securities held by a member of the
DLB Organization are exercised independently from the other members. Each member
of the DLB Organization may adopt additional or amend existing Firewalls. The
primary guidelines for such policies and procedures are as follows:
A. CONFIDENTIALITY
DLB Associates shall make every effort to maintain the confidentiality of
information entrusted to them.
B. MEETINGS
DLB Associates should avoid placing themselves in a position where they
might receive Inside Information from another DLB Associate or officer,
unless they have a legitimate need to know. When meetings occur with
associates representing different members of the DLB Organization to
discuss investment related matters or to make presentations to the same
client or prospective client, the respective individuals shall determine if
Inside Information is likely to be disclosed at the meeting. Where
appropriate they should take steps, in consultation with the Compliance
Director, to ensure that Inside Information does not "pass over" a
Firewall. This may require alteration of the presentation or separate
meetings or presentations. Additionally, someone familiar with compliance
and the federal securities laws, such as the Compliance Director or an
attorney familiar with the laws governing the use of Inside Information,
could attend these meetings to ensure that there are no inadvertent
violations of the securities laws.
C. DUAL FUNCTION EMPLOYEES, OFFICERS, AND DIRECTORS
The roles of individuals who perform dual functions for members of the DLB
Organization should be limited to the extent reasonably practicable to
reduce the likelihood of potential violations of Firewalls. Generally, DLB
Associates who serve as officers or directors of more than one member of
the DLB Organization should not be involved in the other member's
investment or proxy voting decision making process or otherwise be made
aware of currently existing, specific securities positions held by such
other member that are not publicly available.
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D. DUTY TO DISCLOSE BREACHES OF FIREWALL(S)
Any DLB Associate should inform the Compliance Director whenever they
become aware of a breach in said Firewalls(s) including any instance
whereby a DLB Associate becomes involved in the exercise of another
member's investment or voting decision making process (or otherwise was
made aware of specific securities positions held by such other member that
are not publicly available).
ARTICLE IV: CONFIDENTIALITY OF ADVISORY CLIENTS' TRANSACTIONS
Until disclosed in a public report to shareholders or public filing to the SEC,
all information concerning Securities Being Considered for Purchase or Sale by
or on behalf of DLB and/or any of its Advisory Clients shall be kept
confidential and disclosed by DLB Associates only on a need to know basis in
accordance with practices and policies developed and periodically reviewed for
their continuing appropriateness by the Compliance Director.
ARTICLE V: SUPERVISORY PROCEDURES AND PERSONAL LIABILITY
All supervisory personnel are responsible for the reasonable supervision of
their staff to prevent and detect violations of this Code. Failure to supervise
adequately can result in the supervisor being held personally liable for
violations of the securities laws and this Code. Supervisors shall ensure that
employees and/or consultants joining their departments are reported to the
Compliance Department.
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PART THREE - CODE OF ETHICS RELATING TO
PERSONAL SECURITIES TRANSACTIONS
ARTICLE I: GENERAL POLICIES
A. PERSONAL INVESTMENT ACTIVITIES
In addition to the previously discussed duty to avoid illegal Insider
Trading, the principles that govern personal investment activities for DLB
Associates, EXCEPT FOR DISINTERESTED TRUSTEES, include:
1. The duty at all times to place the interests of DLB and/or its
Advisory Clients first;
2. The requirement that all personal securities transactions be
consistent with this Code so as to avoid any actual or potential
conflict of interest or any abuse of an individual's position of trust
and responsibility; and
3. The fundamental standard that individuals should not take
inappropriate advantage of their positions.
The fiduciary principles that govern personal investment activities for
DISINTERESTED TRUSTEES include:
1. The duty at all times to place the interests of The DLB Fund Group
first;
2. The requirement that all personal securities transactions be
consistent with this Code of Ethics so as to avoid any actual or
potential conflict of interest or any abuse of an individual's
position of trust and responsibility; and
3. The fundamental standard that individuals should not take
inappropriate advantage of their positions.
B. GENERAL PROHIBITIONS
In connection with the purchase, sale or disposition of a Security Held Or
To Be Acquired By DLB and/or its Advisory Clients no person, and, in
connection with the purchase, sale or disposition of a Security Held Or To
Be Acquired By The DLB Fund Group, no Disinterested Trustee, may directly
or indirectly:
1. Use information concerning the investment intentions of or influence
the investment decision making process of DLB and/or its Advisory
Clients for personal gain or in a manner detrimental to the interests
of DLB and/or its Advisory Clients;
2. Employ any device, scheme or artifice to defraud DLB and/or its
Advisory Clients;
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3. Make an untrue statement of a material fact;
4. Omit to state a material fact necessary in order to make any statement
made to DLB and/or its Advisory Clients, in light of the circumstances
under which they are made, not misleading;
5. Engage in any act, practice, or course of business that operates or
would operate as fraud, deceit or breach of trust upon, or by, DLB
and/or its Advisory Clients; or
6. Engage in any manipulative practice with respect to DLB and/or its
Advisory Clients.
ARTICLE II: SPECIFIC POLICIES FOR
ACCESS PERSONS, INVESTMENT PERSONS AND PORTFOLIO MANAGERS
While this Code applies to all DLB Associates, there are specific policies that
govern the personal investment activities of Access Persons, Investment Persons
and Portfolio Managers.
A. ACCESS PERSONS
Access Persons are the directors, trustees and officers of DLB and The DLB
Fund Group and any other DLB Associate who in connection with his or her
regular functions or duties, makes, participates in the selection of, or
has ready access to information regarding the Securities Being Considered
for Purchase or Sale by DLB or any Advisory Client, or whose functions
relate to the making of any recommendations with respect to the purchases
or sales. ACCESS PERSONS INCLUDE INVESTMENT PERSONS AND PORTFOLIO MANAGERS.
Access Persons are subject to the following restrictions:
1. PURCHASE, SALE OR OTHER DISPOSITION OF SECURITIES
No Access Person shall purchase, sell or otherwise dispose of any
Security if that same Security is being purchased or sold or being
considered for purchase or sale by or on behalf of DLB and/or its
Advisory Clients, provided however, that this prohibition does not
apply if the disposition involves Securities that are donated to a
tax-exempt organization or if given to a member of the Access Person's
Immediate Family.
2. SERVING ON BOARDS OF TRUSTEES OR DIRECTORS
No Access Person may serve on the Board of Directors or Trustees of a
business entity without prior written approval from the President of
the DLB Organization of which the Access Person is an employee or
officer or in the case of a request by the President of DLB, its Board
of Directors. All Access Persons that wish to serve on a Board of
Directors or Trustees shall submit a written request to the Compliance
Director.
Prior approval is not required for an Access Person who is a
Disinterested Trustee of the DLB Fund Group, although the existence of
any new affiliation should be immediately disclosed to the Compliance
Director.
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3. DUTY TO DISCLOSE POSSIBLE CONFLICTS OF INTEREST
(A) To the extent that any Access Person has a Beneficial Interest in
or Control of Securities of an issuer which is Being Considered
for Purchase or Sale by DLB, he or she shall disclose that actual
or potential conflict of interest in writing to his or her
manager with a copy to the Compliance Director;
(B) Such disclosure must be made prior to the execution of the
Securities transactions;
(C) Transactions where Access Persons are known to have investments
or interests deemed to be material by a Portfolio Manager or the
Compliance Director must be brought to the President of DLB or
his or her designee on a Required Approval basis; and
(D) No Access Person having a Beneficial Interest or Control of
Securities of an issuer shall unilaterally approve such a
transaction involving the Securities of such issuer.
4. INVESTMENT CLUBS
Participation by Access Persons in Investment Clubs is prohibited.
Access Persons who were participating in Investment Clubs prior to
January 1, 2000 are exempted from this restriction ("grandfathered").
However, those qualifying under the "grandfather" provision are
prohibited from joining additional investment clubs. If a
"grandfathered" Access Person makes a recommendation to an investment
club, such Security must be precleared by the Compliance Director
prior to trade execution. Additionally, Access Persons relying on the
"grandfather" provision must disclose their participation and related
holdings annually.
5. SHORT SALES INVOLVING DLB ADVISED OR SUB-ADVISED ENTITIES
No Access Person shall sell short a Security issued by an entity for
which DLB is an investment adviser or sub-adviser. (For example,
MassMutual Corporate Investors and MassMutual Participation
Investors.)
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6. BUSINESS COURTESIES, GIFTS
No DLB Associate may receive any gift or other thing of more than $100
in value from any person or entity that does business with or on
behalf of DLB or an Advisory Client. The exchange of business
courtesies, such as reasonable entertainment and gifts of nominal
value, is generally permissible. The common practices of the business
world are acceptable but care should be taken to stay within the scope
of reasonable value, standard business practices, and professional
association or regulatory guidelines. This will help ensure that no
special indebtedness or conflict of interest arises.
Occasionally, a DLB Associate may be offered entertainment, such as
tickets for cultural or sporting events. A DLB Associate may accept
such offers but only if the offer meets the criteria above and is
associated with the business transactions between DLB and the other
party. Accepting entertainment that is primarily intended to gain
favor or influence is to be strictly avoided.
While a DLB Associate may give gifts of nominal value ($100), such as
promotional items, Access Persons may not directly or indirectly give
or accept bribes, kickbacks, special privileges, personal favors or
unusual or expensive hospitality. A DLB Associate dealing with any
U.S. Government or state agency must notify DLB's legal counsel prior
to the exchange of any business courtesies.
Whether a DLB Associate is engaged in purchasing, selling or providing
service on the behalf of DLB or not, monetary gratuities should not be
accepted.
When the business courtesy involves a gift of travel expenses or
accommodations, it must be authorized in advance by a designated
member of the DLB Board of Directors and proper trip documentation
must be completed.
B. INVESTMENT PERSONS
Investment Persons are any Access Persons who provide information and/or
advice to Portfolio Managers or who help execute a Portfolio Manager's
decisions. INVESTMENT PERSONS INCLUDE PORTFOLIO MANAGERS. In addition to
the provisions of PART THREE, Article II(A) Access Persons, Investment
Persons are subject to the following restrictions:
1. BAN ON SHORT TERM PROFITS
No Investment Person may profit from the purchase and sale, or sale
and purchase, within any 60-day period, of any Security, except for
those Securities types listed in Part THREE, Article III (A)(2)(a).
Any profits realized on such trades will be disgorged pursuant to
instructions from the Compliance Director.
2. PRIVATE PLACEMENTS
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No Investment Person may acquire any Security in a private placement
without the express prior written approval of the Compliance Director.
3. INITIAL PUBLIC OFFERINGS
No Investment Person or Portfolio Manager may purchase any Security in
an Initial Public Offering except purchases of shares of a savings
association, insurance company, or similar institution, under an
existing right as a policyholder or depositor, that have been approved
and precleared in advance by the Compliance Director.
C. PORTFOLIO MANAGERS
Portfolio Managers are Investment Persons who have direct responsibility
and authority to make investment decisions affecting a particular DLB
investment portfolio or an Advisory Client account. In addition to the
provisions of PART THREE, Article II(A) & (B), Portfolio Managers are
subject to the following restrictions:
1. SEVEN-DAY "BLACKOUT" PERIOD
No Portfolio Manager may purchase, sell or dispose of any Security
within seven (7) calendar days before or after the purchase or sale of
that Security by DLB or an Advisory Client for which he or she is a
Portfolio Manager. Any profits realized with respect to such purchase
or sale shall be disgorged pursuant to instructions from the
Compliance Director. Exempt from this provision are those Securities
and transactions enumerated in PART THREE, Article III (A)(2)(a)-(e),
(Please note items (f) and (g) from PART THREE, Article III (A)(2) are
not exempt from this provision.)
2. CONTRA TRADING RULE
No Portfolio Manager shall, without preclearance, sell out of his or
her personal account or the account of any member of his or her
Immediate Family any Security or related Security held by DLB and/or
on behalf of its Advisory Client, for which he or she is a Portfolio
Manager. Any profits realized with respect to such purchase or sale
shall be disgorged pursuant to instructions from the Compliance
Director
Exempt from this provision are those Securities and transactions
enumerated in PART THREE, Article III (A)(2)(a)-(e), (Please note
items (f) and (g) from PART THREE, Article III(A)(2) are not exempt
from these provisions.)
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D. DISINTERESTED TRUSTEES
1. PURCHASE, SALE OR OTHER DISPOSITION OF SECURITIES
No Disinterested Trustee shall purchase, sell or otherwise dispose of
any Security if the Disinterested Trustee has actual knowledge that
such Security is "Being Considered for Purchase or Sale" by or on
behalf of The DLB Fund Group.
ARTICLE III: PRECLEARANCE, DUPLICATE CONFIRMATIONS
AND REPORTING PROCEDURES APPLICABLE TO DLB ASSOCIATES
AND DISINTERESTED TRUSTEES
There are preclearance and a number of reporting requirements that apply to
Access Persons, Investment Persons, Portfolio Managers and Disinterested
Trustees. The Compliance Director will make every effort to inform any
individual that he or she qualifies as an Access Person, Investment Person
and/or Portfolio Manager.
A. ACCESS PERSONS (INCLUDES INVESTMENT PERSONS AND PORTFOLIO MANAGERS)
1. PRECLEARANCE
No Access Person may purchase, sell or otherwise acquire or dispose of
any Security in which he or she has, or as a result of such
transaction will establish, a Beneficial Interest or Control without
the prior written approval of the Compliance Director. Preclearance is
not required if Securities are donated to a tax-exempt organization or
given as a gift between members of the Access Person's Immediate
Family. PRECLEARANCE IS VALID ONLY FOR THE DAY IT IS OBTAINED.
HOW TO OBTAIN PRECLEARANCE.
For preclearance, call the Compliance Hot-line [(413) 744-6973
"NYSE"]. The DLB Compliance Department will typically be available for
preclearance during NYSE trading hours except on days on which DLB
and/or its Advisory Clients has an emergency closing, snow day
cancellation, etc. In such cases the Preclearance fax line (413)
744-6972 will be unavailable and a message will be left on the
Compliance Hot-line [(413) 744-6973 "NYSE"] voice mail which will
instruct the caller as to what number to dial in order to obtain such
preclearance, or in extreme cases, that preclearance is not available.
Preclearance communications may be recorded for the protection of DLB
and its Associates.
2. PRECLEARANCE EXEMPTIONS
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Certain transactions do not need to be precleared.
(a) EXEMPT SECURITIES AND FUNDS
Purchases, sales or dispositions of the following types of
Securities: direct obligations of the government of the United
States, bankers' acceptances, bank certificates of deposit,
commercial paper, shares of registered Open-End Investment
Companies (closed-end mutual funds are not exempt from
preclearance), and high quality short-term debt instruments,
including repurchase agreements. High quality short-term debt
instrument means any instrument that has a maturity at issuance
of less than 366 days and that is rated in one of the two highest
rating categories by a nationally recognized rating organization.
(b) NO DIRECT OR INDIRECT CONTROL OVER ACCOUNT
Purchases, sales or dispositions of securities for an account
over which an Access Person has no direct or indirect control,
typically known as a "blind trust".
(c) INVOLUNTARY PURCHASES OR SALES
Involuntary purchases or sales made by a Access Person or by or
on behalf of an Advisory Client, such as spin-offs of shares of
an issuer to existing shareholders or a call of a debt Security
by the issuer.
(d) DIVIDEND REINVESTMENT PLAN (DRIPS)
Purchases which are part of an automatic dividend reinvestment
plan.
(e) PRO RATA DISTRIBUTIONS
Purchases resulting from the exercise of rights acquired from an
issuer as part of a pro rata distribution to all holders of a
class of Securities of such issuer (and the sale of such rights).
(f) OTHER SECURITIES
Purchases or sales of the following types of Securities:
municipal general obligations, Securities held by a Trust
established to fund the employee's retirement benefit plans such
as a 401(k) plan, interests in Securities that are related to
broad-based equity indices, and interest rate or commodity
futures. Approval from the Compliance Director is required for
these exemptions to be granted.
(g) DE MINIMIS S&P 500 PRECLEARANCE EXEMPTION
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Except as provided in the following paragraph, preclearance is
not required for any acquisitions or dispositions of shares of
stock and bonds issued by a company included in the Standard &
Poor's 500 Index (the "S&P 500") if the total of such purchases,
sales and dispositions does not exceed 1,000 shares of stock or
$10,000 par value of bonds of a single issuer in any given
calendar quarter.
The De Minimis S&P 500 preclearance exemption may not be used in
connection with transactions in warrants, options and futures.
A listing of the S&P 500 is available in the DLB Compliance
Department.
3. DUPLICATE CONFIRMATIONS
All Access Persons shall arrange for copies of confirmations of all
personal Securities transactions involving a Securities account in
which the Access Person has a Beneficial Interest or Control to be
sent promptly by the Access Person's broker(s) directly to the
Compliance Director. Accounts which may only hold Open-End Investment
Companies are exempt from this reporting requirement.
4. INITIAL HOLDINGS REPORT
New Access Persons must file a report disclosing the title, number of
shares, and principal amount of all Securities in which they have any
direct or indirect beneficial ownership when the Access Person became
an Access Person and the name of any broker, dealer, or bank with whom
the Access Person maintained an account in which any Securities were
held for the direct or indirect benefit of the Access Person as of the
date when the person became an Access Person, and the date that the
report is submitted by the Access Person. This Initial Holding Report
is due within ten days after the person became an Access Person.
5. QUARTERLY REPORTS
(a) THE SEC REQUIRES that all Access Persons, within ten (10)
calendar days after the end of each calendar quarter, make a
written report (the "Quarterly Report") certifying to the
Compliance Director that the Quarterly Report lists all Security
transactions in which the Access Person has a Beneficial Interest
or over which the Access Person exercises Control. Copies of
broker prepared periodic securities account statements ("Account
Statement") may be attached to the Quarterly Report in lieu of
listing each of the transactions detailed in the Account
Statement on the Quarterly Report so long as all information
required in the Quarterly Report is contained in the Account
Statement. The Quarterly Report form will be sent out to
Associates at the end of the quarter. Late filers are in
technical violation of the law and will be subject to
disciplinary action.
(b) Each Quarterly Report must contain: (i) with respect to each
reportable transaction for the quarter, the date of the
transaction, the title, the interest rate and maturity date (if
applicable), the number of shares, and the principal amount of
each Security involved,
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the nature of the transaction (e.g. purchase or sale), the price
at which the transaction was effected; and the name of the
broker, dealer, or bank with or through which the transaction was
affected; (ii) with respect to any account established by the
Access Person in which any Securities were held during the
quarter for the direct or indirect benefit of the Access Person:
the name of the broker, dealer or bank with whom the Access
Person established the account and the date the account was
established; and (iii) the date that the report is submitted by
the Access Person.
(c) All Security transactions are reportable, even those exempt from
the preclearance requirements except those exempt Securities
described in;
o PART THREE, Article III (A)(2)(a) and (b)
Notwithstanding the above, any transaction involving shares of an
Open-End Investment Company that is advised by DLB MUST be
reported in the Quarterly Report.
6. ANNUAL CERTIFICATION OF UNDERSTANDING AND COMPLIANCE
All Access Persons shall within 10 days of employment and at least
annually thereafter, certify to the Compliance Director that they have
read and understand this Code, recognize that they are subject to it,
have complied with its requirements and have disclosed or reported all
required personal Securities transactions and holdings.
B. ACCESS PERSONS - ANNUAL DISCLOSURE OF PERSONAL SECURITIES HOLDINGS
All Access Persons shall, at least annually, disclose all Securities,
except as indicated in PART THREE, Article III(A)(2)(a) and (b), to the
Compliance Director in an Annual Disclosure of Personal Securities Holdings
Report, (i) all Securities (title, number of shares and principal amount)
in which he or she has a Beneficial Interest or Control, and (ii) the name
of any broker, dealer or bank with whom the Access Person maintains an
account in which any Securities are held for the direct or indirect benefit
of the Access Person; and (iii) the date the report is submitted by the
Access Person. Only Securities described in PART THREE, Article
III(A)(2)(a) and Securities in accounts described in (b) are exempt from
the Annual Disclosure Requirement. The information contained in the report
must be current as of a date no more than 30 days before the report is
submitted. Any Open-End Investment Company managed by DLB must be
disclosed.
C. DISINTERESTED TRUSTEES
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Within thirty (30) calendar days after the end of each calendar year, each
Disinterested Trustee shall submit a written statement to the Compliance
Director, that he or she has complied with the requirements of this Code of
Ethics applicable to Disinterested Trustees.
Disinterested Trustees need NOT file (a) an initial or annual holdings
report or (b) a quarterly transaction report except where the Disinterested
Trustee knew or, in the ordinary course of fulfilling his or her official
duties as a fund trustee, should have known that during the 15-day period
immediately before and after the Disinterested Trustee's transaction in a
Security such Security is or was purchased or sold by a fund in the DLB
Fund Group or a fund in the DLB Fund Group or its investment advisor
considered purchasing such Security.
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PART FOUR - COMPLIANCE DIRECTOR
ARTICLE I: COMPLIANCE DIRECTOR
The role of the Compliance Director is critical to the implementation and
maintenance of this Code.
A. APPOINTMENT
Each DLB entity's President shall designate a Compliance Director who shall
have the authority and responsibility to administer this Code as it applies
to the operations of that DLB entity and/or its Advisory Clients.
B. PREVENTION OF VIOLATIONS
The Compliance Director shall be, or shall become, familiar with investment
compliance practices and policies and shall report any material inadequacy
to the President and the Chief Legal Officer of David L. Babson Company
Incorporated.
The Compliance Director shall:
1. Furnish all Access Persons with a copy of this Code and periodically
inform them of their duties and obligations thereunder;
2. Obtain signed certifications from each Access Person stating that: (a)
such Access Person has received a copy of the Code; (b) has read it;
(c) understands it; and (d) is either in compliance with all of its
provisions or has disclosed in writing to the Compliance Director any
instance of actual or possible violation of the Code;
3. Conduct periodic educational programs to explain the terms of this
Code and applicable securities laws, regulations and cases;
4. Answer questions regarding this Code, and keep abreast of changes in
applicable laws and regulations;
5. Interpret this Code consistent with the objectives of applicable laws,
regulations and industry practices;
6. Consistent with this Code and applicable SEC rules, promptly review,
and in writing either approve or disapprove, each request of DLB
Associates for clearance to trade in specified Securities for or on
behalf of DLB, one or more Advisory Clients, or for their personal
account;
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7. Conduct audits, inspections and investigations as necessary or
appropriate to prevent or detect possible violations of this Code.
Report, with his or her recommendations, any apparent and material
violations of this Code to the President and the Chief Legal Officer
of DLB. Report, where appropriate, to the directors of DLB, or any
Committee appointed by them to deal with such information;
8. Develop and maintain one or more Restricted Lists.
9. Determine whether particular Securities transactions qualify for the
De Minimis S&P 500 Exception from preclearance as set forth in PART
THREE, Article III(A)(2)(g) De Minimis S&P 500 Exception.
10. Grant exceptions or exemptions on a transaction, an individual or a
class basis, to any of the provisions of PART III, Article III:
Preclearance, Duplicate Confirmations and Reporting Procedures
applicable to DLB Associates and Disinterested Trustees, provided that
such exceptions or exemptions are consistent with the spirit of the
principles on which this Code is premised.
11. Periodic reviews of all personal Securities transactions effected by
Access Persons, the scope and frequency of such review to be
determined by the Compliance Director.
12. Oversee the manner of disposition of any profits required to be
disgorged in conformance with company guidelines.
13. Designate one or more persons to have the authority and responsibility
to act on behalf of the Compliance Director when necessary or
appropriate;
14. Maintain confidential information regarding personal Securities
transactions and holdings and only disclose such information to
persons with a clear need to know, including state and federal
regulators when required or deemed necessary or appropriate by the
Compliance Director in conformance with the provisions of the Code;
15. Develop policies and procedures designed to implement, maintain and
enforce this Code;
16. Resolve issues of whether information received by an officer, director
or employee of the DLB Organization constitutes Inside Information;
17. Confirm that there are department supervisors implementing this Code;
18. Develop, implement, review, and revise specific firewall procedures
consistent with SEC rules and this Code; and
19. Review this Code on a regular basis and recommend to the President and
the DLB Board of Directors amendments, as are necessary or
appropriate.
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C. DETECTION OF VIOLATIONS
To prevent and detect Insider Trading, the Compliance Director shall:
1. Review the trading activity and Holdings reports filed by each Access
Person;
2. Review duplicate brokerage confirmations required of each Access
Person.
3. Review the trading activity of DLB and its Advisory Clients; and
4. Coordinate the review of such reports with other appropriate officers,
directors or employees of the DLB Organization.
D. REPORTS AND RECORDS
1. REPORTS
The Compliance Director shall:
(a) Prepare a quarterly report containing a description of any
material violation requiring significant remedial action during
the past quarter and any other significant information concerning
the application of this Code. The Compliance Director shall
submit the report to DLB's President, Chief Legal Officer and the
Board of Trustees of each mutual fund potentially affected.
(b) Prepare written reports at least annually summarizing any
exceptions or exemptions concerning personal investing made
during the past year; listing any violations requiring
significant remedial action; identifying any recommended changes
to the Code or the procedures thereunder. The report should
include any violations that are material, any sanctions imposed
to such material violations and report any significant conflicts
of interest that arose involving the personal investment policies
of the organization, even if the conflicts have not resulted in a
violation of the Code. The Compliance Director shall submit the
Report to DLB's President, DLB's Chief Legal Officer, the Board
of Directors of DLB and the Board of Trustees of each mutual
fund. The report to the Board of Trustees shall certify that DLB
and the DLB Fund Group have adopted procedures reasonably
necessary to prevent Access Persons from violating the Code.
More frequent reports may be appropriate in certain
circumstances, such as when there have been significant
violations of a code or procedures, or significant conflicts of
interest arising under the code or procedures.
2. RECORDS
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The Compliance Director shall maintain or cause to be maintained, the
following records:
(a) A copy of this Code or any other Code of Ethics which has been in
effect during the most recent 5-year period;
(b) A record of any violation of any such Code and of any action
taken as a result of such violation in the 5-year period
following the end of the fiscal year in which the violation took
place;
(c) A copy of each report made by the Compliance Director for a
period of 5 years from the end of the fiscal year of DLB and of
the DLB Fund Group, as applicable, in which such report is made
or issued;
(d) A list of all persons currently or within the most recent 5-year
period who are or were required to make reports pursuant to this,
or a predecessor Code, or who are or were responsible for
reviewing these reports; along with a copy of all Initial
Holdings Reports, Quarterly Reports, Annual Reports, Preclearance
Forms and Duplicate Confirmations filed during that same period;
(e) An up-to-date list of all Access Persons, Investment Persons and
Portfolio Managers with an appropriate description of their title
or employment; and
(f) A record of the approval of, and rationale supporting, the
acquisition of Securities in IPO's and private placements for at
least five years after the end of the fiscal year in which the
approval is granted.
The aforementioned records shall be maintained in an easily accessible
place for the time period required by applicable SEC rules.
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PART FIVE - GENERAL INFORMATION
ARTICLE I: NO DLB LIABILITY FOR LOSSES
DLB and/or its Advisory Clients shall not be liable for any losses incurred or
profits avoided by any DLB Associate resulting from the implementation or
enforcement of this Code. DLB Associates should understand that their ability to
buy and sell Securities is limited by this Code and that trading activity by DLB
and/or its Advisory Clients may affect the timing of when an Access Person can
buy or sell a particular Security.
ARTICLE II: REPORTING VIOLATIONS
Any DLB Associate who knows or has reason to believe that this Code has been or
may be violated shall bring such actual or potential violation to the immediate
attention of the Compliance Director.
ARTICLE III: PENALTIES FOR VIOLATIONS
Individuals who trade on or inappropriately communicate Inside Information are
not only violating this Code but are also involved in unlawful conduct.
Penalties for trading on or communicating Inside Information can be severe, both
for the individuals involved in such unlawful conduct and their employers. A
person can be subject to penalties even if they do not personally benefit from
the violation. Penalties may include civil injunctions, payment of profits made
or losses avoided ("disgorgement"), jail sentences, fines for the person
committing the violation of up to three times the profit gained or loss avoided,
and fines for the employer or other controlling person of up to the greater of
$1,000,000 or three times the amount of the profit gained or loss avoided.
In addition, any violation of this Code shall be subject to the imposition of
such sanctions by DLB as may be deemed appropriate under the circumstances to
achieve the purposes of applicable SEC rules and this Code. Such sanctions could
include, without limitation, bans on personal trading, reductions in salary
increases, the forfeiture of incentive compensation benefits, disgorgement of
trading profits, transfer to another position at DLB, suspension of employment
and termination of employment. Sanctions for violation of this Code by a
Disinterested Trustee of The DLB Fund Group shall be determined by a majority
vote of the fund's other Disinterested Trustees.
ARTICLE IV: AMENDMENTS
This Code may not be amended as to any entity that adopts it except in a written
form approved by a vote of such entity's Board of Trustees/Directors.
21
<PAGE>
ARTICLE V: DEFINITIONS
ACCESS As defined in Part Three, Article II: Specific Policies
PERSONS for Access Persons, Investment Persons and Portfolio
Mangers.
ADVISORY means any person who has an investment advisory services
CLIENT agreement with DLB.
ASSOCIATES As defined in Part One - Introduction.
BEING A Security is deemed as "Being Considered for Purchase or
CONSIDERED FOR Sale" when a recommendation to purchase or sell such
PURCHASE OR SALE Security has been made and communicated to a portfolio
manager, and, with respect to the person making the
recommendation, when such person seriously considers making
such a recommendation.
BENEFICIAL means any interest by which: (a) an Access Person exercises
INTEREST OR direct or indirect control over the purchase, sale or other
CONTROL disposition of a Security; or (b) an Access Person or any
member of his or her Immediate Family can directly or
indirectly derive a monetary/financial interest from the
purchase, sale, disposition or ownership of a Security.
Examples of indirect monetary/financial interests include:
(a) interests in partnerships and trusts that hold
Securities but does not include Securities held by a blind
trust or by a Trust established to fund employee retirement
benefit plans such as 401(k) plans; (b) a performance-
related fee received by the Access Person for providing
investment advisory services; and (c) a person's rights to
acquire Securities through the exercise or conversion of any
derivative instrument.
CLOSED-END means a mutual fund with a set number of shares issued and
INVESTMENT distributed to investors in a public offering, identical to
COMPANY the way corporate Securities reach public hands. A Closed-
End Investment Company's capitalization is basically fixed
(unless an additional public offering is made). After the
public offering stock is distributed, anyone who wants to
buy or sell shares does so in the secondary market (either
on an exchange or over the counter). Also, see definition
of Open-End Investment Company.
COMPLIANCE means the person designated by each DLB entity's President
DIRECTOR to be principally responsible for the prevention and
detection of violations of this Code and related laws and
regulations.
22
<PAGE>
DISINTERESTED means a Trustee of The DLB Fund Group who is not an
TRUSTEE "interested person" of DLB within the meaning of Section
2(a)(19) of the Investment Company Act of 1940.
DLB ORGANIZATION means David L. Babson and Company Incorporated, the DLB
Funds and all persons controlled by, controlling or under
common control except to the extent that any such person has
adopted policies and procedures to detect and prevent
insider trading that are substantially similar to this Code.
IMMEDIATE FAMILY means related by blood or marriage andrelated by blood or
marriage and living in the same household and includes: any
child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, "significant other", sibling, mother-,
father-, son-, daughter-, brother or sister-in-law, and any
adoptive relationships. The Compliance Director, after
reviewing all the pertinent facts and circumstances, may
determine that an indirect Beneficial Interest in Securities
held by members of the Access Person's Immediate Family does
not exist.
INSIDER means, in most cases, employees, officers and directors of a
company. In addition, a person may become a "temporary
insider" if he or she enters into a special confidential
relationship in the conduct of another company's affairs and
as a result is given access to information solely for DLB
and/or its Advisory Client's purposes. A temporary insider
could include a company's attorneys, accountants, bank
lending officers and printers. A DLB Associate, such as a
securities analyst, may become a temporary insider of
another company if the other company expects such person to
keep the disclosed non-public information confidential and
the relationship at least implies such a duty.
INSIDE INFORMATION means Material Information that is Non-Public Information.
23
<PAGE>
INSIDER TRADING means trading in Securities (whether or not one is an
"Insider") while having Inside Information, or to
communicating Inside Information to others. While the law
concerning insider trading is not static, it is generally
understood to prohibit:
1. trading by an Insider, while in possession of Inside
Information; or
2. trading by a non-insider, while in possession of Inside
Information, where the information either was disclosed
to the non-insider in violation of an Insider's duty to
keep it confidential or was misappropriated; or
3. communicating Inside Information to others by either an
Insider or a non-insider prohibited from trading by
Part II of this Code.
INVESTMENT CLUB means a group of people who pool their assets in order to
make joint decisions (typically a vote) on which Securities
to buy, hold or sell.
INVESTMENT PERSON means any Access Person who provides information and/or
advice to Portfolio Managers or who helps execute a
Portfolio Manager's decisions (e.g., traders, analysts).
MATERIAL means information for which there is a substantial
INFORMATION likelihood that a reasonable investor would consider it
important in making an investment decision, or information
that is reasonably certain to have a significant effect on
the price of a company's Securities. Information that
officers, directors and employees should consider material
includes, but is not limited to: dividend changes, earnings
estimates, changes in previously released earnings
estimates, merger, acquisition or divestiture proposals or
agreements, information relating to a tender offer, major
litigation, liquidity problems, significant management
developments, expansion or curtailment of operations,
significant increases or decreases in purchase orders, new
products or discoveries, adverse test results of new
products, extraordinary borrowing, purchase or sale of
substantial assets, and capital restructuring (including
issue of rights, warrants or convertible securities).
Material Information does not have to relate to a company's
business. For example, information about the contents of a
forthcoming newspaper column that may be expected to affect
the market price of a Security can be considered material
information.
No simple test exists to determine when information is
material. For this reason, you should direct any questions
whatever about whether information is material to the
Compliance Director.
24
<PAGE>
NON-PUBLIC INFORMATION means information that has not been effectively
communicated to the market place. In order for
information to be considered "public", one must be able
to point to some fact to show that the information is
generally available to the public and the securities
markets have had a reasonable time to respond. For
example, the following information would be considered
public information: (a) information found in a public
filing with the SEC or a stock exchange; (b)
information disseminated by the issuer or securities
analysts to the investment community through written
reports or public meetings; or (c) information
appearing in Bloomberg, Dow Jones News Service, Reuters
Economic Services, The Wall Street Journal or other
publications of general circulation.
Information has not been effectively communicated to
the public if there has been: (a) selective disclosure
to DLB or other institutional investors or to select
groups of analysts or brokers; (b) partial disclosure
as long as a material component of the Inside
Information remains undisclosed; or (c) insufficient
time for a relevant securities market(s) to trade on
the information.
OPEN-END means a mutual fund that issues its shares in open-
INVESTMENT ended offerings. New shares are continuously created
COMPANY as investors buy them. Investors who want to sell
shares sell them back to the company (which redeems
them) rather than to another investor. The
capitalization of such a mutual fund is open-ended; as
more investors buy mutual fund shares, the fund's
capital expands. By the same token when investors
liquidate their holdings, the fund's capital shrinks.
Also, see definition of Closed-End Investment Company.
PORTFOLIO MANAGER means an Investment Person who has the direct
responsibility and authority to make investment
decisions affecting a particular DLB and/or Advisory
Client's account or portfolio.
25
<PAGE>
RESTRICTED LIST means a list(s) maintained by a DLB entity that
includes the names of the Securities of which are being
actively traded, Being Considered for Purchase or Sale
by DLB and/or its Advisory Clients or, when
appropriate, its subadvisers, and the names of any
issuer about whom DLB has Inside Information or on
whose board of directors DLB Associates serve. An
issuer, or Security, as applicable, will be removed
from the Restricted List when what had been Inside
Information becomes available to the public, when the
interlocking directorate no longer exists or when what
had been a Security Being Considered for Purchase or
Sale is no longer under such consideration. Each
analyst and trader is responsible for ensuring that all
issuers with whom they have worked are properly
reflected in the Restricted List in accordance with
provisions of this Code.
The content of the Restricted List is confidential and
will be distributed only to those that have a need to
know the identity of the issuers in the context of
performing their job responsibilities;
SECURITY means any stock or transferable share; note, bond,
debenture or other evidence of indebtedness, investment
contract, any warrant or option to acquire or sell a
Security, any financial futures contract, put, call,
straddle, option, or any interest in any group or index
of Securities, or in general, any interest or
instrument commonly known as a "Security."
SECURITY HELD means any Security which, within the most recent 15
OR TO BE days, (i) is or has been held by DLB and/or an Advisory
ACQUIRED Client or (ii) is being or has been considered by DLB
for itself and/or its Advisory Clients. This includes
any option on a Security that is convertible into or
exchangeable for, any Security that is held or to be
acquired. The IM Compliance Director may amend this
definition to the extent necessary to comply with Rule
17j-1 of the Investment Company Act of 1940.
SUB-ADVISER means an investment adviser that has entered into an
investment sub-advisory contract with DLB to provide
investment advisory services to a portfolio or fund for
which DLB is the ultimate investment adviser.
26
<PAGE>
INSIDE INFORMATION STATEMENT
AND
CODE OF ETHICS RELATING TO PERSONAL SECURITIES TRANSACTIONS
DAVID L. BABSON & COMPANY, INC.
BABSON SECURITIES CORPORATION
THE DLB FUND GROUP
JANUARY 1, 2000
27
WESTFIELD CAPITAL MANAGEMENT COMPANY, INC.
CODE OF ETHICS
STATEMENT OF GENERAL PRINCIPLES
As investment adviser to individuals, employee benefit plans, trust accounts,
charitable institutions, foundations, endowments, partnerships and investment
companies (collectively, "Funds"), it is the policy of Westfield Capital
Management Company, Inc. ("Westfield") that Portfolio Managers, Investment
Personnel and Access Persons1 should (1) at all times place the interests of
Funds first; (2) conduct all personal securities transactions in a manner that
is consistent with this Code of Ethics and in such a manner as to avoid any
actual or potential conflict of interest or any abuse of the individual's
position of trust and responsibility; and (3) adhere to the fundamental standard
that Westfield personnel should not take inappropriate advantage of their
positions.
GOVERNING STANDARDS
This Code of Ethics shall be governed by Rule 17j-1 under the Investment Company
Act of 1940 and the Investment Company Institute's Guidelines on Personal
Investing.
Portfolio Managers, Investment Personnel or Access Persons shall not, in
connection with the purchase or sale by such persons of a security "held or to
be acquired" by any Fund:
(1) Employ a device, scheme or artifice to defraud the Fund;
(2) Make to the Fund any untrue statement of a material fact or omit
to state to the Fund a material fact necessary in order to make
the statements made, in light of the circumstances under which
they are made, not misleading;
(3) Engage in any act, practice or course of business which operates
or would operate as a fraud or deceit upon the Fund; or
(4) Engage in any manipulative practice with respect to the Fund.
A security is "held or to be acquired" by a Fund if within the most recent 15
days it (1) is or has been held by the Fund, or (2) is being or has been
considered by the Fund, or by Westfield, for
- ------------------
1 Portfolio Managers have the responsibility and authority to make
decisions about Fund investments, while Investment Personnel include the
analysts and traders who provide information and advice to a portfolio manager
or who help execute the portfolio manager's decisions. Access Persons are (A)
any directors, officers or employees of Westfield (1) who, in connection with
their duties, make, participate in or obtain information regarding the purchase
or sale of a security by a Fund, or (2) whose functions relate to the making of
any recommendations with respect to such purchases and sales, or (3) who, in
connection with their duties, obtain any information concerning securities
recommendations being made by Westfield to a Fund, and (B) any natural person in
a control relationship to Westfield or a Fund who obtains information concerning
recommendations made to a Fund with regard to the purchase or sale of a
security.
<PAGE>
purchase by the Fund. A purchase or sale includes, inter alia, the writing of an
option to purchase or sell.
SUBSTANTIVE RESTRICTIONS ON PERSONAL INVESTING ACTIVITIES
1. Initial Public Offerings
Portfolio Managers and Investment Personnel are prohibited from
acquiring any securities in an initial public offering.
2. Private Placements
Portfolio Managers and Investment Personnel shall, when purchasing
securities in a private placement:
a. Obtain the prior written approval of Karen DiGravio or, in her
absence, Arthur J. Bauernfeind (such prior approval will be valid
only on the day executed by Ms. DiGravio or Mr. Hazard and will
take into account, among other factors, whether the investment
opportunity should be reserved for an investment company and its
shareholders, and whether the opportunity is being offered to an
individual by virtue of his or her position with Westfield or
connection with a Fund);
b. When they are involved in any subsequent decision to invest in
the issuer on behalf of a Fund, disclose their investment to
Karen DiGravio or, in her absence, Arthur J. Bauernfeind and
refer the decision to purchase securities of the issuer for the
Fund to Karen DiGravio or, in her absence, Arthur J. Bauernfeind.
3. Blackout Periods
a. Same Day
Portfolio Managers, Investment Personnel and Access Persons are
prohibited from executing a securities transaction on a day when
a Fund has a pending "buy" or "sell" order in the same security
until that order is executed or withdrawn. Any profits realized
on trades within the proscribed periods must be disgorged to the
Fund by the Portfolio Manager, Investment Personnel or Access
Person.
b. Seven Day
Portfolio Managers are prohibited from buying or selling a
security within seven (7) calendar days before the Fund he or she
manages trades in that security. Any profits realized on trades
within the proscribed period must be disgorged by the Portfolio
Manager to the Fund.
<PAGE>
4. Gifts
Portfolio Managers and Investment Personnel are prohibited from
receiving any gift or other thing of more than $100 in value from any
person or entity that does business with or on behalf of a Fund.
5. Service as a Director.
Portfolio Managers and Investment Personnel are prohibited from serving
on the board of directors of publicly traded companies, without prior
authorization from Westfield's Board of Directors and the Funds' Board
of Directors.
PRECLEARANCE; BROKER CONFIRMATIONS AND STATEMENTS
1. Preclearance
Portfolio Managers, Investment Personnel and Access Persons are
required to obtain written preclearance of all transactions in any
securities other than shares of registered open-end investment
companies in which the person has, or by reason of the transaction
acquires, any direct or indirect beneficial ownership2 ("Personal
Securities") with Karen DiGravio or, in her absence, Arthur J.
Bauernfeind or the day of such transaction.
2. Records of Securities Transactions
Portfolio Managers, Investment Personnel and Access Persons are
required to direct their brokers to provide Karen DiGravio or, in her
absence, Arthur J. Bauernfeind, on a timely basis, duplicate copies of
confirmations of all Personal Securities transactions and copies of
periodic statements for all securities accounts maintained by or for
such persons by such brokers.
COMPLIANCE PROCEDURES
In order to provide Westfield with information to enable it to determine with
reasonable assurance whether the provisions of this Code of Ethics are being
observed by Portfolio
- ---------------------------
2 Beneficial ownership of a security is determined in the same manner
as it would be for the purposes of Section 16 of the Securities Exchange Act of
1934, except that such determination shall apply to all securities that a person
has or acquires. Generally, a person should consider himself the beneficial
owner of securities held by his spouse, his minor children, a relative who
shares his home, or other persons if by reason of any contact, understanding,
relationship, agreement or other arrangement, he obtains from such securities
benefits substantially similar to those of ownership. He should also consider
himself the beneficial owner of securities if he can vest or revest title in
himself now or in the future.
<PAGE>
Managers, Investment Personnel and Access Persons:
1. Karen DiGravio shall notify all Portfolio Managers, Investment
Personnel and Access Persons of the reporting requirements of
this Code of Ethics and shall deliver a copy of this Code to each
person.
2. All Portfolio Managers, Investment Personnel and Access Persons
shall submit to Karen DiGravio, on an annual basis, an Annual
Certification of Compliance with the Code of Ethics as prescribed
in Exhibit A. The annual certification shall be filed with Karen
DiGravio within thirty (30) calendar days after calendar
year-end.
3. All Portfolio Managers and Investment Personnel shall submit to
Karen DiGravio, upon commencement of employment, and thereafter
on an annual basis, personal securities holdings reports in the
form prescribed in Exhibit B. The annual report shall be filed
with Karen DiGravio within thirty (30) calendar days after
calendar year-end.
4. All Portfolio Managers, Investment Personnel and Access Persons
shall submit to Karen DiGravio, on a quarterly basis, personal
securities transactions reports. Each report shall include the
name of the security, nature of the transaction, date of the
transaction, quantity, price and broker-dealer through which the
transaction was effected. Such quarterly reports shall be filed
with Karen DiGravio within ten (10) calendar days after the end
of each calendar quarter. Such reports need not include any
transactions disclosed on confirmations or account statements
previously furnished to Westfield by any broker, or any
transactions in (1) securities issued or guaranteed by the United
States Government, its agencies or instrumentalities; (2) bankers
acceptances; (3) certificates of deposit; (4) commercial paper;
(5) and shares of registered open-end investment companies. The
requirements of this Section 4 may be satisfied by sending
duplicate confirmations of such trades to Karen DiGravio.
5. All Portfolio Managers, Investment Personnel and Access Persons
shall submit to Karen DiGravio, or, in her absence, Arthur J.
Bauernfeind, a request for preclearance in the form prescribed in
Exhibit C for all proposed securities transactions requiring
preclearance pursuant to the requirements of this Code of Ethics.
All decisions regarding the preclearance of all securities
transactions for Portfolio Managers, Investment Personnel and
Access Persons shall be made by Karen DiGravio or, in her
absence, Arthur J. Bauernfeind.
6. Karen DiGravio shall report to Westfield's Board of Directors:
(a) at the next meeting following the deadline for receipt of
annual reports of holdings or quarterly reports of
securities transactions, the results of his review of such
reports, and
<PAGE>
(b) any apparent violation of the reporting requirements.
7. Westfield's Board of Directors shall consider reports made to it
and shall determine whether the policies established in this Code
of Ethics have been violated, and what sanctions, if any, should
be imposed. The Board shall review the operation of this Code of
Ethics at least annually or as dictated by changes in applicable
law or regulation.
8. This Code of Ethics, a copy of each Personal Securities Holdings
Report and each transactions report by the parties covered in the
Code, any written report prepared by Karen DiGravio or, in her
absence, Arthur J. Bauernfeind and lists of all persons required
to make reports hereunder shall be preserved with Westfield for
the period required by Rule 17j-1 under the Investment Company
Act of 1940.
Adopted March 27, 1995; Revised September 15, 1995, April 1, 1997 and as of
December 31, 1999.
<PAGE>
Exhibit A
WESTFIELD CAPITAL MANAGEMENT COMPANY, INC.
CODE OF ETHICS
ANNUAL CERTIFICATION OF COMPLIANCE
Underlined terms have the meaning assigned to them in Westfield Capital
Management Company, Inc.'s Code of Ethics, as amended from time to time.
As a Portfolio Manager, Investment Personnel or Access Person I certify that I
have read and understand the Code of Ethics. I further certify that I have
complied with the requirements of the Code and that I have disclosed or reported
all Personal Securities holdings and/or transactions required to be reported by
the Code.
Signature
Print name
Dated:
<PAGE>
Exhibit B
WESTFIELD CAPITAL MANAGEMENT COMPANY, INC.
CODE OF ETHICS
PERSONAL SECURITIES HOLDINGS REPORT
FOR THE CALENDAR YEAR ENDING 12/31/___
Underlined terms have the meaning assigned to them in Westfield Capital
Management Company, Inc. Code of Ethics dated March 27, 1995.
To Karen DiGravio and/or Arthur J. Bauernfeind:
As Portfolio Manager or Investment Personnel, I am disclosing the following
information regarding my Personal Securities holdings to comply with the Code of
Ethics.
Check Box 1 or 2, as applicable.
1. o I certify that I have no Personal Securities holdings that require
reporting for the year ending 12/31/____.
2. o I certify that the following Personal Securities holdings which require
reporting by me are accurate and complete for the year ending / / .
<TABLE>
<CAPTION>
Broker or Bank
Date of Nature of Security No. of Shares/ Utilized to
Transaction Transaction Name Par Amount Acquire Holding
- ----------- ----------- ---- ---------- ---------------
<S> <C> <C> <C> <C>
</TABLE>
-------------------------
Signature
-------------------------
Print Name
Dated: __________________
<PAGE>
Exhibit C
WESTFIELD CAPITAL MANAGEMENT COMPANY, INC.
CODE OF ETHICS
PRECLEARANCE OF SECURITIES TRANSACTION FORM
PLEASE NOTE THAT THIS PRECLEARANCE IS VALID ONLY FOR THE DATE SET FORTH UNDER
THE AUTHORIZATION BLOCK ON PAGE 3.
<TABLE>
<CAPTION>
<S> <C>
(1) Name of employee requesting authorization: ____________________________
(2) If different from #1, name of the account where
the trade will occur: ____________________________
(3) Relationship of (2) to (1): ____________________________
(4) Name of the firm at which the account is held: ____________________________
(5) Name of Security: ____________________________
(6) Maximum number of shares or units to be purchased
or sold or amount of bond: ____________________________
</TABLE>
(7) Check those that are applicable:
___Purchase ___Sale ___Market Order ___Limit Order (Price of Limit Order:____)
If the answer to any of the following questions is made by checking the answer
in Column I, the Compliance Officer may have to reject the proposed transaction:
<TABLE>
<CAPTION>
COLUMN I COLUMN II
<S> <C> <C>
(8) Do you possess material nonpublic information regarding
the security or the issuer of the security?1 _____ Yes _____ No
(9) To your knowledge, are the securities or "equivalent
securities" (i.e., securities issued by the same entity
as the issuer of a security, and all derivative instruments,
such as options and warrants) held by any investment
companies or other accounts managed by Westfield Capital
Management Company, Inc. (the "Company") _____ Yes _____ No
(10) To your knowledge, are there any outstanding purchase or
sell orders for this security or any equivalent security by
any Company client, including but not limited to any
investment company managed by the Company? _____ Yes _____ No
</TABLE>
- ---------------------------
1 Please note that employees generally are not permitted to acquire or
sell securities when they possess material nonpublic information regarding the
security or the issuers of the security.
<PAGE>
<TABLE>
<CAPTION>
COLUMN I COLUMN II
<S> <C> <C>
(11) To your knowledge, are the securities or equivalent
securities being considered for purchase or sale by
one or more investment companies or other accounts
managed by the Company? _____ Yes _____ No
(12) Are the securities being acquired in an initial
public offering?2 _____ Yes _____ No
(13) Are the securities being acquired in a private
placement?3 _____ Yes _____ No
(14) If you are a Portfolio Manager4, has any account
you manage purchased or sold these securities or
equivalent securities within the past seven calendar
days or do you expect the account to purchase or sell
these securities or equivalent securities within
seven calendar days of your purchase or sale? _____ Yes _____ No
</TABLE>
- ---------------------------
2 Please note that Portfolio Managers and Investment Personnel (as
defined in the Company's Code of Ethics) are not permitted to acquire securities
in an initial public offering for their own or related accounts.
3 Please note that generally acquisitions of securities in a private
placement are discouraged and may be denied.
4 Please see your Compliance Officer if you are not sure whether or not
you are a Portfolio Manager.
<PAGE>
I have read Westfield Capital Management Company, Inc.'s Code of Ethics and
Policy and Procedures Designed to Detect and Prevent Insider Trading within the
prior 12 months and believe that the proposed trade fully complies with the
requirements of each. I acknowledge that the authorization granted pursuant to
this form is valid only on the date on which the authorization is granted (as
set forth immediately below, the "Authorized by" signature block).
------------------------------
Employee Signature
------------------------------
Print Name
------------------------------
Date Submitted
Authorized by: _____________________
Date: _____________________
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS/CSAM CLOSED-END FUNDS
CODE OF ETHICS
I. APPLICABILITY
-------------
This Code of Ethics establishes rules of conduct for "Access Persons" (as
defined below) of Credit Suisse Asset Management, LLC, its subsidiaries and
Credit Suisse Asset Management Securities, Inc. (collectively referred to as
"CSAM") and each U.S. registered investment company that adopts this Code
("Covered Fund") (CSAM and the Covered Funds are collectively referred to as the
"Covered Companies"). For purposes of this Code, "Access Person" shall mean:
o any "Advisory Person" -- any employee or officer of CSAM and any
natural person in a control relationship to a Covered Company (except
for a natural person who, but for his or her holdings in a Covered
Fund, would not be considered an Advisory Person, unless he or she
obtains information concerning recommendations made to the Covered
Fund with regard to the purchase or sale of securities by the Covered
Fund, in which case such person shall be considered an Advisory Person
only with respect to the Covered Fund); or
o any director, trustee or officer of a Covered Fund, whether or not
such person is an Advisory Person, in which case such person shall be
considered an Access Person only with respect to the Covered Fund.
For purposes of this Code:
o the term "security" shall include any option to purchase or sell, any
security that is convertible or exchangeable for, and any other
derivative interest relating to the security; o
o the terms "purchase" and "sale" of a security shall include, among
other things, the writing of an option to purchase or sell a security;
and
o all other terms shall have the same meanings as under the Investment
Company Act of 1940 ("1940 Act"), unless indicated otherwise.
II. STATEMENT OF GENERAL PRINCIPLES
-------------------------------
In conducting personal investment activities, all Access Persons are required to
act consistent with the following general fiduciary principles:
o the interests of CSAM clients, including Covered Funds, must always be
placed first, provided, however, that persons who are Access Persons
only with respect to certain Covered Funds shall place the interests
of such Covered Funds first;
o all personal securities transactions must be conducted in such a
manner as to avoid any actual or potential conflict of interest or any
abuse of an individual's position of trust and responsibility; and
<PAGE>
o Access Persons must not take inappropriate advantage of their
positions.
CSAM has a separate policy and procedures designed to detect and prevent insider
trading, which should be read together with this Code. Nothing contained in this
Code should be interpreted as relieving any Access Person from the obligation to
act in accordance with any applicable law, rule or regulation or any other
statement of policy or procedure adopted by any Covered Company.
III. PROHIBITIONS
------------
The following prohibitions and related requirements apply to Advisory Persons
and/or Access Persons (as stated) and accounts in which they have "Beneficial
Ownership" (as defined in Exhibit 1).
A. SHORT TERM TRADING. CSAM discourages Advisory Persons from short-term trading
(i.e., purchases and sales within a 60 day period), as such activity could be
viewed as being in conflict with CSAM's general fiduciary principles. In no
event, however, may an Advisory Person make a purchase and sale (or sale and
purchase) of a security, including shares of Covered Funds and other U.S.
registered investment companies (other than money market funds), within five
"Business Days" (meaning days on which the New York Stock Exchange is open for
trading). CSAM reserves the right to extend this prohibition period for the
short-term trading activities of any or all Advisory Persons if CSAM determines
that such activities are being conducted in a manner that may be perceived to be
in conflict with CSAM's general fiduciary principles.
B. SIDE-BY-SIDE TRADING. No Access Person may purchase or sell (directly or
indirectly) any security for which there is a "buy" or "sell" order pending for
a CSAM client (except that this restriction does not apply to any Access Person
who is neither an Advisory Person nor an officer of a Covered Fund, unless he or
she knows, or in the ordinary course of fulfilling official duties with a
Covered Fund should know, that there is a "buy" or "sell" order pending with
respect to such security for a CSAM client), or that such Access Person knows
(or should know) at the time of such purchase or sale:
o is being considered for purchase or sale by or for any CSAM client; or
o is being purchased or sold by or for any CSAM client.
C. BLACKOUT PERIODS. No Advisory Person may execute a securities transaction
within five Business Days before and one Business Day after a transaction in
that security for a CSAM client.
D. PUBLIC OFFERINGS. No Advisory Person may directly or indirectly acquire
Beneficial Ownership in any security in a public offering in the primary
securities market.
E. PRIVATE PLACEMENTS. No Advisory Person may directly or indirectly acquire or
dispose of any Beneficial Ownership in any privately placed security without the
express prior written approval of a supervisory person designated in Section IX
of this Code ("Designated Supervisory Person"). Approval will take into account,
among other factors, whether the investment opportunity should be reserved for a
CSAM client, whether the opportunity is being offered to the Advisory Person
2
<PAGE>
because of his or her position with CSAM or as a reward for past transactions
and whether the investment creates or may in the future create a conflict of
interest.
F. SHORT SELLING. Advisory Persons are only permitted to engage in short selling
for hedging purposes. No Advisory Person may engage in any transaction that has
the effect of creating any net "short exposure" in an individual security.
G. FUTURES CONTRACTS. No Advisory Person may invest in futures contracts, except
through the purchase of options on futures contracts.
H. OPTIONS. No Advisory Person may write (i.e., sell) any options except for
hedging purposes and only if the option is fully covered.
I. TRADING, HEDGING AND SPECULATION IN CREDIT SUISSE GROUP SECURITIES.
Transactions by employees, officers and directors of CSAM in securities of
Credit Suisse Group ("CSG") are prohibited for each period beginning 15 calendar
days before announcement of CSG yearly or half-yearly results and ending two
Business Days after the announcement. Employees, officers and directors of CSAM
may only hedge vested positions in CSG stock through short sales or derivative
instruments. Uncovered short exposure, through short sales or otherwise, is not
permitted without the express prior written approval of a Designated Supervisory
Person.
J. INVESTMENT CLUBS. No Advisory Person may participate in an "investment club"
or similar activity.
K. DISCLOSURE OF INTEREST. No Advisory Person may recommend to or effect for any
CSAM client any securities transaction without having disclosed his or her
personal interest (actual or potential), if any, in the issuer of the
securities, including without limitation:
o any ownership or contemplated ownership of any privately placed
securities of the issuer or any of its affiliates;
o any employment, management or official position with the issuer or any
of its affiliates;
o any present or proposed business relationship between the Advisory
Person and the issuer or any of its affiliates; and
o any additional factors that may be relevant to a conflict of interest
analysis.
Where the Advisory Person has a personal interest in an issuer, a decision to
purchase or sell securities of the issuer or any of its affiliates by or for a
CSAM client shall be subject to an independent review by a Designated
Supervisory Person.
L. GIFTS. No Advisory Person may seek or accept any gift of more than a de
minimis value (approximately $250 per year) from any person or entity that does
business with or on behalf of a CSAM client, other than reasonable,
business-related meals and tickets to sporting events, theater and similar
activities. If any Advisory Person is unsure of the appropriateness of any gift,
a Designated Supervisory Person should be consulted.
3
<PAGE>
M. DIRECTORSHIPS AND OTHER OUTSIDE BUSINESS ACTIVITIES. No Advisory Person may
serve on the board of directors/trustees of any issuer without the express prior
written approval of a Designated Supervisory Person. Approval will be based upon
a determination that the board service would be consistent with the interests of
CSAM clients. Where board service is authorized, Advisory Persons serving as
directors will be isolated from those making investment decisions regarding the
securities of that issuer through "informational barrier" or other procedures
specified by a Designated Supervisory Person.
No Advisory Person may be employed (either for compensation or in a voluntary
capacity) outside his or her regular position with CSAM or its affiliated
companies without the written approval of a Designated Supervisory Person.
IV. EXEMPT TRANSACTIONS
-------------------
A. EXEMPTIONS FROM PROHIBITIONS.
1. Purchases and sales of securities issued or guaranteed by the U.S.
government or any agencies or instrumentalities of the U.S. government,
municipal securities, and other non-convertible fixed income securities,
which are in each case rated investment grade, are exempt from the
prohibitions described in paragraphs C and D of Section III if such
transactions are made in compliance with the preclearance requirements of
Section V(B) below.
2. Any securities transaction, or series of related transactions,
involving 500 shares or less of an issuer having a market capitalization
(outstanding shares multiplied by the current market price per share)
greater than $2.5 billion is exempt from the prohibition described in
paragraph C of Section III if such transaction is made in compliance with
the preclearance requirements of Section V(B) below.
B. EXEMPTIONS FROM PROHIBITIONS AND PRECLEARANCE. The prohibitions described
in paragraphs B through E of Section III and the preclearance requirements of
Section V(B) shall not apply to:
o purchases and sales of securities that are direct obligations of the
U.S. government;
o purchases and sales of securities of U.S. registered open-end
investment companies;
o purchases and sales of bankers' acceptances, bank certificates of
deposit, and commercial paper;
o purchases that are part of an automatic dividend reinvestment plan;
o purchases and sales that are non-volitional on the part of either the
Access Person or the CSAM client;
o purchases and sales in any account maintained with a party that has no
affiliation with the Covered Companies and over which no Advisory
Person has, in the judgment of a Designated Supervisory Person after
reviewing the terms and circumstances, direct or indirect influence or
control over the investment or trading of the account; and
4
<PAGE>
o purchases by the exercise of rights offered by an issuer pro rata to
all holders of a class of its securities, to the extent that such
rights were acquired from the issuer.
C. FURTHER EXEMPTIONS. Express prior written approval may be granted by a
Designated Supervisory Person if a purchase or sale of securities or other
outside activity is consistent with the purposes of this Code and Section 17(j)
of the 1940 Act and rules thereunder (attached as Attachment A is a form to
request such approval). For example, a purchase or sale may be considered
consistent with those purposes if the purchase or sale is not harmful to a CSAM
client because such purchase or sale would be unlikely to affect a highly
institutional market, or because such purchase or sale is clearly not related
economically to the securities held, purchased or sold by the CSAM client.
V. TRADING, PRECLEARANCE, REPORTING AND OTHER COMPLIANCE PROCEDURES
----------------------------------------------------------------
A. TRADING THROUGH CSAM. No Advisory Person shall purchase or sell securities
for an account in which he or she has Beneficial Ownership other than through
the CSAM trading desk persons designated by a Designated Supervisory Person,
unless express prior written approval is granted by a Designated Supervisory
Person.
B. PRECLEARANCE. Except as provided in Section IV, before any Advisory Person
purchases or sells any security for any account in which he or she has
Beneficial Ownership, preclearance shall be obtained in writing from a
Designated Supervisory Person (attached as Attachment B is a form to request
such approval). If clearance is given for a purchase or sale and the transaction
is not effected on that Business Day, a new preclearance request must be made.
C. REPORTING.
1. INITIAL CERTIFICATION. Within 10 days after the commencement of his or her
employment with CSAM or his or her affiliation with any Covered Fund, each
Access Person shall submit to a Designated Supervisory Person an initial
certification in the form of Attachment C to certify that:
o he or she has read and understood this Code of Ethics and recognizes
that he or she is subject to its requirements; and
o he or she has disclosed or reported all personal securities holdings
in which he or she has any direct or indirect Beneficial Ownership and
all accounts in which any securities are held for his or her direct or
indirect benefit.
2. ANNUAL CERTIFICATION. In addition, each Access Person shall submit to a
Designated Supervisory Person an annual certification in the form of Attachment
D to certify that:
o he or she has read and understood this Code of Ethics and recognizes
that he or she is subject to its requirements;
o he or she has complied with all requirements of this Code of Ethics;
and
5
<PAGE>
o he or she has disclosed or reported (a) all personal securities
transactions for the previous year and (b) all personal securities
holdings in which he or she has any direct or indirect Beneficial
Ownership and accounts in which any securities are held for his or her
direct or indirect benefit as of a date no more than 30 days before
the annual certification is submitted.
Access Persons may comply with the initial and annual reporting requirements by
submitting account statements and/or Attachment E to a Designated Supervisory
Person within the prescribed periods. An Access Person who is not an Advisory
Person is not required to submit initial or annual certifications, unless such
Access Person is an officer of a Covered Fund.
Each Advisory Person shall annually disclose all directorships and outside
business activities (attached as Attachment F is a form for such disclosure).
3. QUARTERLY REPORTING. All Advisory Persons and each Access Person who is an
officer of a Covered Fund shall also supply a Designated Supervisory Person, on
a timely basis, with duplicate copies of confirmations of all personal
securities transactions and copies of periodic statements for all securities
accounts, including confirmations and statements for transactions and accounts
described in Section IV(B) above (exempt from prohibitions and preclearance).
This information must be supplied at least once per calendar quarter, within 10
days after the end of the calendar quarter.
Each Access Person who is neither an Advisory Person nor an officer of a Covered
Fund is required to report a transaction only if he or she, at the time of that
transaction, knew (or in the ordinary course of fulfilling official duties with
a Covered Fund should have known) that during the 15-day period immediately
before or after the date of the transaction the security such person purchased
or sold was purchased or sold by the Covered Fund or was being considered for
purchase or sale by the Covered Fund.
VI. COMPLIANCE MONITORING AND SUPERVISORY REVIEW
--------------------------------------------
A Designated Supervisory Person will periodically review reports from the CSAM
trading desk (or, if applicable, confirmations from brokers) to assure that all
transactions effected by Access Persons for accounts in which they have
Beneficial Ownership are in compliance with this Code and Rule 17j-1 under the
1940 Act.
Material violations of this Code and any sanctions imposed shall be reported not
less frequently than quarterly to the board of directors of each relevant
Covered Fund and to the senior management of CSAM. At least annually, each
Covered Company shall prepare a written report to the board of
directors/trustees of each Covered Fund, and to the senior management of CSAM,
that:
o describes issues that have arisen under the Code since the last
report, including, but not limited to, material violations of the Code
or procedures that implement the Code and any sanctions imposed in
response to those violations; and
o certifies that each Covered Company has adopted procedures reasonably
necessary to prevent Access Persons from violating the Code.
6
<PAGE>
Material changes to this Code of Ethics must be approved by the Board of
Directors of each Covered Fund no later than six months after the change is
adopted. That approval must be based on a determination that the changes are
reasonably necessary to prevent Access Persons from engaging in any conduct
prohibited by the Code and Rule 17j-1 under the 1940 Act. Board approval must
include a separate vote of a majority of the independent directors.
VII. SANCTIONS
---------
Upon discovering that an Access Person has not complied with the requirements of
this Code, the senior management of the relevant Covered Company may impose on
that person whatever sanctions are deemed appropriate, including censure; fine;
reversal of transactions and disgorgement of profits; suspension; or termination
of employment.
VIII. CONFIDENTIALITY
---------------
All information obtained from any Access Person under this Code shall be kept in
strict confidence, except that reports of transactions will be made available to
the Securities and Exchange Commission or any other regulatory or
self-regulatory organization to the extent required by law or regulation.
IX. FURTHER INFORMATION
-------------------
The Designated Supervisory Persons are Hal Liebes and James W. Bernaiche or
their designees in CSAM's legal and compliance department. Any questions
regarding the Code of Ethics should be directed to a Designated Supervisory
Person.
Dated: March 1, 2000
<PAGE>
EXHIBIT 1
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS
CODE OF ETHICS
DEFINITION OF BENEFICIAL OWNERSHIP
The term "Beneficial Ownership" as used in the attached Code of Ethics is to be
interpreted by reference to Rule 16a-1(a)(2) under the Securities Exchange Act
of 1934 ("Rule"). Under the Rule, a person is generally deemed to have
Beneficial Ownership of securities if the person (directly or indirectly),
through any contract, arrangement, understanding, relationship or otherwise, has
or shares a direct or indirect pecuniary interest in the securities.
The term "pecuniary interest" is generally defined in the Rule to mean the
opportunity (directly or indirectly) to profit or share in any profit derived
from a transaction in the securities. A person is deemed to have an "indirect
pecuniary interest" within the meaning of the Rule:
o in any securities held by members of the person's immediate family sharing
the same household; the term "immediate family" includes any child,
stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling,
mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law
or sister-in-law, as well as adoptive relationships;
o a general partner's proportionate interest in the portfolio securities held
by a general or limited partnership;
o a person's right to dividends that is separated or separable from the
underlying securities;
o a person's interest in certain trusts; and
o a person's right to acquire equity securities through the exercise or
conversion of any derivative security, whether or not presently
exercisable.1
For purposes of the Rule, a person who is a shareholder of a corporation or
similar entity is not deemed to have a pecuniary interest in portfolio
securities held by the corporation or entity, so long as the shareholder is not
a controlling shareholder of the corporation or the entity and does not have or
share investment control over the corporation's or the entity's portfolio. The
term "control" means the power to exercise a controlling influence over
management or policies, unless the power is solely the result of an official
position with the company.
- ----------
1 The term "derivative security" is defined as any option, warrant, convertible
security, stock appreciation right or similar right with an exercise or
conversion privilege at a price related to an equity security (or similar
securities) with a value derived from the value of an equity security.
<PAGE>
ATTACHMENT A
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS/CSAM CLOSED-END FUNDS
CODE OF ETHICS -- SPECIAL APPROVAL FORM
1. The following is a private placement of securities or other investment
requiring special approval in which I want to acquire or dispose of
Beneficial Ownership:
NAME OF PRIVATE
- ---------------
SECURITY OR DATE TO BE AMOUNT TO RECORD PURCHASE HOW ACQUIRED
------------ ---------- --------- ------ -------- ------------
OTHER INVESTMENT ACQUIRED BE HELD OWNER PRICE (BROKER/ISSUER)
- ---------------- -------- ------- ----- ----- ---------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Would this investment opportunity be appropriate for a CSAM client?
___ Yes ___ No
2. I want to engage in the following outside business activity:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
3. I want special approval to place personal securities trades other than
through the CSAM trading desk (please describe):
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
I certify, as applicable, that I (a) am not aware of any non-public information
about the issuer, (b) have made all disclosures required by the Code of Ethics
and (c) will comply with all reporting requirements of the Code.
- -------------------------------- -------------------------------
Signature Date
- --------------------------------
Print Name
___ Approved
___ Not Approved
- ------------------------------- ------------------------------
Designated Supervisory Person Date
<PAGE>
ATTACHMENT B
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS/CSAM CLOSED-END FUNDS
CODE OF ETHICS -- PERSONAL TRADING PRECLEARANCE FORM
This form should be filled out completely to expedite approval.
1. Security: ________________________________________
Ticker: __________________________________________
____ Purchase ____ Sale
2. Number of shares/bonds/units/contracts: ___________________________________
3. Account Name/Shortname: ___________________________________________________
4. Brokerage Firm AND Account Number: ________________________________________
5. Why do you want to purchase or sell? Is this an opportunity appropriate for
CSAM clients?
___________________________________________________________________________
6. Are you aware of a CSAM Advisory Person who is buying or selling or who
plans to buy or sell this security for his or her personal accounts or CSAM
clients?
___ Yes ___ No
If yes, who?
___________________________________________________________________________
7. If the amount is less than 500 shares, is the issuer market capitalization
greater than $2.5 billion?
___ Yes ___ No
I certify that I (a) am not aware of any non-public information about the
issuer, (b) have made all disclosures required by the Code of Ethics and this
trade otherwise complies with the Code, including the prohibition on investments
in initial public offerings, and (c) will comply with all reporting requirements
of the Code.
- ---------------------------------- ------------------------------------
Signature of Advisory Person Date
- ----------------------------------
Print Name
___ Approved
___ Not Approved
- ---------------------------------- ------------------------------------
Designated Supervisory Person Date - VALID THIS BUSINESS DAY ONLY.
<PAGE>
ATTACHMENT C
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS/CSAM CLOSED-END FUNDS
CODE OF ETHICS
INITIAL CERTIFICATION
I certify that I:
o have read and understood the Code of Ethics for Credit Suisse Asset
Management, LLC, the Warburg Pincus Funds and the CSAM Closed-End Funds and
recognize that I am subject to its requirements; and
o have disclosed or reported all personal securities holdings in which I had
any direct or indirect Beneficial Ownership and accounts in which any
securities were held for my direct or indirect benefit as of the date I
commenced employment with CSAM or the date I became affiliated with a
Covered Fund.
- -------------------------------- -------------------------------
Signature of Access Person Date
- --------------------------------
Print Name
<PAGE>
ATTACHMENT D
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS/CSAM CLOSED-END FUNDS
CODE OF ETHICS
ANNUAL CERTIFICATION
I certify that I:
o have read and understood the Code of Ethics for Credit Suisse Asset
Management, LLC, the Warburg Pincus Funds and the CSAM Closed-End Funds and
recognize that I am subject to its requirements;
o have complied with all requirements of the Code of Ethics and Policy and
Procedures Designed to Detect and Prevent Insider Trading in effect during
the year ended December 31, 1999; and
o have disclosed or reported all personal securities transactions for the
year ended December 31, 1999 and all personal securities holdings in which
I had any direct or indirect Beneficial Ownership and all accounts in which
any securities were held for my direct or indirect benefit as of December
31, 1999.
- -------------------------------- -------------------------------
Signature of Access Person Date
- --------------------------------
Print Name
<PAGE>
ATTACHMENT E
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS/CSAM CLOSED-END FUNDS
CODE OF ETHICS - PERSONAL SECURITIES ACCOUNT DECLARATION
ALL ACCESS PERSONS MUST COMPLETE EACH APPLICABLE ITEM (1, 2, 3 OR 4) AND SIGN
BELOW.
1. The following is a list of securities/commodities accounts in which I have
Beneficial Ownership:
BROKER/DEALER ACCOUNT TITLE AND NUMBER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. The following is a list of securities/commodities accounts in which I had
Beneficial Ownership that have been opened or closed in the past year:
BROKER/DEALER ACCOUNT TITLE AND NUMBER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3. The following is a list of any other securities or other investment
holdings in which I have Beneficial Ownership (for securities held in
accounts other than those disclosed in response to items 1 and 2):
NAME OF PRIVATE
- ---------------
SECURITY OR
-----------
OTHER DATE AMOUNT HELD RECORD PURCHASE HOW ACQUIRED
----- ---- ----------- ------ -------- ------------
INVESTMENT ACQUIRED OWNER PRICE (BROKER/ISSUER)
---------- -------- ----- ----- ---------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. I do not have Beneficial Ownership in any securities/commodities accounts
or otherwise have Beneficial Ownership of any securities or other
instruments subject to the Code of Ethics. (Please initial.)
-------------
Initials
I declare that the information given above is true and accurate:
- -------------------------------- -------------------------------
Signature of Access Person Date
- -------------------------------
Print Name
<PAGE>
ATTACHMENT F
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS/CSAM CLOSED-END FUNDS
CODE OF ETHICS
OUTSIDE BUSINESS ACTIVITIES
Outside business activities include, but are not limited to, the following:
o self-employment;
o receiving compensation from another person or company;
o serving as an officer, director, partner, or consultant of another business
organization (including a family owned company); and
o becoming a general or limited partner in a partnership or owning any stock
in a business, unless the stock is publicly traded and no control
relationship exists.
Outside business activities include serving with a governmental (federal, state
or local) or charitable organization whether or not for compensation.
ALL ADVISORY PERSONS MUST COMPLETE AT LEAST ONE CHOICE (1 OR 2) AND SIGN BELOW.
1. The following are my outside business activities:
APPROVED BY DESIGNATED
OUTSIDE BUSINESS DESCRIPTION OF SUPERVISORY PERSON (YES/NO)
ACTIVITY ACTIVITY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. I am not involved in any outside business activities. (Please initial)
------------
Initials
I declare that the information given above is true and accurate:
- -------------------------------- -------------------------------
Signature of Advisory Person Date
- --------------------------------
Print Name
CODE OF ETHICS
FORT WASHINGTON INVESTMENT ADVISORS, INC.
Fort Washington Investment Advisors, Inc. ("Fort Washington" or the
"Advisor") has adopted this Code of Ethics (the "Code") effective as of
________________, 1995 to specify and prohibit certain types of personal
securities transactions deemed to create a conflict of interest and to establish
reporting requirements and preventive procedures pursuant to the provisions of
Rule 17j-l(b)(1) under the Investment Company Act of 1940 (the "1940 Act").
I. GENERAL STANDARDS OF ETHICAL CONDUCT
Directors, officers and other access persons (as hereinafter defined)
shall have the duty at all times to place the interests of the investment
companies and other clients for which Fort Washington acts as investment manager
or advisor ahead of their own interests. All personal securities transactions of
such individuals and certain other types of actions shall be conducted
consistently with this Code and in such a manner as to avoid any actual or
potential conflict of interest or any abuse of such individual's position of
trust and responsibility, to the Advisor and its clients. All activities of
personnel associated with the Advisor shall be conducted in accordance with the
fundamental standard that they shall not take any inappropriate advantage of
their positions with the Advisor.
II. RULES APPLICABLE TO DIRECTORS, OFFICERS AND OTHER ACCESS PERSONS OF THE
ADVISOR
A. Definitions
1 "Access Person" means any owner, director, officer, principal or
Advisory Person (as defined below) of the Advisor.
2 "Advisory Person" means any employee of the Advisor (or of any entity
in a control relationship to the Advisor) who, in connection with his or her
regular functions or duties, makes, participates in or obtains information
regarding the purchase or sale of securities by a Client or whose functions
relate to any recommendations with respect to such purchases or sales, and any
natural person in a control relationship with the Advisor who obtains
information regarding the purchase or sale of securities.
3 "Beneficial Ownership " shall be interpreted in accordance with the
provisions of Rule 16a-l(a) (exclusive of Section (a) (1) of such Rule) of the
Securities Exchange Act of 1934, a copy of which is attached hereto.
4 "Client" means any person or entity, including an investment company,
for which Fort Washington serves as investment manager or advisor.
<PAGE>
5 "Control" shall have the same meaning as set forth in Section 2(a)(9)
of the 1940 Act.
6 "Portfolio Manager" means an Advisory Person who has or shares
principal responsibility for managing the portfolio of any Client.
7 "Purchase or sale of a security" includes, among other things, the
writing of an option to purchase or sell a security or the purchase or sale of a
future or index on a security or option thereon.
8 "Review Officer" means any designated review officer of the Advisor
or, in the absence of any such designation, the Secretary of the Advisor.
9 "Security" shall have the meaning as set forth in Section 2(a)(36) of
the 1940 Act (in effect, all securities). The term shall not include securities
issued by the U.S. Government (or any other "government security" as that term
is defined in the 1940 Act), bankers' acceptances, bank certificates of deposit,
commercial paper, such other money market instruments as may be designated by
the Review Officer of the Advisor, and shares of registered open-end investment
companies ("Exempt Securities ").
10 A security is "being considered for purchase or sale" when a
recommendation to purchase or sell the security has been made and communicated
and, with respect to the person making the recommendation, when such person
seriously considers making such a recommendation.
B. Prohibited Purchases and Sales
1 No Access Person shall purchase or sell, directly or indirectly, any
security in which he or she has, or by reason of such transaction acquires, any
direct or indirect beneficial ownership on a day during which the Advisor, on
behalf of any Client, has a pending "buy" or "sell" order in that same security
(until the order is executed or withdrawn), if such person knows or should have
known of such pending order at the time of such person's purchase or sale.
2 No Access Person shall purchase or sell, directly or indirectly, any
security in which he or she has, or by reason of such transaction acquires, any
direct or indirect beneficial ownership and which he or she knows or should have
known, at the time of such purchase or sale, is being considered for purchase or
sale for any Client.
3 No Advisory Person shall purchase or sell, directly or indirectly,
any security in which he or she has, or by reason of such transaction acquires,
any direct or indirect beneficial ownership within seven calendar days before or
after the execution of a trade in the same securities by the Advisor on behalf
of any Client for r which such person acts as Portfolio Manager.
4 No Advisory Person may profit from the purchase and sale, or sale and
purchase, of the same or equivalent securities within sixty calendar days
("short-term trade"). This restriction does not apply to short-term trades:
2
<PAGE>
a) involving Exempt Securities,
b) for which express prior approval has been received from the Review
Officer,
c) involving de minimis shares (which in any event shall mean shares
having a value of $5,000 or less at the time of both their purchase and their
sale),
d) involving any account over which the Advisory Person has no direct
or indirect influence or control,
e) that are nonvolitional on the part of the Advisory Person, or
f) that result from an automatic dividend reinvestment plan or an
automatic withdrawal plan.
If any Advisory Person engages in any trading in violation of this subsection 4,
any profits realized on such trades is required to be disgorged to a charitable
organization selected by the Board of Directors of the Company.
5 No Advisory Person may acquire any securities in an initial public
offering without express prior approval from the Review Officer.
6 No Advisory Person may acquire any security of any issuer in a
private placement without express prior approval from the Review Officer. Such
individual must disclose his or her investment in such security if he or she
takes part in any subsequent decision to invest in any security of that issuer.
C. Exempted Transactions
The prohibitions of Section II.B. L, 2. and 3 above and of Section II F
shall not apply to:
1 purchases or sales effected in any account over which the person has
no direct or indirect influence or control;
2 purchases or sales which are nonvolitional on the part of the person;
3 purchases which are part of an automatic dividend reinvestment plan
or an automatic withdrawal plan;
4 purchases effected upon the exercise of rights issued by an issuer
pro rata. to all holders of a class of its securities, to the extent such rights
were acquired from such issuer, and sales of such rights so acquired; and
5 purchases and sales which receive prior approval in writing by the
Review Officer (a) as only remotely potentially harmful to any Client because
they would be very
3
<PAGE>
unlikely to affect a highly institutional market or because they clearly are not
economically related to the securities to be purchased or sold or held by the
Advisor for any Client or (b) as not representing any danger of the abuses
proscribed by Rule 17j-1, but only if in each case the prospective purchaser has
identified to the Review Officer all factors of which he or she is aware which
are potentially relevant to a conflict of interest analysis, including the
existence of any substantial economic relationship between his or her
transaction and securities held or to be held by any Client.
D. Restrictions on Serving on Boards of Directors
----------------------------------------------
No Advisory Person may serve on the board of directors of a
publicly-traded company without prior approval from the Review Officer.
E. Restrictions Involving Gifts
No Advisory Person shall accept in any calendar year gifts with a value
of more than $100 from any person that does business with the Advisor, directly
or on behalf of any Client; provided, however, that this prohibition shall not
apply to the following:
(i) an occasional breakfast, luncheon, dinner or reception, ticket to a
sporting event or the theater, or comparable entertainment that is not so
frequent, so costly nor so extensive as to raise any question of impropriety;
(ii) a breakfast, luncheon, dinner, reception or cocktail party in
conjunction with a bona fide business meeting; and
(iii) a gift approved in writing by the Review Officer [as not being of
such character or value as would raise any question of impropriety].
F. Preclearance of Securities Transactions
Each Access Person who is required to file reports with the Review
Officer pursuant to Section III hereof must obtain approval from the Review
Officer prior to purchasing or selling any securities in a Pre-Clearance
Transaction. "Pre-Clearance Transaction" means any of the following: (i) a
transaction in a given security which, when combined with all previous
transactions by the Access Person in such security during the preceding three
months, would represent a total transaction value exceeding $15,000, (ii) a
transaction in a security that is neither listed on a national securities
exchange nor acquired by such Access Person in an offering made pursuant to a
then-effective registration statement under the Securities Act of 1933, or (iii)
any transaction in the security of a company whose total market capitalization
is less than $200 million. Any approval given by the Review Officer shall be
valid for a period of five trading days.
4
<PAGE>
III. REPORTING
A. Requirements for all Directors, Officers and Other Access Persons
-----------------------------------------------------------------
1 Coverage: Each Access Person shall file with the Review Officer
confidential quarterly reports containing the information required in Section
III.A.2. of this Code with respect to all transactions during the preceding
quarter in any securities in which such person has, or by reason of such
transaction acquires, any direct or indirect beneficial ownership, provided that
no Access Persons shall be required to report transactions effected for any
account over which such Access Person has no direct or indirect influence or
control (except that such an Access Person must file a written certification
stating that he or she has no direct or indirect influence or control over the
account in question). All Access Persons shall file reports; if no transactions
have been effected by an Access Person during the relevant period, that person
shall represent in the report that no transactions subject to reporting
requirements were effected.
2 Filings: Every report shall be made no later than 10 days after the
end of the calendar quarter in which the transaction to which the report relates
was effected, and shall contain the following information:
a) the date of the transaction, the title and the number of shares and
the principal amount of each security involved;
b) the nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition);
c) the price at which the transaction was effected; and
d) the name of the broker, dealer or bank with or through whom the
transaction was effected;
and a certification by such Access Person that he or she has complied, during
such calendar quarter, with the requirements of Sections II B, II D, II E, and
II F of this Code.
3 Any report may contain a statement that it shall not be construed as
an admission by the person making the report that he or she has any direct or
indirect beneficial ownership in the security to which the report relates.
4 Each Advisory Person shall file with the Review Officer a
confidential annual report containing information as of the end of the fiscal
year identifying the title, the number of shares and the principal amount of
each security held. Such report shall be filed no later than 30 days after the
end of the fiscal year to which the report relates. A report containing similar
information must be furnished by each Advisory Person upon the commencement of
employment.
5 Each Access Person must arrange for duplicate copies of trade
confirmations and periodic statements of his or her brokerage accounts to be
sent to the Review Officer.
5
<PAGE>
B. Certification
All Access Persons shall certify annually that they have read and
understand the Code and recognize that they are subject to its requirements. All
Access Persons further are required to certify that they have complied with the
requirements of the Code and that they have disclosed or reported all personal
securities transactions that are required to be disclosed or reported pursuant
to the requirements of the Code. Such certification shall be furnished to the
Review/Officer no later than 30 days after the end of the fiscal year.
IV. REVIEW
In reviewing transactions, the Review Officer shall take into account
the exemptions allowed under Section II.C. Before making a determination that a
violation has been committed, the Review Officer shall give such person an
opportunity to supply additional information regarding the transaction in
question.
V. SANCTIONS
If the Review Officer determines that a violation of this Code has
occurred, he or she shall so advise the Board of Directors, which may impose
such sanctions as it deems appropriate, including, inter alia, disgorgement of
any profits realized by the violator as a result of the violation, or a letter
of censure or suspension, or a termination of the employment of the violator.
VI. MISCELLANEOUS
A. Access Persons
The Review Officer will identify all Access Persons who are under a
duty to make reports to the Advisor and will inform such persons of such duty.
Any failure by the Review Officer to notify any person of his or her duties
under this Code shall not relieve such person of his or her obligations
hereunder.
B. Records
The Advisor shall maintain records in the manner and to the extent set
forth below, which records may be maintained on microfilm under the conditions
described in Rule 3 1 a-2(f) under the 1940 Act, and shall be available for
examination by representatives of the Securities and Exchange Commission
("SEC"):
1 copy of this Code and any other code which is, or at any time within
the past five years has been, in effect shall be preserved in an easily
accessible place;
2 a record of any violation of this Code and of any action taken as a
result of such violation shall be preserved in an easily accessible place for a
period of not less than five years following the end of the fiscal year in which
the violation occurs;
6
<PAGE>
3 a copy of each report made pursuant to this Code shall be preserved
for a period of not less than five years from the end of the fiscal year in
which it is made, the first two years in an easily accessible place; and
4 a list of all persons who are required, or within the past five years
have been required, to make reports pursuant to this Code shall be maintained in
an easily accessible place.
C. Confidentiality
All reports of securities transactions and any other information filed
pursuant to this Code shall be treated as confidential.
D. Interpretation of Provisions
The Board of Directors of the Advisor may from time to time adopt such
interpretations of this Code as it deems appropriate.
7
<PAGE>
TRANSACTIONS REPORT
Fort Washington Investment Advisors, Inc.
To: [Review Officer]
From: _______________________________________
(Your Name)
This Transaction Report (the "Report") is submitted pursuant to Section
III of the Code of Ethics of Fort Washington Investment Advisors, Inc. and
supplies (on the attached table) information with respect to transactions in any
security in which I may be deemed to have, or by reason of such transaction
acquire, any direct or indirect beneficial ownership interest (whether or not
such security is a security held or to be acquired by the Advisor for any
Client) for the calendar quarter ended . Unless the context otherwise requires,
all terms used in the Report shall have the same meaning as set forth in the
Code of Ethics.
For purposes of the Report beneficial ownership shall be interpreted
subject to the provisions of the Code of Ethics and Rule 16a-l(a) (exclusive of
Section (a)(1) of such Rule) of the Securities Exchange Act of 1934.
<TABLE>
<CAPTION>
Nature of
Transaction
(Whether Name of the
Purchase, Principal Broker, Dealer
Sale, or Other Amount of Price at Which or Bank with
Type of Securities the Whom the Name of
Title of Date of Disposition or Acquired or Transaction Transaction Ownership of
Securities Transaction Acquisition Disposed of Was Effected Was Effected Securities*
---------- ----------- ----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
I CERTIFY THAT (a) I AM FULLY FAMILIAR WITH THE CODE OF ETHICS OF FORT
WASHINGTON INVESTMENT ADVISORS, INC., (b) TO THE BEST OF MY KNOWLEDGE THE
INFORMATION FURNISHED IN THIS REPORT IS TRUE AND CORRECT, AND (c) DURING THE
QUARTER THAT IS THE SUBJECT OF THIS- REPORT I HAVE COMPLIED WITH THE PROVISIONS
OF SECTIONS II B, II D, II E AND II F OF THE CODE OF ETHICS.
Name (Print) ____________________________
Title/Position ____________________________
Signature ____________________________
Date ____________________________
758371.01
- ----------------------
* If appropriate, you may disclaim beneficial ownership of any security listed
in this report.
Scudder Kemper Investments, Inc.
CODE OF ETHICS
January 1, 2000
<PAGE>
CONTENTS
Preamble
Part 1: Conflicts of Interest
Part 2: Personal Investments
o Definitions
o Specific Rules and Regulations Applicable to
Employees
o Specific Rules and Regulations Applicable to Access
Persons
o Specific Rules and Regulations Applicable to
Investment Personnel
o Specific Rules and Regulations Applicable to
Portfolio Managers
o General
o Excessive Trading
o Disgorgement; Other Penalties
Part 3: Insider Trading
o Introduction
o General Guidelines
o Definitions
Part 4: Confidentiality
Part 5: Proprietary Rights of the Firm
Part 6: Gifts and Entertainment
o Overview
o General Guidelines
o Reporting and Supervision
Part 7: Fiduciary and Corporate Activities
o Executorships
o Trusteeships
o Custodianships for Minors
o Directorships and Consultant Positions in Business
Corporations
o Public and Charitable Positions
o Outside Activities
o New Employees
o Written Approval
Part 8: External Communications
Part 9: Reporting Apparent Violations
Part 10: Condition of Employment or Service
<PAGE>
Form 1 Personal Transaction Report
Form 2 Personal Transaction Preclearance Form
Form 3 Special Transaction Preclearance Form
Form 4 Annual Acknowledgment of Obligations Under Code of Ethics
Form 5 Affiliated Persons Letter
Form 6 Report of Gifts and Entertainment
Form 7 Request for Approval of Fiduciary, Corporate or Other Outside Activity
Form 8 Annual Review of Personal Activities
Form 9 Personal Securities Holdings Form
<PAGE>
SCUDDER KEMPER INVESTMENTS, INC. SP&P #16-1
Effective Date: 1/1/00
Distribution: General
STANDARD POLICY AND PROCEDURE MEMORANDUM #16-1
(Replaces SP&P #16-1 dtd 1/1/98, SP&P #16-2 dated 6/3/88,
SP&P #16-3 dated 3/15/89, SP&P #16-4 dated 5/18/88, SP&P #16-5 dated 4/29/91,
SP&P #16-6 dated 6/27/88, SP&P #16-8 dated 2/13/90, and SP&P #16-2 dated 3/1/95)
CODE OF ETHICS
PREAMBLE
WE WILL AT ALL TIMES CONDUCT OURSELVES WITH INTEGRITY AND DISTINCTION, PUTTING
FIRST THE INTERESTS OF OUR CLIENTS.
From the time of our Firm's inception, we have looked on our obligations to our
clients as fiduciary in nature. Our relationships were to be unencumbered in
fact or appearance by conflicts of interest, and the needs of our clients thus
represented a benchmark for assessing our own business decisions.
We believe and have always believed that our own long-term business interests
are best served by strict adherence to these principles. They are reflected in
the following internal policies and prescriptions and are implicit in the
judgment that our responsibilities exceed in scope and depth the literal
restrictions imposed by law on investor behavior (e.g., the prohibition on use
of inside information.).
The rules set forth in this Code have been adopted by Scudder Kemper
Investments, Inc. ("Scudder Kemper") and certain of its subsidiaries (the
"Covered Companies"), including Scudder Investor Services, Inc., Kemper
Distributors, Inc., Scudder Financial Services, Inc., Kemper Service
Corporation, Scudder Service Corporation, Scudder Trust Company, Scudder Fund
Accounting Corporation, and by Scudder Kemper-sponsored investment companies as
their codes of ethics applicable to Scudder Kemper-affiliated personnel.
<PAGE>
PART 1: CONFLICTS OF INTEREST
This Code does not attempt to spell out all possible cases of conflicts of
interest and we believe that members of the organization should be conscious
that areas other than personal investment transactions may involve conflicts of
interest. One such area would be accepting favors from brokers or other vendors
or service providers. We are a natural object of cultivation by firms wishing to
do business with us and it is possible that this consideration could impair our
objectivity.
A conflict of interest could also occur in securities which have a thin market
or are being purchased or sold in volume by any client or clients. Likewise, the
purchase of stocks or bonds in anticipation of (1) an upwards change to "Buy" in
the price rating, (2) their being added to the Investment Universe with a "Buy"
rating, or (3) their being purchased by a large account or group of accounts
would clearly be in conflict with our clients' interest.
Other examples of such conflicts would include the purchase or sale of a
security by a member of the organization prior to initiating a similar
recommendation to a client. Analysts occupy a particularly visible position. It
follows that analysts should be particularly careful to avoid the appearance of
"jumping the gun" before recommending a change in the rating on one of the
stocks for which he or she is responsible.
Accordingly, all personnel are required to adhere to the following rules
governing their investment activities. These rules cannot cover all situations
which may involve a possible conflict of interest. If an employee becomes aware
of a personal interest that is, or might be, in conflict with the interest of a
client, that person should disclose the potential conflict to the Legal
Department for appropriate consideration, BEFORE any transaction is executed.
We are anxious to give every member of the Firm reasonable freedom with respect
to his/her own and family's investment activities. Furthermore, we believe that
we will be stronger and our product better if the members of the organization
have a personal interest in investing and the courage of their convictions with
respect to investment decisions. At the same time, in a profession such as ours,
it is possible to abuse the trust which has been placed in us and there could be
conflicts of interest between our clients and our personal investment
activities. In many cases such conflicts might be somewhat theoretical. On the
other hand, in a matter of this nature we must be almost as careful of
appearances as we are of the actual facts.
Our underlying philosophy has always been to avoid conflicts of interest
wherever possible and, where they unavoidably occur, to resolve them in favor of
the client. When a conflict does occur, an individual in an investment counsel
organization must recognize that the client's interests supercede the interests
of the Firm's employees and those of any members of the person's family whom he
or she may advise. This condition inevitably places some restriction on freedom
of investment for members of the organization and their families.
When any member of the organization thinks it possible that a personal
transaction can be misinterpreted as involving a conflict of interest, that
person is encouraged to write a short explanatory memorandum and attach it to
the confidential quarterly Personal Transaction Report (Form 1). Such a
memorandum should, of course, briefly document any discussion with and approval
by the Legal Department.
Personal Transaction Reports are reviewed by designees of the Ethics Committee,
who are responsible for determining whether violations have occurred, giving the
person involved an opportunity to supply additional information, and
recommending appropriate follow-up action including disciplinary measures for
late reports or other infractions.
<PAGE>
PART 2: PERSONAL INVESTMENTS
DEFINITIONS
(a) Access Person includes employees who have access to timely
information relating to investment management activities,
research and/or client portfolio holdings.
(b) Affiliated person letter (407 letter) is a letter from the
compliance department on behalf of Scudder Kemper Investments,
Inc. authorizing an employee to open a brokerage account and
providing for the direction of duplicate trade confirmations
and account statements to the compliance department. All
access persons must apply for an affiliated person letter for
each personal account prior to making any personal trades for
the account. Employees who are not deemed access persons will
receive an affiliated person letter on request, but such
letter will NOT require the direction of duplicate trade
confirmations and account statements.
(c) Beneficial Interest. You will be considered to have
a Beneficial Interest in any investment that is (whether
directly or indirectly) held by you, or by others for your
benefit (such as custodians, trustees, executors, etc.);
held by you as a trustee for members of your immediate
family (spouse, children, stepchildren, grandchildren,
parents, stepparents, grandparents, siblings,
parents-in-law, children-in-law, siblings-in-law); and held
in the name of your spouse, or minor children (including
custodians under the Uniform Gifts to Minors Act) OR ANY
RELATIVE OF YOURS OR OF YOUR SPOUSE (INCLUDING AN ADULT
CHILD) WHO IS SHARING YOUR HOME, whether or not you
supervise such investments. You will also be considered to
have a Beneficial Interest in any investment as to which you
have a contract, understanding, relationship, agreement or
other arrangement that gives you, or any person described
above, a present or future benefit substantially equivalent
to an ownership interest in that investment. For example,
you would be considered to have a Beneficial Interest in the
following:
o an investment held by a trust of which you are the settlor,
if you have the power to revoke the trust without
obtaining the consent of all the beneficiaries;
o an investment held by any partnership in which you are
a partner;
o an investment held by an investment club of which you are
a member;
o an investment held by a personal holding company controlled
by you alone or jointly with others.
If you have any question as to whether you have a Beneficial
Interest in an investment, you should review it with the Legal
Department.
(d) Covered Company is defined in the Preamble on page 1.
(e) Derivative includes options, futures contracts, options on
futures contracts, swaps, caps and the like, where the
underlying instrument is a Security, a securities index, a
financial indicator, or a precious metal.
(f) Employees includes all employees of each of the Covered
Companies who do not fall within the definition of Access
Person, Investment Personnel or Portfolio Manager.
(g) Initial Public Offering shall include initial offerings in
equities.
<PAGE>
(h) Investment Personnel are traders, analysts, and other
employees who work directly with Portfolio Managers in an
assistant capacity, as well as those who in the course of
their job regularly receive access to client trading activity
(this would generally include members of the Investment
Operations and Mutual Fund Accounting groups). As those
responsible for providing information or advice to Portfolio
Managers or otherwise helping to execute or implement the
Portfolio Managers' recommendations, Investment Personnel
occupy a comparably sensitive position, and thus additional
rules outlined herein apply to such individuals.
(i) Personal Account means an account through which an employee
of a Covered Company has a Beneficial Interest in any
Security or Derivative.
(j) Personal Transaction means an investment transaction in a
Security or Derivative in which an employee of a Covered
Company has a Beneficial Interest.
(k) Portfolio Managers are those employees of a Covered Company
entrusted with the direct responsibility and authority to make
investment decisions affecting a client. PIC Consultants are
included in this definition. In their capacities as
fiduciaries, Portfolio Managers occupy a more sensitive
position than many members of the Scudder Kemper organization
because they are originating transactions for their clients.
(l) Private Placement is defined as an offering of a security,
which is being acquired in connection with an offering not
being made to "the public" but to a limited number of
investors and which has been deemed not to require
registration with the SEC.
(m) Reportable Transaction includes any transaction in a
Security or Derivative; provided that Reportable Transaction
does not include any transaction in (i) direct obligations of
the US Government, or (ii) open-end investment companies for
which none of the Advisers serves as investment adviser.
(n) Security includes without limitation stocks, bonds,
debentures, notes, bills and any interest commonly known as a
security, and all rights or contracts to purchase or sell a
security.
(o) Scudder Kemper Funds means each registered investment company
to which an Adviser renders advisory services, other than
funds sponsored by an organization unaffiliated with Scudder
Kemper.
(p) Waiver from preclearance exempts certain accounts from the
preclearance requirements. An access person may receive a
certificate of waiver from preclearance under the following
circumstances:
(i) Account under the exclusive discretion of an access
person's spouse, where the spouse is employed by an
investment firm where the spouse is subject to
comparable preclearance requirements;
(ii) The account is under the exclusive discretion of an
outside money manager; or
(iii) Any other situation where a waiver of preclearance
is appropriate.
A certificate of waiver from preclearance is available at the
discretion of the Ethics Committee. All accounts receiving a
certificate of waiver from preclearance must apply for a 407
letter. Transactions occurring in accounts which have obtained
a waiver from preclearance are not exempt from the quarterly
reporting requirement.
<PAGE>
SPECIFIC RULES AND RESTRICTIONS APPLICABLE TO ALL EMPLOYEES
The following rules and restrictions are applicable to all Employees
(including Access Persons, Investment Personnel and Portfolio
Managers):
(a) Every Employee must file by the seventh day of the month
following the end of each quarter with the individual
designated by the Ethics Committee a confidential Personal
Transaction Report for the immediately preceding quarter (Form
1: Quarterly Personal Transaction Report). Each report must
set forth every Reportable Transaction for any Personal
Account in which the Employee has any Beneficial Interest.
In filing the reports for accounts within these rules please
note:
(I) YOU MUST FILE A REPORT EVERY QUARTER WHETHER OR NOT
THERE WERE ANY REPORTABLE TRANSACTIONS. All
Reportable Transactions should be listed if possible
on a single form. For every Security listed on the
report, the information called for in EACH column
must be completed by all reporting individuals.
(ii) Reports must show sales, purchases, or other
acquisitions, or dispositions, including gifts,
exercise of conversion rights and the exercise or
sale of subscription rights. Approved Personal
Transaction Preclearance Forms must be attached for
all applicable transactions. Reinvestment of
dividends (but not additional share purchases)
through dividend reinvestment plans of publicly held
companies need be indicated only on the line provided
above PURCHASES on the reverse side of the report.
(iii) Quarterly reports on family and other accounts that
are fee-paying firm clients need merely list the
Scudder Kemper account number under Item #1 on Page 1
of the report; these securities transactions do not
have to be itemized.
(iv) Employees may not purchase securities issued as part
of an initial public offering until three business
days after the public offering date (i.e., the
settlement date), and then only at the prevailing
market price. In addition, employees may not
participate in new issues of municipal bonds until a
CUSIP number has been identified.
(b) Employees are not permitted to serve on the boards of publicly
traded companies unless such service is approved in advance by
the Ethics Committee or its designee on the basis that it
would be consistent with the interests of the Firm. In the
case of Investment Personnel service on the board of a public
company must be consistent with the interests of the Fund with
which the Investment Personnel is associated as well as the
shareholders of such Fund, and the Investment Personnel must
be isolated from participating in investment decisions
relating to that company. See Part 7: Fiduciary and Corporate
Activities for further detail on the approval process.
(c) For purposes of this Code, a prohibition or requirement
applicable to any given person applies also to transactions in
securities for any of that person's Personal Accounts,
INCLUDING TRANSACTIONS EXECUTED BY THAT PERSON'S SPOUSE OR
RELATIVES LIVING IN THAT PERSON'S HOUSEHOLD, unless such
account is specifically exempted from such requirement by the
Ethics Committee or its designee.
<PAGE>
(d) Employees may not purchase or sell securities on the
Restricted List absent a special exception from the Legal
Department. Employees may not disclose the identities of
issuers on the Restricted List to others outside the firm.
Please See Part 3: Insider Trading, which is incorporated by
reference.
SPECIFIC RULES AND RESTRICTIONS APPLICABLE TO ALL ACCESS PERSONS
(a) Access Persons are subject to each of the foregoing rules and
restrictions applicable to Employees.
(b) Access Persons may not purchase or sell a "private placement"
security without the prior written approval of the Ethics
Committee or its designee and, in the case of Portfolio
Managers and research analysts, the additional approval of
their departmental reviewer (see Form 3: Special Preclearance
Form). Typically, a purchase of a private placement will not
be approved where any part of the offering is being acquired
by a client.
(c) All Access Persons must disclose promptly to the Ethics
Committee or its designee the existence of any Personal
Account and must direct their brokers to supply duplicate
confirmations of all Reportable Transactions and copies of
periodic statements for all such accounts to an individual
designated by the Ethics Committee. (Use Form 5: Affiliated
Persons Letter.) These confirmations will be used to check for
conflicts of interest by comparing the information on the
confirmations against the Firm's pre-clearance records (see
sub-section (f) below) and quarterly Personal Transaction
Reports.
(d) All Access Persons are required to "pre-clear" their
personal transactions with the Ethics Committee's designee.
(Use Form 2: Preclearance Form.) If circumstances are such
that the Firm lacks the ability to preclear a particular
transaction, permission to execute that transaction will not
be granted. Submissions for request of trade approval must
be submitted no later than 3:30pm. If preclearance is
granted, the Access Person has until the end of the day
preclearance is granted to execute his or her trade. After
such time the Access Person must obtain preclearance again.
(Limit orders which have been precleared and placed within
this time limit need not be precleared on subsequent days so
long as the terms of the order are not changed.) Prior
approval is not required for the exercise of rights, the
rounding out of fractional shares and receipt of stock
dividends or stock splits. Similarly, prior approval is not
required for transactions in shares of registered open-end
investment companies (except in the case of a Portfolio
Manager who wishes to purchase or sell shares of his/her
Fund when the Fund is other than a money market fund) and
U.S. Government securities transactions.
(e) Access Persons may not purchase any Security where the
investment rating is upgraded to "Buy" (or any Security added
to the Investment Universe with a "Buy" rating until two weeks
after the date of the rating change or addition. (See SP&P
#31-5 regarding Price Rating System.).
(f) Access Persons may not sell any Security where the investment
rating is downgraded to "Unattractive" until two weeks after
the date of the rating change.
(g) Access Persons may not purchase securities that are added to
the PIC Universe until two weeks after the date of the
addition.
<PAGE>
(h) In the event that an Access Person desires to trade less than
$10,000 of a Security that has a market capitalization of at
least $5 billion, pre-clearance will be granted absent special
circumstances. (However, please note that even trades falling
within this de minimus exception must be pre-cleared with the
Ethics Committee or its designee.)
(i) No Access Person will receive approval to execute a securities
transaction when any client has a pending "buy" or "sell"
order in that same (or a related) Security until that order is
executed or withdrawn. Examples of related securities include
options, warrants, rights, convertible securities and American
Depository Receipts, each of which is considered "related" to
the Security into which it can be converted or exchanged.
(j) Within 10 days of the commencement of employment (or within 10
days of obtaining Access Person status) all Access Persons
must disclose all holdings of securities and/or derivatives in
which they have a Beneficial Interest (and indicate which of
those holdings are private placements). ACCESS PERSONS MUST
FILE AN INITIAL REPORT EVEN IF THEY HAVE NO HOLDINGS. Holdings
in direct obligations of the U.S. Government and mutual (i.e.,
open-end) funds other than Scudder Kemper Funds need not be
listed.
(k) Access Persons shall submit an Annual Statement of Securities
Holdings as part of the annual ethics questionnaire. The
Annual Statement of Securities Holdings shall only include
holdings that are not received by the Legal Department in the
form of duplicate statements.
SPECIFIC RULES AND RESTRICTIONS APPLICABLE TO INVESTMENT PERSONNEL
(a) Investment Personnel are subject to each of the foregoing
rules and restrictions applicable to Employees and Access
Persons.
(b) Investment Personnel are prohibited from profiting from the
buying and selling, or selling and buying, of the same (or
related) securities within a 60 calendar-day period.
(c) Investment Personnel who hold a privately placed Security of
an issuer whose securities are being considered for purchase
by a client must disclose to their departmental reviewer that
preexisting interest where they are involved in the
consideration of the investment by the client (using Form 3:
Special Transaction Preclearance Form). The client's purchase
of such securities must be approved by the relevant
departmental reviewer.
(d) Research analysts are required to obtain special preclearance
(using Form 3: Special Transaction Preclearance Form) and
approval from their supervisor prior to purchasing or selling
a Security in an industry or country he or she follows.
SPECIFIC RULES AND RESTRICTIONS APPLICABLE TO PORTFOLIO MANAGERS
(a) Portfolio Managers are subject to each of the foregoing rules
and restrictions applicable to Employees, Access Persons and
Investment Personnel.
(b) Portfolio Managers may not buy or sell a Security within seven
calendar days before and after a portfolio that he or she
manages trades in that Security.
(c) When a Portfolio Manager wants to sell from his or her
Personal Account securities held by his or her clients, the
Portfolio Manager must receive prior written approval from the
Ethics Committee or its designee (Using Form 3) before acting
for the Personal Account. The Portfolio Manager must explain
his or her reasons for selling the securities.
<PAGE>
(d) When a Portfolio Manager wants to purchase for a Personal
Account a Security eligible for purchase by one of his or her
clients, the Portfolio Manager must receive prior written
approval from the Ethics Committee or its designee (Using Form
3) before acting for the Personal Account. The Portfolio
Manager must explain his or her reasons for purchasing the
securities.
(e) A Portfolio Manager may not engage in short sales other than
"short sales against the box" for which both Regular and
Special Preclearance are required.
GENERAL
(a) Apart from these specific rules, purchases and sales should be
arranged in such a way as to avoid any conflict with clients
in order to implement the intent of this Code. Any attempt by
an employee to do indirectly what this Code is meant to
prohibit will be deemed a direct violation of the Code. If
there is any doubt whether you may be in conflict with
clients, particularly with respect to securities with thin
markets, you should check before buying or selling with the
Ethics Committee or its designee.
(b) Hardship exceptions may be granted, in the sole discretion of
the Ethics Committee or its designee, with respect to certain
provisions of this Code in rare instances where unique
circumstances exist.
(c) The Ethics Committee or its designee, on behalf of the Firm,
will report annually to each Scudder Kemper Fund's board of
directors concerning existing procedures and any material
changes to those procedures as well as any instances requiring
significant remedial action during the past year which relate
to that Fund.
(d) Access Persons are permitted to maintain Margin Accounts.
Nonetheless, sales by Access Persons pursuant to margin calls
must be precleared in accordance with standard preclearance
procedures.
EXCESSIVE TRADING
The firm believes that it is appropriate for its members to participate in the
public securities markets as part of their overall personal investment programs.
As in other areas, however, this should be done in a way that creates no
potential conflicts with the interests of our clients or our firm. Further, it
is important that members recognize that otherwise appropriate trading, if
excessive (measured in terms of frequency, complexity of trading programs or
number of trades), or if conducted during work-time or using firm resources, can
give rise to conflicts of a different category such as by distracting time,
focus, and energy from our efforts on behalf of our clients or by exceeding a
reasonable standard of firm accommodation of members' basic personal needs.
Accordingly, personal trading rising to such dimension as to create this
possibility is not consistent with the Code of Ethics, should be avoided, and
will not be approved. This provision is consistent with Group policies and by
Zurich Basics, which sets out the Group's core values and basic principles.
<PAGE>
DISGORGEMENT; OTHER PENALTIES
Any profits realized from a transaction that was not precleared or from a
transaction that otherwise violates a provision of this Code will be disgorged
to an appropriate charity. The Ethics Committee, in its discretion, may waive
disgorgement in exceptional circumstances. The Ethics Committee also reserves
the right to impose other penalties for violations of the Code, including
requiring reversal of a trade, fines, suspension of trading privileges and,
under the most serious of violations, termination of employment.
PART 3: INSIDER TRADING
I. INTRODUCTION
Employees may not transact in a security while in possession of material,
nonpublic information relating to the issuer of the security. This prohibition
applies to trading on behalf of client accounts and personal accounts. In
addition, employees may not convey material, nonpublic information about public
traded issuers to others outside the company.
SP&P 16 - 11B sets forth the company policy on Insider Trading, and is
incorporated into the Code of Ethics by reference.
II. GENERAL GUIDELINES
Employees may not transact in a security, on behalf of a client account or a
personal account, while in possession of material, nonpublic information
concerning the issuer of the security.
a. Employees who receive information which they believe may be material
and nonpublic are required to contact the Legal Department immediately.
In such circumstances, employees should not share the information with
other employees, including supervisors. Employees may not share
material, nonpublic information with others outside the firm.
b. Employees may not purchase or sell securities on the Restricted List
absent a special exception from the Legal Department. Employees may not
disclose the identities of issuers on the Restricted List to others
outside the firm.
c. Employees may not solicit material, nonpublic information from
officers, directors or employees of public issuers.
d. Employees may not knowingly transact in securities prior to trades
made on behalf of clients, or prior to the publication of research
relating to the security.
e. Employees may not cause nonpublic information about a security to be
passed across a firewall.
III. DEFINITIONS
Material information is information that a reasonable investor would find
relevant to making an investment decision. Any information which if announced to
the public, would likely cause a change in the price of a security, is likely to
be material.
The following types of information are likely to be material: earnings, mergers
and acquisitions, dividends and special dividends, product developments,
licenses, changes in management, major litigation or regulatory action, and/or
actions by prominent investors.
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Nonpublic information is information that has not been disclosed to the public.
Information available in newspapers, magazines, radio, television, and/or news
services is generally public information. Restricted List is a document
disseminated by the Legal Department setting forth securities which employees
may not buy and/or sell for personal and client accounts.
A firewall is a procedure designed to prevent the misuse of material, nonpublic
information received by the firm in the course of its business. Employees with
questions concerning firewall procedures and their applicability should contact
the Legal Department for further guidance. SP&P 16 - 11C sets forth the company
policy on Firewall Procedures, and is incorporated into the Code of Ethics by
reference.
PART 4: CONFIDENTIALITY
Our obligation as fiduciaries to act at all times in our clients' best interests
requires that we share information concerning our clients -- including
particularly information concerning their identities, holdings and account
transactions -- with those outside the Firm only on a "need to know" basis.
Accordingly, no member of the organization may discuss with, or otherwise inform
others of, the identity of any client, or any actual or contemplated transaction
for the account of a client, except in the performance of employment duties or
in an official capacity and then only for the benefit of the client, and in no
event for a direct or indirect personal benefit.
PART 5: PROPRIETARY RIGHTS OF THE FIRM
When a member of the organization leaves the firm, for whatever reason, certain
business principles and procedures should be observed. Some are obvious and
inherent in the basic ethical relationship between any person and his or her
firm. In our case, there are many additional constraints as a result of our
being a confidential fiduciary in a field involving special ethical, regulatory
and professional considerations.
By way of background, the firm does not wish to deter any individuals from
furthering their careers, if they think their situation can be improved with
another firm. But if any member of the organization does move on to another
firm, he or she does so subject to those constraints.
The collective efforts of everyone at Scudder Kemper have contributed over a
period of years to what our firm is today. This includes our recognized
reputation as professional investors with a high sense of personal integrity and
ethics. Many persons have contributed to the investment product we offer and
have participated in the development of our roster of existing and prospective
clients. The central principle is that the client has retained the firm, not any
individual. Members of the firm should also understand that our clients and our
employees are central to the value of the firm. Accordingly, while still an
employee, and for at least six months after the departure (unless a longer
period has been agreed to), departing members of the firm may not solicit
clients to retain, or other firm employees to join, another investment
management firm.
Any member of the organization must recognize that these elements of our
business are the property of the firm and its clients. In addition, the firm has
certain obligations not to disclose the confidential and proprietary information
of third party suppliers. None of such materials or information may be removed
from the firm or used in any way outside of Scudder Kemper either during or
after association with the firm.
In brief, the actions of anyone in the organization or of any departing member
of the organization are expected to be consistent with the spirit and intent of
this memorandum which reasserts the fact that
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no one of us can take away, use or otherwise make available to a third party
what belongs to the firm or its supplier.
For example, the following items are representative of the property of the firm
or its suppliers and are not to be removed whether they are original documents,
copies, tapes or reproductions of any kind:
o Names, addresses, telephone numbers and other client contact
and correspondence procedures.
o Records and files of our clients' accounts including the
computer database.
o Account operational procedures and instructions.
o Asset listings for clients and prospects including cost
prices, dates of acquisition and the like.
o All firm research memoranda, procedures and files, including
drafts thereof, as well as procedures, notes or tapes of
research interviews, discussions, annual reports and company
releases, brokers' reports, outside consultants' reports and
any other material pertaining to investments.
o All operating memoranda such as Standard Policy and
Procedures memoranda, operations manuals, procedures and
memoranda, and compliance checklists, manuals, procedures
and memoranda.
o All computer software programs, databases and related
documentation pertaining to account or research operations,
procedures or controls including access to and use of such
programs.
o Presentation materials (including drafts, memoranda and
other materials related thereto) prepared for marketing
purposes or client meetings, including computer software
programs and documentation of third party suppliers.
o All information pertaining to investment counsel and fund
prospects including lists and contact logs.
o Account performance data for all accounts which have been or
are under the supervision of the firm.
o Internal analyses, management information reports and
worksheets such as marketing and business plans, profit
margin studies, and compensation reviews.
These examples are only illustrative and not intended as all inclusive. In
addition, you are reminded of our long and strong tradition of confidentiality
with respect to client affairs and the confidential information of third party
suppliers and the representations we make to our clients and our suppliers in
this regard.
In order to maintain the professional nature of the firm, we have an obligation
to protect vigorously the rights of our clients and the firm. The firm may
enforce these rights pursuant to appropriate judicial proceedings.
Alternatively, the firm, in its discretion, may initiate proceedings before the
American Arbitration Association in order to resolve any controversy or claim it
may have arising out of or relating to this policy, or breach of it, and
judgment on an award rendered by the arbitrator may be entered in any court
having jurisdiction.
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PART 6: GIFTS AND ENTERTAINMENT
I. OVERVIEW
It is appropriate for employees to maintain friendly but professional
relationships with persons with whom Scudder Kemper conducts its business. These
business counterparts may include persons who are associated with Scudder
Kemper's vendors, contractors, providers of service, and members of the
investment community. It is appropriate for employees to give and/or receive
gifts, business meals and/or entertainment from such business counterparts,
provided that they are not excessive in value or frequency. The good judgment of
our employees and their supervisors is of paramount importance in ensuring
compliance with this provision.
SP&P 16 - 11A sets forth the company policy on Gifts and Entertainment, and is
incorporated into the Code of Ethics by reference.
II. GENERAL GUIDELINES
(a) Employees may not accept gifts that are excessive in value or
frequency.
(b) The following types of transactions should be approved by a supervisor
using Form 6 (The Scudder Kemper Gift Form; See Section III):
i. Gifts valued in excess of $100;
ii. Business meals valued in excess of $200; and
iii. Entertainment valued in excess of $300.
(c) Invitations which involve the payment of substantial expenses generally
should be avoided (See SP&P 16-2A). Under most circumstances lodging
and transportation charges should be considered the obligation of
Scudder Kemper.
(d) The frequency of invitations should also be taken into account,
especially entertainment. Employees generally should not accept more
than three invitations a year from any single individual, group or
organization, subject to approval from a supervisor.
(e) When analysts and product leaders accept broker invitations to research
and investment meetings, an effort should be made to use firms on our
"Approved List" or those which are bona fide candidates for the list.
It is not good business practice to accept assistance and invitations
from firms with which we are not likely to do business.
(f) Employees may not accept gifts of cash. Employees may not accept
gifts of favorable rates on financial transactions such as loans or
brokerage commissions.
III. REPORTING AND SUPERVISION
As described above, gifts valued at over $100 and the other items outlined in
II(b) hereof, must be approved by a supervisor. The supervisor must have a
corporate title of Managing Director or Senior Vice President, and must be in
the same department as the employee receiving the gift. The Scudder Kemper Gift
Form (Form 6) must be completed within ten days of receipt of the gift.
Completed gift forms are sent to Carol Beckett, at 345 Park Avenue, NY, NY
10154. In addition, gifts subject to Form 6 must be reported on the Quarterly
Personal Transaction Report.
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PART 7: FIDUCIARY AND CORPORATE ACTIVITIES
In many fiduciary and corporate activities, members of the organization are, or
will become, engaged in responsible duties involving the expenditure of time and
the application of information and experience which properly belong to the firm
or are derived from the Scudder Kemper relationship. With certain exceptions
referred to below, any compensation or profits from these activities are,
accordingly, considered to be Scudder Kemper's income.
The Ethics Committee must give WRITTEN approval to all existing or prospective
relationships and activities as described below, and no new relationship should
be initiated without written authorization on Form 7: Request For Approval of
Fiduciary, Corporate or Other Outside Activity. In those instances when approval
of a prospective fiduciary relationship, e.g., executor or trustee, has been
given and the individual subsequently is in a position to qualify and act in the
fiduciary capacity, that person is required to reapply for approval if the
character of the activity changes. The same procedures should be followed as
those for the approval of any fiduciary activity except that reference should be
made to the earlier obtained approval under "Salient Facts" on the approval
form.
EXECUTORSHIPS
The duties of an executor are often arduous, time consuming and, to a
considerable extent, foreign to our business. As a general rule, Scudder Kemper
wishes to discourage acceptance of executorships by members of the organization.
However, business considerations or family relationships may make it desirable
to accept executorships under certain wills. In these instances follow the
procedures set forth in SP&P #16-15, Acting As Executor Under A Client's Will.
In all cases, it is necessary for the individual to have the written
authorization of the firm to act as an executor.
When members of the organization accept executorships UNDER CLIENTS' WILLS, the
organization has consistently held to the belief that these individuals are
acting for Scudder Kemper and that fees received for executors' services
rendered while associated with the firm are exclusively Scudder Kemper income.
In such instances, the firm will indemnify the individual, and the individual
will be required at the time of
qualifying as executor to make a written assignment to the firm of any
executor's fees due under such executorship. Copies of this assignment and
Scudder Kemper's authorization to act as executor are to be filed in the
client's file.
Generally speaking, it is not desirable for members of the organization to
accept executorships UNDER THE WILLS OF NON-CLIENTS. Normally, however,
authorization will be given in the case of executorships for members of an
individual's immediate family assuming that arrangements for the anticipated
work load can be made without undue interference with the individual's
responsibilities to Scudder Kemper. (For example, this may require the
employment of an agent to handle the large amount of detail which is usually
involved.) In such a case, the firm would expect the individual to retain the
commission. There may be other exceptions which will be determined by the facts
of each case. All such existing or prospective relationships should be reported
in writing.
TRUSTEESHIPS
It is often desirable for members of the organization to act individually as
trustees for clients' trusts. Such relationships are not inconsistent with the
nature of our business. As a general rule, Scudder Kemper does not accept
trustee's commissions where it acts as investment counsel. As in the case of
executorships, all trusteeships must have the written approval of the firm.
<PAGE>
It is our standard practice to indemnify those individuals who act as trustees
for clients' trusts at the request of the firm. In this connection, the
individual member of the organization acting as a trustee will be asked to agree
not to claim or accept trustee's commissions for acting. This applies to trusts
which employ Scudder Kemper as investment counsel or those which are invested in
one or more of the Funds administered by Scudder Kemper.
It is recognized that individuals may be asked to serve as trustees of trusts
which do not employ Scudder Kemper. As in the case of executorships, the firm
will normally authorize individuals to act as trustees for trusts of their
immediate family. Other non-client trusteeships can conflict with our clients'
interests so that acceptance of such trusteeships will be authorized only in
unusual circumstances.
CUSTODIANSHIPS FOR MINORS
It is expected that most custodianships will be for minors of an individual's
immediate family. These will be considered as automatically authorized and do
not require written approval of the firm. However, the WRITTEN approval of
Scudder Kemper is required for all other custodianships for minors.
DIRECTORSHIPS AND CONSULTANT POSITIONS IN BUSINESS CORPORATIONS
Occasionally, members of the organization are asked to serve as directors or
consultants in business organizations. As a general policy, Scudder Kemper
considers it inadvisable for such individuals to serve in these capacities. No
such position may be accepted without the written authorization of the Ethics
Committee or its designee. In the exceptional instances where such authorization
is granted, the fees or other income resulting from such a relationship are to
be turned over to Scudder Kemper (unless the firm decides otherwise) to
compensate it for the resources made available. Scudder Kemper reserves the
right to require that any member of the organization relinquish any outside
business connection when it believes that such connection is unduly time
consuming or conflicts with the interests of the firm or its clients.
PUBLIC AND CHARITABLE POSITIONS
Scudder Kemper has consistently encouraged members of the organization to take
part in community activities and to take an active role in public and charitable
organizations. The firm expects that when accepting such duties, members of the
organization will consider possible conflicts of interest with our business as
well as the demands that such positions make upon their time. Several examples
of possible conflicts might be helpful.
When agreeing to serve in a public or charitable position, a member of the
organization should clarify in advance in writing that he or she will not
provide free continuous investment advice and management. This should be made
particularly clear where Investment Committee responsibilities are considered.
Serving without compensation on the Investment Committee of a charity which
might appropriately employ Scudder Kemper would ordinarily not be in our best
interest and prior written approval is required.
Another example of a possible conflict which should be avoided arises when a
charity is involved in fund raising. Our work gives us access to detailed
knowledge of each client's capacity to contribute and is compounded by the close
relationship which should exist between consultant and client. For any member of
the organization in the course of a charitable solicitation to take advantage of
this confidential relationship -- or even to seem to do so -- would be
unprofessional. Even under the best circumstances, the solicitation of a client
by a member of the organization is awkward and discouraged.
<PAGE>
Members of the organization should also make it clear in writing to the public
or charitable organization that they will not participate in any search or
selection process for a future investment adviser. It is expected that the
participation of a member of the Scudder Kemper organization in a charitable
organization will not preclude the firm from being a candidate for employment as
investment counsel to that organization.
OUTSIDE ACTIVITIES
The foregoing does not cover all situations in which a member of the
organization may be in a position to realize financial gain which should be
treated as belonging to Scudder Kemper. It is expected that opportunities for
substantial compensation or profit from sources outside of the firm may, for
example, be offered to a member of the organization by reason of his association
with the firm or because of his investment and financial skill or experience.
Scudder Kemper reserves the right to decide if such compensation or profit
should be accepted and, if accepted, whether or not it should be turned over to
Scudder Kemper. All such cases must be reported promptly in writing for Ethics
Committee review and before they are operative.
NEW EMPLOYEES
It is desirable that any fiduciary or corporate activities of a prospective
employee be reviewed by Scudder Kemper prior to the conclusion of arrangements
for employment. However, if such activities have not been reported prior to
employment, they should be reported in writing as promptly as possible
thereafter. It is recognized that there may be justification for treating such
activities which ante-date the individual's association with the firm on a
different basis than might otherwise apply. However, Scudder Kemper reserves the
right to make what it considers an appropriate determination in each case. It
also reserves the right to require that any employee give up any fiduciary or
corporate activity which it finds in conflict with the best interests of the
firm or any of its clients.
WRITTEN APPROVAL
Where written approval is required, Form 7 should be filed with the Ethics
Committee. A separate form should be filed for each trust, executorship and the
like. Note that once an activity has been approved, no additional requests for
approval need be filed unless the character of the activity changes, e.g., if a
member of the organization has obtained approval to be named as a prospective
executor or trustee, that individual should submit a new request to qualify and
serve in this capacity by resubmitting a new Form 7 for review.
PART 8: EXTERNAL COMMUNICATIONS
In our sales, marketing, client reporting and corporate communications
activities, the Firm's products, services, capabilities, and past and potential
accomplishments must be presented fairly, accurately and clearly. All marketing
materials must be reviewed by the Global Compliance Group in accordance with
SP&P #12-7. All press interviews must be cleared in advance by Public Relations.
Reports to clients, including client account valuation and performance data,
must be fair.
<PAGE>
PART 9: REPORTING APPARENT VIOLATIONS
Scudder Kemper believes that maintaining a strong compliance culture is in the
best interest of the firm and its clients, in that it helps both to maintain
client and employee confidence, and to avoid the costs (both reputational and
monetary) associated with compliance violations. While reducing compliance
violations to a minimum is our goal, realistically speaking, violations may
occur from time to time in an organization as large as ours. When violations
occur, it is important that they be dealt with immediately by the appropriate
members of the organization. We encourage all Scudder Kemper employees to report
apparent compliance violations TO THE LEGAL DEPARTMENT. Violations that go
unreported have the potential to cause far more damage than violations that are
taken care of immediately upon discovery.
It is extremely important that apparent compliance violations be reported
through the appropriate channels. The Legal Department should be contacted in
all cases except cases involving potential violations of Human Resources
policies, which should be reported directly to Human Resources. While resolving
apparent compliance violations should virtually always involve the management of
the business unit involved, it is not necessarily appropriate (nor is it
required) that an employee report apparent violations to his or her manager, as
well as to the Legal Department.
Reports of apparent compliance violations will be treated confidentially to the
fullest extent possible. In no event will the firm tolerate retaliation against
persons who report apparent compliance violations. We realize that employees may
lack the training to distinguish actual from apparent compliance violations, and
accordingly, the fact that a reported incident proves, after investigation, not
to have involved a compliance violation will not result in any sanction against
the reporter, provided that the report was made in good faith.
PART 10: CONDITION OF EMPLOYMENT OR SERVICE
Compliance with the Code of Ethics is a condition of employment or continued
affiliation with Scudder Kemper and the Scudder Kemper Funds, and conduct not in
accordance shall constitute grounds for actions including termination of
employment or removal from office.
Employees must certify annually that they have read and agree to comply in all
respects with this Code of Ethics and that they have disclosed or reported all
personal transactions it requires to be disclosed or reported. (See Form 4:
Annual Acknowledgement of Obligations Under Code of Ethics). In addition, each
year every member of the organization is required to file with the Legal
Department a complete list of all fiduciary, corporate, and other relationships
of the nature described in Part 7 above. The report is titled Form 8: Annual
Review of Personal Activities and is attached to this memorandum.
OPPENHEIMER CAPITAL
CODE OF ETHICS
Effective July 1, 1999
INTRODUCTION
This Code of Ethics is based on the principle that you, as an officer or
employee of Oppenheimer Capital (OpCap), owe a fiduciary duty to the
shareholders of the registered investment companies (the Funds) and other
clients (together with the Funds, the Advisory Clients) for which OpCap serves
as an adviser or subadviser. Accordingly, you must avoid activities, interests
and relationships that might interfere or appear to interfere with making
decisions in the best interests of our Advisory Clients.
At all times, you must:
1. PLACE THE INTERESTS OF OUR ADVISORY CLIENTS FIRST. In other
words, as a fiduciary you must scrupulously avoid serving your
own personal interests ahead of the interests of our Advisory
Clients. You may not cause an Advisory Client to take action, or
not to take action, for your personal benefit rather than the
benefit of the Advisory Client. For example, you would violate
this Code if you caused an Advisory Client to purchase a Security
you owned for the purpose of increasing the price of that
Security. If you are an employee who makes decisions about
investments (each a Portfolio Manager) or provides information or
advice to a Portfolio Manager or helps execute a Portfolio
Manager's decisions (together with Portfolio Managers, each a
Portfolio Employee), you would also violate this Code if you made
a personal investment in a Security that might be an appropriate
investment for an Advisory Client without first considering the
Security as an investment for the Advisory Client.
2. CONDUCT ALL OF YOUR PERSONAL SECURITIES TRANSACTIONS IN FULL
COMPLIANCE WITH THIS CODE AND THE PIMCO ADVISORS INSIDER TRADING
POLICY. OpCap encourages you and your family to develop personal
investment programs. However, you must not take any action in
connection with your personal investments that could cause even
the appearance of unfairness or impropriety. Accordingly, you
must comply with the policies and procedures set forth in this
Code under the heading Personal Securities Transactions. In
addition, you must comply with the policies and procedures set
forth in the PIMCO Advisors Insider Trading Policy, which is
attached to this Code as Appendix I. Doubtful situations should
be resolved against your personal trading.
3. AVOID TAKING INAPPROPRIATE ADVANTAGE OF YOUR POSITION. The
receipt of investment opportunities, gifts or gratuities from
persons seeking business with OpCap directly or on behalf of an
Advisory Client could call into question the independence of your
business judgment. Accordingly, you must comply with the policies
and procedures set forth in this Code under the heading Fiduciary
Duties. Doubtful situations should be resolved against your
personal interest.
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TABLE OF CONTENTS
SECTION PAGE
PERSONAL SECURITIES TRANSACTIONS 3
Trading in General 3
Securities 3
Exempt Securities 3
Beneficial Ownership 4
Exempt Transactions 5
Preclearance Procedures 6
Initial Public Offerings 6
Private Placements 6
Short-Term Trading Profits 7
Use of Broker-Dealers 7
REPORTING 8
Reporting of Transactions 8
Annual Reports 8
FIDUCIARY DUTIES 8
Gifts 8
Service as a Director 8
COMPLIANCE 9
Certificate of Receipt 9
Certificate of Compliance 9
Remedial Actions 9
REPORTS TO DIRECTORS AND TRUSTEES 9
Reports of Significant Remedial Action 9
Annual Reports 9
APPENDICES:THE FOLLOWING APPENDICES ARE ATTACHED TO AND ARE A PART OF THIS CODE:
I. PIMCO Advisors Insider Trading Policy and Procedures 11
II. Form for preclearance of Non-Exempt Securities transactions 18
III. Form for annual report of personal Securities holdings 19
IV. Form for acknowledgment of receipt of this Code 21
V. Form for annual certification of compliance with this Code 22
VI. Policy Regarding Special Trading Procedures For Securities
of PIMCO Advisors Holdings L.P. 23
QUESTIONS
Questions regarding this Code should be addressed to a Compliance Officer. The
Compliance Officers are Frank Poli and Joseph DiBartolo.
2
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PERSONAL SECURITIES TRANSACTIONS
TRADING IN GENERAL
You may not engage, and you may not permit any other person or entity to engage,
in any purchase or sale of any Security (other than an Exempt Security), of
which you have, or by reason of the transaction will acquire, Beneficial
Ownership, unless (i) the transaction is an Exempt Transaction or (ii) such
transaction is approved by a Compliance Officer and precleared.
SECURITIES
The following are Securities:
Any note, stock, treasury stock, bond, debenture, evidence of indebtedness,
certificate of interest or participation in any profit-sharing agreement,
collateral-trust certificate, preorganization certificate or subscription,
transferable share, investment contract, voting-trust certificate, certificate
of deposit for a security, fractional undivided interest in oil, gas, or other
mineral rights, any put, call, straddle, option or privilege on any security
(including a certificate of deposit) or on any group or index of securities
(including any interest therein or based on the value thereof), or any put,
call, straddle, option or privilege entered into on a national securities
exchange relating to foreign currency, or, in general, any interest or
instrument commonly known as a security, or any certificate of interest or
participation in, temporary or interim certificate for, receipt for, guarantee
of, or warrant or right to subscribe to or purchase, any security.
The following are not Securities:
Commodities, futures and options traded on a commodities exchange, including
currency futures. However, futures and options on any group or index of
Securities are Securities.
EXEMPT SECURITIES
The following are Exempt Securities:
1. Securities issued by the Government of the United States.
2. Bankers' acceptances, bank certificates of deposit, commercial
paper, bank repurchase agreements and such other money market
instruments as may be designated from time to time by the
committee appointed by OpCap to administer this Code (the
Compliance Committee).
3. Shares of registered open-end investment companies.
3
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BENEFICIAL OWNERSHIP
You are considered to have Beneficial Ownership of Securities if you have or
share a direct or indirect Pecuniary Interest in the Securities.
You have a Pecuniary Interest in Securities if you have the opportunity,
directly or indirectly, to profit or share in any profit derived from a
transaction in the Securities.
The following are examples of an indirect Pecuniary Interest in Securities:
1. Securities held by members of your immediate family sharing
the same household; however, this presumption may be rebutted
by convincing evidence that profits derived from transactions
in these Securities will not provide you with any economic
benefit.
Immediate family means any child, stepchild, grandchild,
parent, stepparent, grandparent, spouse, sibling,
mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law, and includes any adoptive
relationship.
2. Your interest as a general partner in Securities held by a
general or limited partnership.
3. Your interest as a manager-member in the Securities held by a
limited liability company.
You do not have an indirect Pecuniary Interest in Securities held by a
corporation, partnership, limited liability company or other entity in which you
hold an equity interest, unless you are a controlling equityholder or you have
or share investment control over the Securities held by the entity.
The following circumstances constitute Beneficial Ownership by you of Securities
held by a trust:
1. Your ownership of Securities as a trustee where either you or
members of your immediate family have a vested interest in the
principal or income of the trust.
2. Your ownership of a vested beneficial interest in a trust.
3. Your status as a settlor of a trust, unless the consent of
all of the beneficiaries is required in order for you to
revoke the trust.
4
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EXEMPT TRANSACTIONS
The following are Exempt Transactions:
1. Any transaction in Securities in an account over which you do
not have any direct or indirect influence or control. There is
a presumption that you can exert some measure of influence or
control over accounts held by members of your immediate family
sharing the same household, but this presumption may be
rebutted by convincing evidence.
2. Purchases of Securities under dividend reinvestment plans.
3. Purchases of Securities by exercise of rights issued to the
holders of a class of Securities pro rata, to the extent they
are issued with respect to Securities of which you have
Beneficial Ownership.
4. Acquisitions or dispositions of Securities as the result of a
stock dividend, stock split, reverse stock split, merger,
consolidation, spin-off or other similar corporate
distribution or reorganization applicable to all holders of a
class of Securities of which you have Beneficial Ownership.
5. Subject to the restrictions on participation in private
placements set forth below under Private Placements,
acquisitions or dispositions of Securities of a private
issuer. A private issuer is a corporation, partnership,
limited liability company or other entity which has no
outstanding publicly-traded Securities, and no outstanding
Securities which are exercisable to purchase, convertible into
or exchangeable for publicly-traded Securities. However, you
will have Beneficial Ownership of Securities held by a private
issuer whose equity Securities you hold, unless you are not a
controlling equityholder and do not have or share investment
control over the Securities held by the entity.
6. Such other classes of transactions as may be exempted from
time to time by the Compliance Committee based upon a
determination that the transactions are unlikely to violate
Rule 17j-1 under the Investment Company Act of 1940, as
amended. The Compliance Committee may exempt designated
classes of transactions from any of the provisions of this
Code except the provisions set forth below under Reporting.
7. Such other specific transactions as may be exempted from time
to time by a Compliance Officer. On a case-by-case basis when
no abuse is involved a Compliance Officer may exempt a
specific transaction from any of the provisions of this Code
except the provisions set forth below under Reporting.
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PRECLEARANCE PROCEDURES
If a Securities transaction requires preclearance:
1. The Securities may not be purchased or sold if at the time of
preclearance there is a pending buy or sell order on behalf of
an Advisory Client in the same Security or an equivalent
Security or if you knew or should have known that an Advisory
Client would be trading in that security or an equivalent
Security on the same day.
An equivalent Security of a given Security is (i ) a Security
issuable upon exercise, conversion or exchange of the given
Security, or (ii) a Security exercisable to purchase,
convertible into or exchangeable for the given Security, or
(iii) a Security otherwise representing an interest in or
based on the value of the given Security.
2. If you are a Portfolio Manager (or a person identified by the
CIO as having access to the same information), the Securities
may not be purchased or sold during the period which begins
seven days before and ends seven days after the day on which
an Advisory Client trades in the same Security or an
equivalent Security; except that you may, if you preclear the
transaction, (i) trade same way to an Advisory Client after
its trading is completed, or (ii) trade opposite way to an
Advisory Client before its trading is commenced.
If you are a Portfolio Manager, and you preclear a Securities
transaction and trade same way to an Advisory Client before
its trading is commenced, the transaction is not a violation
of this Code unless you knew or should have known that the
Advisory Client would be trading in that Security or an
equivalent Security within seven days after your trade.
3. The Securities may be purchased or sold only if you have asked
the Trading Department to preclear the purchase or sale, the
Trading Department has given you preclearance in writing, and
the purchase or sale is executed by the close of business on
the day preclearance is given. The form for requesting
preclearance is attached to this Code as Appendix II.
INITIAL PUBLIC OFFERINGS
If you are a Portfolio Employee, you may not acquire Beneficial Ownership of any
Securities (other than Exempt Securities) in an initial public offering.
PRIVATE PLACEMENTS
If you are a Portfolio Employee, you may not acquire Beneficial Ownership of any
Securities (other than Exempt Securities) in a private placement, unless you
have received the prior written approval of the Chief Executive Officer or the
General Counsel of PIMCO Advisors. Approval will be not be given unless a
determination is made that the investment opportunity should not be reserved for
one or more Advisory Clients, and that the opportunity to invest has not been
offered to you by virtue of your position.
If you are a Portfolio Employee, and you have acquired Beneficial Ownership of
Securities in a private placement, you must disclose your investment when you
play a part in any consideration of an investment by an Advisory Client in the
issuer of the Securities, and any decision to make such
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an investment must be independently reviewed by a Portfolio Manager who does not
have Beneficial Ownership of any Securities of the issuer.
SHORT-TERM TRADING PROFITS
If you are a Portfolio Employee, you may not profit from the purchase and sale,
or sale and purchase, within 60 calendar days, of the same Securities or
equivalent Securities (other than Exempt Securities) of which you have
Beneficial Ownership. Any such short-term trade must be unwound, or if that is
not practical, the profits must be contributed to a charitable organization.
You are considered to profit from a short-term trade if Securities of which you
have Beneficial Ownership are sold for more than the purchase price of the same
Securities or equivalent Securities, even though the Securities purchased and
the Securities sold are held of record or beneficially by different persons or
entities.
PUTS, CALLS, STRADDLES AND OPTIONS; SHORT SALES
You may not acquire Beneficial Ownership of any put, call, straddle, option or
privilege on any Securities on the Approved List or any equivalent Securities or
sell any such Securities or equivalent Securities short. You may not acquire
Beneficial Ownership of any put, call, straddle, option or privilege on any
Securities which are not shares of a large-cap issuer.
A large-cap issuer is an issuer with a total market capitalization in excess of
one billion dollars and an average daily trading volume during the preceding
calendar quarter, on the principal securities exchange (including NASDAQ) on
which its shares are traded, in excess of 100,000 shares.
A list of large-cap issuers will be prepared as of the last business day of each
calendar quarter, will be available for review with any Compliance Officer, and
will be effective for the following calendar quarter.
USE OF BROKER-DEALERS
You may not engage, and you may not permit any other person or entity to engage,
in any purchase or sale of publicly-traded Securities (other than Exempt
Securities) of which you have, or by reason of the transaction will acquire,
Beneficial Ownership, except through a registered broker-dealer. You will engage
in purchases or sales of publicly-traded Securities only through Charles Schwab
& Co. or such other registered broker-dealer as may be specified by the
Compliance Committee.
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REPORTING
REPORTING OF TRANSACTIONS
You must cause each broker-dealer which maintains an account for Securities of
which you have Beneficial Ownership, to provide to the Compliance Committee, on
a timely basis, duplicate copies of confirmations of all transactions in the
account and of periodic statements for the account, and you must report to the
Compliance Committee, on a timely basis, all transactions effected without the
use of a broker in Securities (other than Exempt Securities) of which you have
Beneficial Ownership.
ANNUAL REPORTS
You must disclose your holdings of all Securities (other than Exempt Securities)
of which you have Beneficial Ownership upon commencement of your employment by
OpCap or the effective date of this Code, whichever occurs later, and annually
thereafter. The form for this purpose is attached to this Code as Appendix III.
FIDUCIARY DUTIES
GIFTS
You may not accept any investment opportunity, gift, gratuity or other thing of
more than nominal value, from any person or entity that does business, or
desires to do business, with OpCap directly or on behalf of an Advisory Client.
You may accept gifts from a single giver so long as their aggregate annual value
does not exceed the equivalent of $100. You may attend business meals, business
related conferences, sporting events and other entertainment events at the
expense of a giver, so long as the expense is reasonable and both you and the
giver are present. You must obtain prior written approval from your supervisor
(the person to whom you report) for all air travel, conferences, and business
events that require overnight accommodations. You must provide a copy of such
written approval to the Compliance Committee.
SERVICE AS A DIRECTOR
If you are a Portfolio Employee, you may not serve on the board of directors or
other governing board of a publicly traded entity, unless you have received the
prior written approval of the Chief Executive Officer or the General Counsel of
PIMCO Advisors. Approval will not be given unless a determination is made that
your service on the board would be consistent with the interests of our Advisory
Clients. If you are permitted to serve on the board of a publicly traded entity,
you will be isolated from those Portfolio Employees who make investment
decisions with respect to the securities of that entity, through a "Chinese
Wall" or other procedures.
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COMPLIANCE
CERTIFICATE OF RECEIPT
You are required to acknowledge receipt of your copy of this Code. A form for
this purpose is attached to this Code as Appendix IV.
CERTIFICATE OF COMPLIANCE
You are required to certify upon commencement of your employment or the
effective date of this Code, whichever occurs later, and annually thereafter,
that you have read and understand this Code and recognize that you are subject
to this Code. Each annual certificate will also state that you have complied
with the requirements of this Code during the prior year, and that you have
disclosed, reported, or caused to be reported all transactions during the prior
year in Securities (other than Exempt Securities) of which you had or acquired
Beneficial Ownership. A form for this purpose is attached to this Code as
Appendix V.
REMEDIAL ACTIONS
If you violate this Code, you are subject to remedial actions, which may
include, but are not limited to, disgorgement of profits, imposition of a
substantial fine, demotion, suspension or termination.
REPORTS TO DIRECTORS AND TRUSTEES
REPORTS OF SIGNIFICANT REMEDIAL ACTION
The General Counsel of PIMCO Advisors or his delegate will on a timely basis
inform the directors or trustees of each Fund which is an Advisory Client of
each significant remedial action taken in response to a violation of this Code.
A significant remedial action means any action that has a significant financial
effect on the violator, such as disgorgement of profits, imposition of a
substantial fine, demotion, suspension or termination.
ANNUAL REPORTS
The General Counsel of PIMCO Advisors or his delegate will report annually to
the Management Board of PIMCO Advisors and the directors or trustees of each
Fund which is an Advisory Client with regard to efforts to ensure compliance by
the officers and employees of OpCap with their fiduciary obligations to our
Advisory Clients.
The annual report will, at a minimum:
1. Summarize existing procedures regarding personal Securities
transactions, and any changes in such procedures during
the prior year;
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2. Summarize the violations of this Code, if any, which resulted
in significant remedial action during the prior year; and
3. Describe any recommended changes in existing procedures or
restrictions based upon experience with this Code, evolving
industry practices, or developments in applicable laws or
regulations.
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APPENDIX I
PIMCO ADVISORS
INSIDER TRADING POLICY AND PROCEDURES
Effective as of May 1, 1995
SECTION I. POLICY STATEMENT ON INSIDER TRADING
A. Policy Statement on Insider Trading
PIMCO Advisors L.P. ("PIMCO Advisors"), its affiliates, PIMCO Partners, G.P.
("PIMCO GP") and PIMCO Fund Distributors LLC ("PFD") collectively the "Company"
or "PIMCO Advisors") forbid any of their officers, directors or employees from
trading, either personally or on behalf of others (such as, mutual funds and
private accounts managed by PIMCO Advisors), on the basis of material non-public
information or communicating material non-public information to others in
violation of the law. This conduct is frequently referred to as "insider
trading". This is a group wide policy.
The term "insider trading" is not defined in the federal securities laws, but
generally is used to refer to the use of material non-public information to
trade in securities or to communications of material non-public information to
others in breach of a fiduciary duty.
While the law concerning insider trading is not static, it is generally
understood that the law prohibits:
(1) trading by an insider, while in possession of material non-public
information, or
(2) trading by a non-insider, while in possession of material
non-public information, where the information was disclosed to
the non-insider in violation of an insider's duty to keep it
confidential, or
(3) communicating material non-public information to others in breach of
a fiduciary duty.
This policy applies to every such officer, director and employee and extends to
activities within and outside their duties at the Company. Every officer,
director and employee must read and retain this policy statement. Any questions
regarding this policy statement and the related procedures set forth herein
should be referred to a Compliance Officer of PIMCO Advisors.
The remainder of this memorandum discusses in detail the elements of insider
trading, the penalties for such unlawful conduct and the procedures adopted by
the Company to implement its policy against insider trading.
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1. TO WHOM DOES THIS POLICY APPLY?
This Policy applies to all employees, officers and directors (direct or
indirect) of the Company ("Covered Persons"), as well as to any transactions in
any securities participated in by family members, trusts or corporations
controlled by such persons. In particular, this Policy applies to securities
transactions by:
the Covered Person's spouse;
the Covered Person's minor children;
any other relatives living in the Covered Person's household;
a trust in which the Covered Person has a beneficial interest, unless
such person has no direct or indirect control over the trust;
a trust as to which the Covered Person is a trustee;
a revocable trust as to which the Covered Person is a settlor;
a corporation of which the Covered Person is an officer, director or
10% or greater stockholder; or
a partnership of which the Covered Person is a partner (including most
investment clubs) unless the Covered Person has no direct or indirect
control over the partnership.
2. WHAT IS MATERIAL INFORMATION?
Trading on inside information is not a basis for liability unless the
information is material. "Material information" generally is defined as
information for which there is a substantial likelihood that a reasonable
investor would consider it important in making his or her investment decisions,
or information that is reasonably certain to have a substantial effect on the
price of a company's securities.
Although there is no precise, generally accepted definition of materiality,
information is likely to be "material" if it relates to significant changes
affecting such matters as:
dividend or earnings expectations;
write-downs or write-offs of assets;
additions to reserves for bad debts or contingent liabilities;
expansion or curtailment of company or major division operations;
proposals or agreements involving a joint venture, merger,
acquisition, divestiture, or leveraged buy-out;
new products or services;
exploratory, discovery or research developments;
criminal indictments, civil litigation or government investigations;
disputes with major suppliers or customers or significant changes in
the relationships with such parties;
labor disputes including strikes or lockouts;
substantial changes in accounting methods;
major litigation developments;
major personnel changes;
debt service or liquidity problems;
bankruptcy or insolvency;
extraordinary management developments;
public offerings or private sales of debt or equity securities;
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calls, redemptions or purchases of a company's own stock;
issuer tender offers; or
recapitalizations.
Information provided by a company could be material because of its expected
effect on a particular class of the company's securities, all of the company's
securities, the securities of another company, or the securities of several
companies. Moreover, the resulting prohibition against the misuses of "material"
information reaches all types of securities (whether stock or other equity
interests, corporate debt, government or municipal obligations, or commercial
paper) as well as any option related to that security (such as a put, call or
index security).
Material information does not have to relate to a company's business. For
example, in Carpenter v. U.S., 108 U.S. 316 (1987), the Supreme Court considered
as material certain information about the contents of a forthcoming newspaper
column that was expected to affect the market price of a security. In that case,
a reporter for The Wall Street Journal was found criminally liable for
disclosing to others the dates that reports on various companies would appear in
the Journal and whether those reports would be favorable or not.
3. WHAT IS NON-PUBLIC INFORMATION?
In order for issues concerning insider trading to arise, information must not
only be "material", it must be "non-public". "Non-public" information is
information which has not been made available to investors generally.
Information received in circumstances indicating that it is not yet in general
circulation or where the recipient knows or should know that the information
could only have been provided by an "insider" is also deemed "non-public"
information.
At such time as material, non-public information has been effectively
distributed to the investing public, it is no longer subject to insider trading
restrictions. However, for "non-public" information to become public
information, it must be disseminated through recognized channels of distribution
designed to reach the securities marketplace.
To show that "material" information is public, you should be able to point to
some fact verifying that the information has become generally available, for
example, disclosure in a national business and financial wire service (Dow Jones
or Reuters), a national news service (AP or UPI), a national newspaper (The Wall
Street Journal, The New York Times or Financial Times), or a publicly
disseminated disclosure document (a proxy statement or prospectus). The
circulation of rumors or "talk on the street", even if accurate, widespread and
reported in the media, does not constitute the requisite public disclosure. The
information must not only be publicly disclosed, there must also be adequate
time for the market as a whole to digest the information. Although timing may
vary depending upon the circumstances, a good rule of thumb is that information
is considered non-public until the third business day after public disclosure.
Material non-public information is not made public by selective dissemination.
Material information improperly disclosed only to institutional investors or to
a fund analyst or a favored group of analysts retains its status as "non-public"
information which must not be disclosed or otherwise misused. Similarly, partial
disclosure does not constitute public dissemination. So long as any material
component of the "inside" information possessed by the Company has yet to be
publicly disclosed, the information is deemed "non-public" and may not be
misused.
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INFORMATION PROVIDED IN CONFIDENCE. Occasionally, one or more directors,
officers, or employees of the Company may become temporary "insiders" because of
a fiduciary or commercial relationship. For example, personnel at the Company
may become insiders when an external source, such as a company whose securities
are held by one or more of the accounts managed by the Company, entrusts
material, non-public information to the Company's portfolio managers or analysts
with the expectation that the information will remain confidential.
As an "insider", the Company has a fiduciary responsibility not to breach the
trust of the party that has communicated the "material non-public" information
by misusing that information. This fiduciary duty arises because the Company has
entered or has been invited to enter into a commercial relationship with the
client or prospective client and has been given access to confidential
information solely for the corporate purposes of that client or prospective
client. This obligation remains whether or not the Company ultimately
participates in the transaction.
INFORMATION DISCLOSED IN BREACH OF A DUTY. Analysts and portfolio managers at
the Company must be especially wary of "material non-public" information
disclosed in breach of a corporate insider's fiduciary duty. Even where there is
no expectation of confidentiality, a person may become an "insider" upon
receiving material, non-public information in circumstances where a person
knows, or should know, that a corporate insider is disclosing information in
breach of the fiduciary duty he or she owes the corporation and its
shareholders. Whether the disclosure is an improper "tip" that renders the
recipient a "tippee" depends on whether the corporate insider expects to benefit
personally, either directly or indirectly, from the disclosure. In the context
of an improper disclosure by a corporate insider, the requisite "personal
benefit" may not be limited to a present or future monetary gain. Rather, a
prohibited personal benefit could include a reputational benefit, an expectation
of a "quid pro quo" from the recipient or the recipient's employer by a gift of
the "inside" information.
A person may, depending on the circumstances, also become an "insider" or
"tippee" when he or she obtains apparently material, non-public information by
happenstance, including information derived from social situations, business
gatherings, overheard conversations, misplaced documents, and "tips" from
insiders or other third parties.
4. IDENTIFYING MATERIAL INFORMATION
Before trading for yourself or others, including investment companies or private
accounts managed by the Company, in the securities of a company about which you
may have potential material, non-public information, ask yourself the following
questions:
i. Is this information that an investor could consider important in making
his or her investment decisions? Is this information that could
substantially affect the market price of the securities if generally
disclosed?
ii. To whom has this information been provided? Has the information been
effectively communicated to the marketplace by being published in The
Financial Times, Reuters, The Wall Street Journal or other publications
of general circulation?
Given the potentially severe regulatory, civil and criminal sanctions to which
you the Company and its personnel could be subject, any director, officer and
employee uncertain as to whether the
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information he or she possesses is material non-public" information should
immediately take the following steps:
i. Report the matter immediately to a Compliance Officer or the General
Counsel of PIMCO Advisors;
ii. Do not purchase or sell the securities on behalf of yourself or others,
including investment companies or private accounts managed by PIMCO
Advisors; and
iii. Do not communicate the information inside or outside the Company,
other than to a Compliance Officer or the General Counsel of PIMCO
Advisors.
After the Compliance Officer or General Counsel has reviewed the issue, you will
be instructed to continue the prohibitions against trading and communication or
will be allowed to trade and communicate the information.
5. PENALTIES FOR INSIDER TRADING
Penalties for trading on or communicating material non-public information are
severe, both for individuals involved in such unlawful conduct and their
employers. A person can be subject to some or all of the penalties below even if
he or she does not personally benefit from the violation. Penalties include:
civil injunctions
treble damages
disgorgement of profits
jail sentences
fines for the person who committed the violation of up to three
times the profit gained or loss avoided, whether or not the person
actually benefited, and
fines for the employer or other controlling person of up to the
greater of $1,000,000 or three times the amount of the profit
gained or loss avoided.
In addition, any violation of this policy statement can be expected to result in
serious sanctions by the Company, including dismissal of the persons involved.
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SECTION II. PROCEDURES TO IMPLEMENT THE POLICY AGAINST INSIDER TRADING
A. Procedures to Implement the Policy Against Insider Trading
The following procedures have been established to aid the officers, directors
and employees of PIMCO Advisors in avoiding insider trading, and to aid PIMCO
Advisors in preventing, detecting and imposing sanctions against insider
trading. Every officer, director and employee of PIMCO Advisors must follow
these procedures or risk serious sanctions, including dismissal, substantial
personal liability and criminal penalties.
TRADING RESTRICTIONS AND REPORTING REQUIREMENTS
1. No employee, officer or director of PIMCO Advisors who possesses
material non-public information relating to PIMCO Advisors, may buy or
sell any securities of PIMCO Advisors Holdings L.P. or engage in any
other action to take advantage of, or pass on to others, such material
non-public information.
2. No employee, officer or director of PIMCO Advisors who obtains material
non-public information which relates to any other company or entity in
circumstances in which such person is deemed to be an insider or is
otherwise subject to restrictions under the federal securities laws may
buy or sell securities of that company or otherwise take advantage of,
or pass on to others, such material non-public information.
3. No employee, officer or director of PIMCO Advisors shall engage in a
securities transaction with respect to the securities of PIMCO Advisors
Holdings L.P., except in accordance with the specific procedures
published from time to time by PIMCO Advisors.
4. Each employee, officer and director of PIMCO Advisors shall submit
reports of every securities transaction involving securities of PIMCO
Advisors Holdings L.P. (if applicable) to a Compliance Officer in
accordance with the terms of PIMCO Advisors' Code of Ethics as they
relate to any other securities transaction.
5. No employee shall engage in a securities transaction with respect to
any securities of any other company, except in accordance with the
specific procedures set forth in PIMCO Advisors' Code of Ethics.
6. Employees shall submit reports concerning each securities transaction
in accordance with the terms of the Code of Ethics and verify their
personal ownership of securities in accordance with the procedures set
forth in the Code of Ethics.
7. Because even inadvertent disclosure of material non-public information
to others can lead to significant legal difficulties, officers,
directors and employees of PIMCO Advisors should not discuss any
potentially material non-public information concerning PIMCO Advisors
or other companies, including other officers, employees and directors,
except as specifically required in the performance of their duties.
B. Chinese Wall Procedures
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The Insider Trading and Securities Fraud Enforcement Act in the US requires the
establishment and strict enforcement of procedures reasonably designed to
prevent the misuse of "inside" information1. Accordingly, you should not discuss
material non-public information about PIMCO Advisors or other companies with
anyone, including other employees, except as required in the performance of your
regular duties. In addition, care should be taken so that such information is
secure. For example, files containing material non-public information should be
sealed; access to computer files containing material non-public information
should be restricted.
C. Resolving Issues Concerning Insider Trading
The federal securities laws, including the US laws governing insider trading,
are complex. If you have any doubts or questions as to the materiality or
non-public nature of information in your possession or as to any of the
applicability or interpretation of any of the foregoing procedures or as to the
propriety of any action, you should contact your Compliance Officer. Until
advised to the contrary by a Compliance Officer, you should presume that the
information is material and non-public and you should not trade in the
securities or disclose this information to anyone.
- --------
1 The antifraud provisions of United States securities laws reach insider
trading or tipping activity worldwide which defrauds domestic securities
markets. In addition, the Insider Trading and Securities Fraud Enforcement Act
specifically authorizes the SEC to conduct investigations at the request of
foreign governments, without regard to whether the conduct violates United
States law.
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APPENDIX II
EMPLOYEE TRADE PRECLEARANCE FORM
PLEASE USE A SEPARATE FORM FOR EACH SECURITY
- --------------------------------------------------------------------------------
Name of Employee (please print)
- --------------- -------------------- ---------------- -------------------------
Department Supervisor Telephone Date
- --------------- -------------------- ---------------- -------------------------
Broker Account Number Telephone Sales Representative
( )
- --------------------------------------------------------------------------------
- ---------------------------------------------------- --------------------------
|_| Buy |_| Sell Ticker Symbol Price: Limit _______ Market |_|
-------------
- --------------------------------------------------------------------------------
- ----------------------------------- -------------------------------------------
Quantity Issue (Full Security Description)
- ----------------------------------- -------------------------------------------
- -------------------------------------------------------------------------------
Special Instructions
- -------------------------------------------------------------------------------
Approvals
- -------------------------------------------------------------------------------
This area reserved for Trading Department use only
- -------------------------------------------------------------------------------
Trade Has Been Date Approved Approved By
|_| Approved |_| Not Approved
- ------------------------------ ------------------------ --------------------
- -------------------------------------------------------------------------------
Legal / Compliance (if required)
- -------------------------------------------------------------------------------
APPROVALS ARE VALID UNTIL THE CLOSE OF BUSINESS ON THE DAY APPROVAL HAS BEEN
GRANTED. ACCORDINGLY, GTC (GOOD TILL CANCELED) ORDERS ARE PROHIBITED. IF A
TRADE IS NOT EXECUTED BY THE CLOSE OF BUSINESS RESUBMITTING A NEW
PRECLEARANCE FORM IS REQUIRED. IT IS EACH EMPLOYEE'S RESPONSIBILITY TO
COMPLY WITH ALL PROVISIONS OF THE CODE. OBTAINING PRECLEARANCE SATISFIES THE
PRECLEARANCE REQUIREMENTS OF THE CODE AND DOES NOT IMPLY COMPLIANCE WITH THE
CODE'S OTHER PROVISIONS.
PRECLEARANCE PROCEDURES APPLY TO ALL EMPLOYEES AND THEIR IMMEDIATE FAMILY
(AS DEFINED BY THE CODE) INCLUDING: A) ALL ACCOUNTS IN THE NAME OF THE
EMPLOYEE OR THE EMPLOYEE'S SPOUSE OR MINOR CHILDREN; B) ALL ACCOUNTS IN
WHICH ANY OF SUCH PERSONS HAVE A BENEFICIAL INTEREST; AND C) ALL OTHER
ACCOUNTS OVER WHICH ANY SUCH PERSON EXERCISES ANY INVESTMENT DISCRETION.
PLEASE SEE THE CODE FOR THE COMPLETE DEFINITION OF IMMEDIATE FAMILY.
BY SIGNING BELOW THE EMPLOYEE CERTIFIES THE FOLLOWING: THE EMPLOYEE AGREES
THAT THE ABOVE ORDER IS IN COMPLIANCE WITH THE CODE OF ETHICS AND IS NOT
BASED ON KNOWLEDGE OF AN ACTUAL CLIENT ORDER WITHIN THE PREVIOUS SEVEN
CALENDAR DAYS IN THE SECURITY THAT IS BEING PURCHASED OR SOLD, OR KNOWLEDGE
THAT THE SECURITY IS BEING CONSIDERED FOR PURCHASE OR SALE IN ONE OR MORE
SPECIFIC CLIENT ACCOUNTS, OR KNOWLEDGE OF A CHANGE OR PENDENCY OF A CHANGE
OF AN INVESTMENT MANAGEMENT RECOMMENDATION. THE EMPLOYEE ALSO ACKNOWLEDGES
THAT HE/SHE IS NOT IN POSSESSION OF MATERIAL, INSIDE INFORMATION PERTAINING
TO THE SECURITY OR ISSUER OF THE SECURITY.
- ---------------------------------- ------------------------------------------
Employee Signature Date
PLEASE SEND A COPY OF THIS COMPLETED FORM TO THE
COMPLIANCE DEPARTMENT FOR ALL EXECUTED TRADES
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APPENDIX III
OPPENHEIMER CAPITAL
PERSONAL SECURITIES HOLDINGS
In accordance with the Code of Ethics, please provide a list of all Securities
(other than Exempt Securities) in which you or any account, in which you have a
Pecuniary Interest, has a Beneficial Interest and all Securities (other than
Exempt Securities) in non-client accounts for which you make investment
decisions. This includes not only securities held by brokers, but also
Securities held at home, in safe deposit boxes, or by an issuer.
(1) Name of employee: ___________________________
(2) If different than #1, name of the person
in whose name the account is held: ___________________________
(3) Relationship of (2) to (1): ___________________________
(4) Broker(s) at which Account is Maintained: ___________________________
___________________________
___________________________
___________________________
(5) Account Number(s): ___________________________
___________________________
___________________________
___________________________
(6) Phone number(s) of Broker: ____________________________
___________________________
___________________________
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(7) For each account, attach your most recent account statement listing
Securities in that account. If you own Securities that are not listed
in an attached account statement, list them below:
Name of Security Quantity Value Custodian
1. __________________ ___________ ___________ ___________________
2. __________________ ___________ ___________ ___________________
3. __________________ ___________ ___________ ___________________
4. __________________ ___________ ___________ ___________________
5. __________________ ___________ ___________ ___________________
(Attached separate sheet if necessary)
I certify that this form and the attached statements (if any) constitute all of
the Securities of which I have Beneficial Ownership as defined in the Code.
------------------------------
Signature
------------------------------
Print Name
Dated: _________________
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APPENDIX IV
OPPENHEIMER CAPITAL
ACKNOWLEDGMENT CERTIFICATION
CODE OF ETHICS
and
INSIDER TRADING POLICY AND PROCEDURES
I hereby certify that I have read and understand the attached Oppenheimer
Capital Code of Ethics and Pimco Advisors Insider Trading Policy and Procedures
(together the "Code"). Pursuant to such Code, I recognize that I must disclose
or report all personal securities transactions required to be disclosed or
reported thereunder and comply in all other respects with the requirements of
the Code. I also agree to cooperate fully with any investigation or inquiry as
to whether a possible violation of the foregoing Code has occurred. I understand
that any failure to comply in all aspects with the foregoing and these policies
and procedures may lead to sanctions including dismissal.
Date: __________________________ ______________________________
Signature
______________________________
Print Name
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APPENDIX V
OPPENHEIMER CAPITAL
ANNUAL CERTIFICATION OF COMPLIANCE
I hereby certify that I have complied with the requirements of the Code of
Ethics and the Insider Trading Policy and Procedures, for the year ended
December 31, ____. Pursuant to the Code, I have disclosed or reported all
personal securities transactions required to be disclosed or reported
thereunder, and complied in all other respects with the requirements of the
Code. I also agree to cooperate fully with any investigation or inquiry as to
whether a possible violation of the Code has occurred.
Date: __________________________ ______________________________
Signature
______________________________
Print Name
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APPENDIX VI
PIMCO ADVISORS
POLICY REGARDING SPECIAL TRADING PROCEDURES
FOR SECURITIES OF PIMCO ADVISORS HOLDINGS L.P.
Effective as of May 1, 1996
INTRODUCTION
PIMCO Advisors Holdings L.P. (as defined below) has adopted an Insider Trading
Policy and Procedures applicable to all personnel which prohibits insider
trading in any securities, and prohibits all employees from improperly using or
disclosing material, non-public information, a copy of which has been supplied
to you.
For the purposes of this memorandum, the term the "Company" shall include PIMCO
Advisors Holdings L.P. ("PIMCO Holdings"), PIMCO Advisors L.P. ("PIMCO
Advisors"), PIMCO Partners, G.P. ("PIMCO GP"), PIMCO Funds Distribution LLC
("PFD") (collectively, "PIMCO Advisors") and any entity in relation to which
PIMCO Advisors or one of its subsidiaries acts as a general partner or owns 50%
or more of one the issued and outstanding stock.
PERSONS TO WHOM THIS SPECIAL TRADING POLICY APPLIES
This Policy applies to all employees of the Company, and in the case of PIMCO
Holdings, the members of the Management Board ("Covered Persons"), as well as to
any transactions in securities participated in by family members, trusts or
corporations controlled by a Covered Person. In particular, this Policy applies
to securities transactions by:
the Covered Person's spouse;
the Covered Person's minor children;
any other relatives living in the Covered Person's household;
a trust in which the Covered Person has a beneficial interest, unless
such Covered Person has no direct or indirect control over the trust;
a trust as to which the Covered Person is a trustee;
a revocable trust as to which the Covered Person is a settlor;
a corporation of which the Covered Person is an officer, director or
10% or greater stockholder; or
a partnership of which the Covered Person is a partner (including
most investment clubs), unless the Covered Person has no direct or
indirect control over the partnership.
The family members, trust and corporations listed above are hereinafter referred
to as "Related persons."
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SECURITIES TO WHICH THIS SPECIAL TRADING POLICY APPLIES
Unless stated otherwise, the following Special Trading Procedures apply to all
transactions by Covered Persons and their Related Persons involving any class or
series of units of limited partner interest of PIMCO Holdings or other
securities of PIMCO Holdings, including options and other derivative securities
(such as a put, call or index security) in relation to such securities (the
"PIMCO Holdings' Securities").
SPECIAL TRADING PROCEDURES RELATING TO SECURITIES OF PIMCO HOLDINGS
1. TRADING WINDOWS
There are times when the Company may be engaged in a material non-public
development or transaction. Even if you are not aware of this development or
transaction, if you trade PIMCO Holdings' Securities before such development or
transaction is disclosed to the public, you might expose yourself and the
Company to a charge of insider trading that could be costly and difficult to
refute. In addition, such a trade by you could result in adverse publicity to
you or the company.
Therefore, the following rule shall apply: each Covered Person and all of such
person's Related Persons may only purchase or sell PIMCO Holdings' Securities
during four "trading windows" that may occur each year. The four trading windows
are generally during the months of February, May, August and November. A
memorandum detailing the specific dates of the period is sent to each employee
approximately one week prior to the opening of the window.
TRADING ON THE BASIS OF MATERIAL NON-PUBLIC INFORMATION OR COMMUNICATING
MATERIAL NON-PUBLIC INFORMATION TO OTHERS AT ANY TIME, INCLUDING IN A TRADING
WINDOW, IS A VIOLATION OF THE LAW AND A VIOLATION OF THIS POLICY.
In accordance with the procedure for waivers described below, in special
circumstances a waiver may be given to allow a trade to occur outside of a
trading window.
Employees of PIMCO Advisors should be aware that there are potential tax
consequences for such employees resulting from the ownership of PIMCO Holdings'
Securities. Each such employee contemplating purchasing PIMCO Holdings'
Securities should discuss the matter with such employee's tax advisor.
The exercise of options to purchase PIMCO Holdings' Securities for cash are not
covered by the procedures outlined above, but the securities so acquired may not
be sold except during a trading window and after all other requirements of this
policy have been satisfied.
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2. POST-TRADE REPORTING
All Covered Persons shall submit to the Compliance Officer a report of every
securities transaction in PIMCO Holdings' Securities in which they and any of
their Related Persons have participated as soon as practicable following the
transaction and in any event not later than the fifth day after the end of the
month in which the transaction occurred. The report shall include: (1) the date
of the transaction and the title and number of shares or principal amount of
each security involved; (2) the nature of the transaction (i.e., purchase, sale
or any other type of acquisition or disposition); (3) the price at which the
transaction was effected; and (4) the name of the broker/dealer with or through
whom the transaction was effected. In addition, on an annual basis, each Covered
Person must confirm the amount of PIMCO Holdings' Securities which such person
and his her Related Persons beneficially own.
Each Covered Person (and not the Company) is personally responsible for insuring
that his or her transactions comply fully with any and all applicable securities
laws, including, but not limited to, the restrictions imposed under Sections
16(a) and 16(b) of the Securities Exchange Act of 1934 and Rule 144 under the
Securities Act of 1933.
3. RESOLVING ISSUES CONCERNING INSIDER TRADING
If you have any doubts or questions as to whether information is material or
non-public, or as to the applicability or interpretation of any of the foregoing
procedures, or as to the propriety of any action, you should contact the
Compliance Officer before trading or communicating the information to anyone.
Until these doubts or questions are satisfactorily resolved, you should presume
that the information is material and non-public and you should NOT trade in the
securities or communicate this information to anyone.
4. MODIFICATIONS AND WAIVERS
PIMCO Advisors (with the consent of PIMCO Holdings) reserves the right to amend
or modify this policy statement at any time. Waiver of any provision of this
policy statement in a specific instance may be authorized in writing by the
Compliance Officer and either the General Counsel of PIMCO Holdings or any
member of the Management Board of PIMCO Holdings. Any such waiver shall be
reported to the Management Board of PIMCO Holdings at the next regularly
scheduled meeting of each.
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FEBRUARY 2000
AS AMENDED AND RESTATED
ALLIANCE CAPITAL MANAGEMENT L.P.
CODE OF ETHICS AND STATEMENT OF POLICY AND PROCEDURES REGARDING
PERSONAL SECURITIES TRANSACTIONS
1. PURPOSES
(A) Alliance Capital Management L.P. ("Alliance", "we" or "us") is a
registered investment adviser and acts as investment manager or
adviser to investment companies and other Clients. In this capacity,
we serve as fiduciaries and owe our Clients an undivided duty of
loyalty. We must avoid even the appearance of a conflict that may
compromise the trust Clients have placed in us and must insist on
strict adherence to fiduciary standards and compliance with all
applicable federal and state securities laws. Adherence to this Code
of Ethics and Statement of Policy and Procedures Regarding Personal
Securities Transactions (the "Code and Statement") is a fundamental
condition of service with us, any of our subsidiaries or our general
partner (the "Alliance Group").
(B) The Code and Statement is intended to comply with Rule 17j-1 under the
Investment Company Act which applies to us because we serve as an
investment adviser to registered investment companies. Rule 17j-1
specifically requires us to adopt a code of ethics that contains
provisions reasonably necessary to prevent our "access persons"
(defined in Rule 17j-1 to cover persons such as officers, directors,
portfolio managers, traders, research analysts and others) from
engaging in fraudulent conduct, including insider trading. Each
investment company we advise has also adopted a code of ethics with
respect to its access persons. As set forth in Section 3 below, our
Code and Statement applies to all Employees and all other individuals
who are Access Persons. The Code and Statement is also intended to
comply with the provisions of Rule 204-2 under the Investment Advisers
Act of 1940 (the "Advisers Act") which requires us to maintain records
of securities transactions in which certain of our personnel have any
Beneficial Ownership.
(C) All Employees and all other individuals who are Access Persons
(collectively, "you") also serve as fiduciaries with respect to our
Clients and in this capacity you owe an undivided duty of loyalty to
our Clients. As part of this duty and as expressed throughout the Code
and Statement, you must at all times:
(i) Place the interests of our Clients first;
(ii) Conduct all personal securities transactions consistent with this
Code and Statement and in such a manner that avoids any actual or
potential conflict of interest or any abuse of your
responsibility and position of trust; and
(iii) Abide by the fundamental standard that you not take
inappropriate advantage of your position.
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(D) This Code and Statement does not attempt to identify all possible
conflicts of interests and literal compliance with each of the
specific procedures will not shield you from liability for personal
trading or other conduct which violates your fiduciary duties to our
Clients. In addition to the specific prohibitions contained in this
Code and Statement, you are also subject to a general requirement not
to engage in any act or practice that would defraud our Clients. This
general prohibition includes, in connection with the purchase or sale
of a Security held or to be acquired or sold (as this phrase is
defined below in Section 2(k)) by a Client:
(i) Making any untrue statement of a material fact;
(ii) Creating materially misleading impressions by omitting to state
or failing to provide any information necessary to make any
statements made, in light of the circumstances in which they are
made, not misleading;
(iii) Making investment decisions, changes in research ratings and
trading decisions other than exclusively for the benefit of and
in the best interest of our Clients;
(iv) Using information about investment or trading decisions or
changes in research ratings (whether considered, proposed or
made) to benefit or avoid economic injury to you or anyone other
than our Clients;
(v) Taking, delaying or omitting to take any action with respect to
any research recommendation, report or rating or any investment
or trading decision for a Client in order to avoid economic
injury to you or anyone other than our Clients;
(vi) Purchasing or selling a Security on the basis of knowledge of a
possible trade by or for a Client;
(vii) Revealing to any other person (except in the normal course of
your duties on behalf of a Client) any information regarding
Securities transactions by any Client or the consideration by any
Client of Alliance of any such Securities transactions; or
(viii) Engaging in any manipulative practice with respect to any
Client.
(E) The provisions contained in this Code and Statement must be followed
when making a personal securities transaction. These policies and
procedures, which must be followed, are considerably more restrictive
and time-consuming than those applying to investments in the mutual
funds and other Clients we advise. If you are not prepared to comply
with these policies and procedures, you must forego personal trading.
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2. DEFINITIONS
The following definitions apply for purposes of the Code and Statement in
addition to the definitions contained in the text itself.
(A) "ACCESS PERSON" means any director or officer of the general partner
of Alliance, as well as any of the following persons:
(i) any Employee who, in connection with his or her regular functions
or duties --
(A) makes, participates in, or obtains information regarding the
purchase or sale of a Security by a Client, or whose
functions relate to the making of any recommendations with
respect to such purchases or sales;
(B) obtains information from any source regarding any change, or
consideration of any change in Alliance's internal research
coverage, a research rating or an internally published view
on a Security or issuer; or
(C) obtains information from any source regarding the placing or
execution of an order for a Client account; and
(ii) any natural person having the power to exercise a controlling
influence over the management or policies of Alliance (unless
that power is solely the result of his or her position with
Alliance) who:
(A) obtains information concerning recommendations made to a
Client with regard to the purchase or sale of a Security;
(B) obtains information from any source regarding any change, or
consideration of any change in research coverage, research
rating or a published view on a Security or issuer; and
(C) obtains information from any source regarding the placing or
execution of an order for a Client account.
(B) A SECURITY IS "BEING CONSIDERED FOR PURCHASE OR SALE" WHEN:
(i) an Alliance research analyst issues research information
(including as part of the daily morning call) regarding initial
coverage of, or changing a rating with respect to, a Security;
(ii) a portfolio manager has indicated (during the daily morning call
or otherwise) his or her intention to purchase or sell a
Security;
(iii) a portfolio manager places an order for a Client; or
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(iv) a portfolio manager gives a trader discretion to execute an order
for a Client over a specified period of time.
(C) "BENEFICIAL OWNERSHIP" is interpreted in the same manner as in
determining whether a person is subject to the provisions of Section
16 of the Securities Exchange Act of 1934 ("Exchange Act"), Rule 16a-1
and the other rules and regulations thereunder and includes ownership
by any person who, directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise, has or shares a
direct or indirect pecuniary interest in a Security. For example, an
individual has an indirect pecuniary interest in any Security owned by
the individual's spouse. Beneficial Ownership also includes, directly
or indirectly, through any contract, arrangement, understanding,
relationship, or otherwise, having or sharing "voting power" or
"investment power," as those terms are used in Section 13(d) of the
Exchange Act and Rule 13d-3 thereunder.
(D) "CLIENT" means any person or entity, including an investment company,
for which Alliance serves as investment manager or adviser.
(E) "COMPLIANCE OFFICER" refers to Alliance's Compliance Officer.
(F) "CONTROL" has the same meaning set forth in Section 2(a)(9) of the
Investment Company Act.
(G) "EMPLOYEE" refers to any person who is an employee of any member of
the Alliance Group, including both part-time employees, as well as
consultants (acting in the capacity of a portfolio manager, trader or
research analyst) under the control of Alliance who, but for their
status as consultants, would otherwise come within the definition of
Access Person.
(H) "INITIAL PUBLIC OFFERING" means an offering of securities registered
under the Securities Act of 1933, the issuer of which, immediately
before the registration, was not subject to the reporting requirements
of Sections 13 or 15(d) of the Securities Exchange Act of 1934.
(I) "INVESTMENT PERSONNEL" refers to:
(i) any Employee who acts in the capacity of a portfolio manager,
research analyst or trader;
(ii) any Employee who assists someone acting in the capacity of a
portfolio manager, research analyst or trader and as an assistant
has access to information generated or used by portfolio
managers, research analysts and traders (including, for example,
assistants who have access to the Alliance Investment Review or
the Alliance International Investment Review);
(iii) any Employee who receives the Alliance Investment Review or the
Alliance International Investment Review; or
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(iv) any natural person who Controls Alliance and who obtains
information concerning recommendations made to a Client regarding
the purchase or sale of securities by the Client.
(J) "LIMITED OFFERING" means an offering that is exempt from registration
under the Securities Act of 1933 pursuant to Sections 4(2) or 4(6)
thereof or pursuant to Rules 504, 505 or 506 under the Securities Act
of 1933.
(K) "PERSONAL ACCOUNT" refers to any account (including, without
limitation, a custody account, safekeeping account and an account
maintained by an entity that may act in a brokerage or a principal
capacity) in which an Access Person or Employee has any Beneficial
Ownership and any such account maintained by or for a financial
dependent. For example, this definition includes Personal Accounts of:
(i) an Access Person's or Employee's spouse, including a legally
separated or divorced spouse who is a financial dependent,
(ii) financial dependents residing with the Access Person or Employee,
and
(iii) any person financially dependent on an Access Person or Employee
who does not reside with that person, including financially
dependent children away at college.
(L) "PURCHASE OR SALE OF A SECURITY" includes, among other transactions,
the writing or purchase of an option to sell a Security and any short
sale of a Security.
(M) "SECURITY" has the meaning set forth in Section 2(a)(36) of the
Investment Company Act and any derivative thereof, commodities,
options or forward contracts, except that it shall not include shares
of open-end investment companies registered under the Investment
Company Act, securities issued by the Government of the United States,
short-term debt securities that are government securities within the
meaning of Section 2(a)(16) of the Investment Company Act, bankers'
acceptances, bank certificates of deposit, commercial paper, and such
other money market instruments as are designated by the Compliance
Officer.
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(N) "SECURITY HELD OR TO BE ACQUIRED OR SOLD" means:
(i) any Security which, within the most recent 15 days (1) is or has
been held by a Client or (2) is being or has been considered by a
Client (to the extent known by Alliance) or Alliance for purchase
by the Client; and
(ii) any option to purchase or sell, and any Security convertible into
or exchangeable for, a Security.
(O) "SUBSIDIARY" refers to either of the following types of entities with
respect to which Alliance, directly or indirectly, through the
ownership of voting securities, by contract or otherwise has the power
to direct or cause the direction of management or policies of such
entity:
(i) any U.S. entity engaged in money management; and
(ii) any non-U.S. entity engaged in money management for U.S. accounts.
3. APPLICATION
(A) This Code and Statement applies to all Employees and to all other
individuals who are Access Persons. Please note that certain
provisions apply to all Employees while other provisions apply only to
Access Persons and others apply only to certain categories of Access
Persons who are also Investment Personnel (e.g., portfolio managers
and research analysts).
(B) Alliance will provide a copy of this Code and Statement to all
Employees and all individuals who are Access Persons. In addition, the
Compliance Officer will maintain lists of Access Persons and
Investment Personnel, including a separate list of portfolio managers
and research analysts.
4. LIMITATIONS ON PERSONAL SECURITIES TRANSACTIONS
(A) ALL EMPLOYEES
It is the responsibility of each Employee to ensure that all personal
securities transactions are made in strict compliance with the
restrictions and procedures in the Code and Statement and otherwise
comply with all applicable legal and regulatory requirements.
EMPLOYEES MUST HOLD ALL SECURITIES IN A PERSONAL ACCOUNT. This
requirement applies to all types of personal securities transactions
including, for example, the purchase of Securities in a private
placement or other direct investment. In addition, Employees may not
take physical possession of certificates or other formal evidence of
ownership.
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Personal securities transactions for Employees may be effected only in
a Personal Account and in accordance with the following provisions:
(i) DESIGNATED BROKERAGE ACCOUNTS
All Personal Accounts of an Employee that are maintained as
brokerage accounts must be held only at the following designated
broker-dealers: Donaldson, Lufkin & Jenrette, Merrill Lynch &
Co., and Charles Schwab.
(ii) SECURITIES BEING CONSIDERED FOR CLIENT PURCHASE OR SALE
An Employee may not purchase or sell a Security, or engage in any
short sale of a Security, in a Personal Account if, at the time
of the transaction, the Security is being considered for purchase
or sale for a Client or is being purchased or sold for a Client.
The following non-exhaustive list of examples illustrates this
restriction:
o An Alliance research analyst issues research information
(including as part of the daily morning call) regarding
initial coverage of, or changing a rating with respect to, a
Security.
o A portfolio manager has, during the daily morning call,
indicated his or her intention to purchase or sell a
Security.
o A portfolio manager places an order in the Security to
purchase or sell the Security for a Client.
o An open order in the Security exists on the trading desk.
o An open limit order exists on the trading desk, and it is
reasonably likely that the Security will reach that limit
price in the near future.
(iii) RESTRICTED LIST
A Security may not be purchased or sold in a Personal Account if,
at the time of the transaction, the Security appears on the
Alliance Daily Restricted List and is restricted for Employee
transactions. The Daily Restricted List is made available each
business day to all Employees via Lotus Notes and the Alliance
Alert.
(iv) PRECLEARANCE REQUIREMENT
An Employee may not purchase or sell, directly or indirectly, any
Security in which the Employee has (or after such transaction
would have) any Beneficial Ownership unless the Employee obtains
the prior written approval to the transaction from the Compliance
Department and, in the case of Investment Personnel, the head of
the business unit in which the Employee works. A request for
preclearance must be made in writing in advance of the
contemplated transaction and must state:
a. the name of the Security involved,
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b. the number of shares or principal amount to be purchased or
sold, and
c. a response to all questions contained in the appropriate
pre-clearance form.
Preclearance requests will be acted on only between the
hours of 10:00 a.m. and 3:30 p.m. Any approval given under
this paragraph will remain in effect only until the end of
the trading day on which the approval was granted.
When a Security is being considered for purchase or sale for
a Client or is being purchased or sold for a Client
following the approval on the same day of a personal trading
request form with respect to the same security, the
Compliance Department is authorized to cancel the personal
order if (x) it has not been executed and the order exceeds
a market value of $50,000 or (y) the Compliance Department
determines, after consulting with the trading desk and the
appropriate business unit head (if available), that the
order, based on market conditions, liquidity and other
relevant factors, could have an adverse impact on a Client
or on a Client's ability to purchase or sell the Security or
other Securities of the issuer involved.
(v) AMOUNT OF TRADING
No more than an aggregate of 20 securities transactions may occur
in an Employee's Personal Accounts in any consecutive thirty-day
period.
(vi) DISSEMINATION OF RESEARCH INFORMATION
An Employee may not buy or sell any Security that is the subject
of "significantly new" or "significantly changed" research during
a forty-eight hour period commencing with the first publication
or release of the research. The terms "significantly new" and
"significantly changed" include:
a. the initiation of coverage by an Alliance research analysts;
b. any change in a research rating or position by an Alliance
research analyst (unless the research analyst who makes the
change advises the Compliance Department in writing that the
change is the result of an unanticipated widely disseminated
announcement or market event, e.g., the announcement of a
major earnings warning as opposed to the research analysts
independently rethinking his or her subjective assessment of
the security); and c. any other rating, view, opinion, or
advice from an Alliance research analyst, the issuance (or
reissuance) of which in the opinion of such research analyst
or head of research would be reasonably likely to have a
material effect on the price of the security.
(B) ACCESS PERSONS
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In addition to the requirements set forth in paragraph (a) of this
Section 4, the following restrictions apply to all Access Persons:
(i) SHORT SALES
No Access Person shall engage in any short sale of a Security if,
at the time of the transaction, any Client has a long position in
such Security (except that an Access Person may engage in short
sales against the box and covered call writing provided that
these personal securities transactions do not violate the
prohibition against short-term trading).
(ii) SHORT-TERM TRADING
All Access Persons are subject to a mandatory buy and hold of all
Securities for 60 calendar days. An Access Person may, however,
after 30 calendar days, sell a Security if the sale price is
lower than the original purchase price (i.e., at a loss on the
original investment). Any trade made in violation of this
paragraph shall be unwound, or, if that is not practicable, all
profits from the short-term trading must be disgorged as directed
by the Compliance Officer.
(iii) NON-EMPLOYEE ACCESS PERSONS
Any non-Employee Access Person with actual knowledge that a
Security is being considered for purchase or sale for a Client
may not purchase or sell such Security.
(C) INVESTMENT PERSONNEL
In addition to the requirements set forth in paragraphs (a) and (b) of
this Section 4, the following restrictions apply to all Investment
Personnel:
(i) INITIAL PUBLIC OFFERINGS
No Investment Personnel shall acquire any direct or indirect
Beneficial Ownership in any Securities in any Initial Public
Offering.
(ii) LIMITED OFFERINGS
No Investment Personnel shall acquire any Beneficial Ownership in
any Securities in any Limited Offering of Securities unless the
Compliance Officer and the business unit head give express prior
written approval and document the basis for granting or denying
approval after due inquiry. The Compliance Officer, in
determining whether approval should be given, will take into
account, among other factors, whether the investment opportunity
should be reserved for a Client and whether the opportunity is
being offered to the individual by virtue of his or her position
with the Alliance Group. Investment Personnel so authorized to
acquire Securities in a Limited Offering must disclose that
investment when they play a part in any Client's subsequent
consideration of an investment in the issuer, and in such
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a case, the decision of Alliance to purchase Securities of that
issuer for a Client will be subject to an independent review by
Investment Personnel with no personal interest in such issuer.
(iii) BOARD MEMBER OR TRUSTEE
No Investment Personnel shall serve on any board of directors or
trustees or in any other management capacity of any private or
public company without prior written authorization from the
Compliance Officer based upon a determination that such service
would not be inconsistent with the interests of any Client. This
prohibition does not include non-profit corporations, charities
or foundations; however, approval from the Investment Personnel's
supervisor is necessary.
(iv) RECEIPT OF GIFTS
No Investment Personnel shall receive any gift or other thing of
more than de minimis value from any person or entity, other than
a member of the Alliance Group, that does business with Alliance
on behalf of a Client, provided, however, that receipt of the
following shall not be prohibited:
a. an occasional breakfast, luncheon, dinner or reception,
ticket to a sporting event or the theater, or comparable
entertainment, that is not so frequent, so costly, nor so
extensive as to raise any question of impropriety;
b. a breakfast, luncheon, dinner, reception or cocktail party
in conjunction with a bona fide business meeting; and
c. a gift approved in writing by the Compliance Officer.
(D) PORTFOLIO MANAGERS
In addition to the requirements set forth in paragraphs (a), (b) and
(c) of this Section 4, the following restrictions apply to all persons
acting in the capacity of a portfolio manager of a Client account:
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(i) BLACKOUT PERIODS
No person acting in the capacity of a portfolio manager shall buy
or sell a Security for a Personal Account within seven calendar
days before and after a Client trades in that Security. In the
case of Client accounts managed by more than one portfolio
manager, this restriction will apply to the portfolio manager who
makes the decision to purchase or sell the relevant Security. If
a portfolio manager engages in such a personal securities
transaction during a blackout period, the Compliance Officer will
break the trade or, if the trade cannot be broken, the Compliance
Officer will direct that any profit realized on the trade be
disgorged.
(ii) ACTIONS DURING BLACKOUT PERIODS
No person acting in the capacity of a portfolio manager shall
delay or accelerate a Client trade due to a previous purchase or
sale of a Security for a Personal Account. In the event that a
portfolio manager determines that it is in the best interest of a
Client to buy or sell a Security for the account of the Client
within seven days of the purchase or sale of the same Security in
a Personal Account, the portfolio manager should contact the
Compliance Officer immediately who may direct that the trade in
the Personal Account be canceled or take other appropriate
relief.
(iii) TRANSACTIONS CONTRARY TO CLIENT POSITIONS
No person acting in the capacity of a portfolio manager shall
purchase or sell a Security in a Personal Account contrary to
investment decisions made on behalf of a Client, unless the
portfolio manager represents and warrants in the personal trading
request form that (x) it is appropriate for the Client account to
buy, sell or continue to hold that Security and (y) the decision
to purchase or sell the Security for the Personal Account arises
from the need to raise or invest cash or some other valid reason
specified by the portfolio manager and approved by the Compliance
Officer and is not otherwise based on the portfolio manager's
view of how the Security is likely to perform.
(E) RESEARCH ANALYSTS
In addition to the requirements set forth in paragraphs (a), (b), (c)
of this Section 4, the following restrictions apply to all persons
acting in the capacity of a research analyst:
(i) BLACKOUT PERIODS
No person acting as a research analyst shall buy or sell a
Security within seven calendar days before and after making a
change in a rating or other published view with respect to that
Security. If a research analyst engages in such a personal
securities transaction during a blackout period, the Compliance
Officer will break the trade or, if the trade cannot be broken,
the Compliance Officer will direct that any profit realized on
the trade be disgorged.
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(ii) ACTIONS DURING BLACKOUT PERIODS
No person acting as a research analyst shall delay or accelerate
a rating or other published view with respect to any Security
because of a previous purchase or sale of a Security in such
person's Personal Account. In the event that a research analyst
determines that it is appropriate to make a change in a rating or
other published view within seven days of the purchase or sale of
the same Security in a Personal Account, the research analyst
should contact the Compliance Officer immediately who may direct
that the trade in the Personal Account be canceled or take other
appropriate relief.
(iii) ACTIONS CONTRARY TO RATINGS
No person acting as a research analyst shall purchase or sell a
Security (to the extent such Security is included in the research
analyst's research universe) contrary to an outstanding rating or
a pending ratings change, unless (x) the research analyst
represents and warrants in the personal trading request form that
(as applicable) there is no reason to change the outstanding
rating and (y) the research analyst's personal trade arises from
the need to raise or invest cash or some other valid reason
specified by the research analyst and approved by the Compliance
Officer and is not otherwise based on the research analyst's view
of how the security is likely to perform.
5. EXEMPTED TRANSACTIONS
(A) The pre-clearance requirements, as described in Section 4(a)(iv) of
this Code and Statement, do not apply to:
(i) NON-VOLITIONAL TRANSACTIONS
Purchases or sales that are non-volitional (including, for
example, any Security received as part of an individual's
compensation) on the part of an Employee (and any Access Person
who is not an Employee) or are pursuant to a dividend
reinvestment plan (up to an amount equal to the cash value of a
regularly declared dividend, but not in excess of this amount).
(ii) EXERCISE OF PRO RATA ISSUED RIGHTS
Purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of the issuer's
Securities, to the extent such rights were acquired from such
issuer, and sales of such rights so acquired. This exemption
applies only to the exercise or sale of rights that are issued in
connection with a specific upcoming public offering on a
specified date, as opposed to rights acquired from the issuer
(such as warrants or options), which may be exercised from
time-to-time up until an expiration date. This exemption does not
apply to the sale of stock acquired pursuant to the exercise of
rights.
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<PAGE>
(B) The restrictions on effecting transactions in a (1) Security being
considered for purchase or sale, as described in Sections 4(a)(ii) and
4(b)(iii) or (2) that is the subject of "significantly new" or
"significantly changed" research, as described in Section 4(a)(vi) of
this Code and Statement, do not apply to:
(i) NON-VOLITIONAL TRANSACTIONS
Purchases or sales that are non-volitional (including, for
example, any Security received as part of an individual's
compensation) on the part of an Access Person or are pursuant to
a dividend reinvestment plan (up to an amount equal to the cash
value of a regularly declared dividend, but not in excess of this
amount).
(ii) EXERCISE OF PRO RATA ISSUED RIGHTS
Purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of the issuer's
Securities, to the extent such rights were acquired from such
issuer, and sales of such rights so acquired. This exemption
applies only to the exercise or sale of rights that are issued in
connection with a specific upcoming public offering on a
specified date, as opposed to rights acquired from the issuer
(such as warrants or options), which may be exercised from
time-to-time up until an expiration date. This exemption does not
apply to the sale of stock acquired pursuant to the exercise of
rights.
(iii) DE MINIMIS TRANSACTIONS -- FIXED INCOME SECURITIES
Any of the following Securities, if at the time of the
transaction, the Access Person has no actual knowledge that the
Security is being considered for purchase or sale by a Client,
that the Security is being purchased or sold by the Client or
that the Security is the subject of significantly new or
significantly changed research:
a. Fixed income securities transaction involving no more than
100 units or having a principal amount not exceeding
$25,000; or
b. Non-convertible debt securities and non-convertible
preferred stocks which are rated by at least one nationally
recognized statistical rating organization ("NRSRO") in one
of the three highest investment grade rating categories.
(iv) DE MINIMIS TRANSACTIONS -- EQUITY SECURITIES
Any equity Securities transaction, or series of related
transactions, involving shares of common stock and excluding
options, warrants, rights and other derivatives, provided
a. any orders are entered after 10:00 a.m. and before 3:00 p.m.
and are not designated as "market on open" or "market on
close";
13
<PAGE>
b. the aggregate value of the transactions do not exceed (1)
$10,000 for securities with a market capitalization of less
than $1 billion; (2) $25,000 for securities with a market
capitalization of $1 billion to $5 billion and (3) $50,000
for securities with a market capitalization of greater than
$5 billion; and
c. the Access Person has no actual knowledge that the Security
is being considered for purchase or sale by a Client, that
the Security is being purchased or sold by or for the Client
or that the Security is the subject of significantly new or
significantly changed research.
(C) NON-EMPLOYEE ACCESS PERSONS
The restrictions on Employees and Access Persons, as described in
Sections 4(a) and 4(b) of this Code and Statement, do not apply to
non-Employee Access Persons, if at the time of the transaction
involved, such person has no actual knowledge that the Security
involved is being considered for purchase or sale.
(D) EXTREME HARDSHIP
In addition to the exceptions contained in Section 5(a) and (b), the
Compliance Officer may, in very limited circumstances, grant other
exceptions under any Section of the Code and Statement on a
case-by-case basis, provided:
(i) The individual seeking the exception furnishes to the Compliance
Officer:
a. a written statement detailing the efforts made to comply
with the requirement from which the individual seeks an
exception;
b. a written statement containing a representation and warranty
that (1) compliance with the requirement would impose a
severe undue hardship on the individual and (2) the
exception would not, in any manner or degree, harm or
defraud the Client or compromise the individual's or
Alliance's fiduciary duty to any Client; and
c. any supporting documentation that the Compliance Officer may
request;
(ii) The Compliance Officer conducts an interview with the individual
or takes such other steps the Compliance Officer deems
appropriate in order to verify that granting the exception will
not in any manner or degree, harm or defraud the Client or
compromise the individual's or Alliance's fiduciary duty to any
Client; and
(iii) The Compliance Officer maintains, along with statements provided
by the individual, a written record that contains:
a. the name of the individual;
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<PAGE>
b. the specific requirement of Section 4 from which the
individual sought an exception;
c. the name of the Security involved, the number of shares or
principal amount purchased or sold, and the date or dates on
which the Securities were purchased or sold;
d. the reason(s) the individual sought an exception from the
requirements of Section 4;
e. the efforts the individual made to comply with the
requirements of Section 4 from which the individual sought
to be excepted; and
f. the independent basis upon which the Compliance Officer
believes that the exemption should be granted.
(E) Any Employee or Access Person who acquires an interest in any private
investment fund (including a "hedge fund") or any other Security that
cannot be purchased and held in a Personal Account shall be excepted
from the requirement that all Securities be held in a Personal
Account, as described in Section 4(a) of this Code and Statement. Such
Employee or Access Person shall provide the Compliance Officer with a
written statement detailing the reason why such Security cannot be
purchased and held in a Personal Account. Transactions in these
Securities nevertheless remain subject to all other requirements of
this Code and Statement, including applicable private placement
procedures, preclearance requirements and blackout period trading
restrictions.
6. REPORTING
(A) INITIAL HOLDINGS REPORTS BY ALL ACCESS PERSONS
Each Access Person must, at the time of becoming an Access Person,
provide an initial holdings report to the Compliance Officer
disclosing the following:
(i) all Securities beneficially owned by the Access Person (including
the title, number of shares and/or principal amount of each
Security beneficially owned);
(ii) the name of any broker-dealer or financial institution where the
Access Person maintains a Personal Account; and
(iii) the date the report is submitted by the Access Person.
This report must be submitted no later than 10 days after a
person becomes an Access Person. In the event that Alliance
already maintains a record of the required information via
account statements received from the Access Person's
broker-dealer (because, for example, a new Access Person is
already an Alliance Employee), the Access Person may satisfy this
requirement by (i) confirming in writing (which may include
e-
15
<PAGE>
mail) the accuracy of the record within 10 days after becoming an
Access Person and (ii) recording the date of the confirmation.
(A) ANNUAL HOLDINGS REPORTS BY ACCESS PERSONS
Each Access Person must, by January 30 of each year, provide an annual
holdings report to the Compliance Officer disclosing the following:
(i) all Securities beneficially owned by the Access Person (including
the title, number of shares and/or principal amount of each
Security beneficially owned);
(ii) the name of any broker-dealer or financial institution where the
Access Person maintains a Personal Account; and
(iii) the date the report is submitted by the Access Person.
The first annual holdings report submitted will be for the
year ending December 31, 2000 and must be provided to the
Compliance Officer by January 30, 2001.
The information must be current as of a date not more
than 30 days before the report is submitted. In the event that
Alliance already maintains a record of the required
information via account statements received from the Access
Person's broker-dealer, an Access Person may satisfy this
requirement by (i) confirming in writing (which may include
e-mail) the accuracy of the record and (ii) recording the date
of the confirmation.
(B) DISCLOSURE OF PERSONAL ACCOUNTS AND BENEFICIALLY OWNED SECURITIES
Upon commencement of employment with a member of the Alliance Group,
an Employee must:
(i) file with the Compliance Officer a list of all Personal Accounts
by completing the Employee Compliance Statement (a copy of which
is attached as Appendix A), and while so employed maintain the
list on a current basis; and
(ii) Disclose to the Compliance Officer all Securities holdings in
which the Employee has any Beneficial Ownership, and thereafter
on an annual basis, to the extent these Securities do not appear
on the Employee's account statements.
(C) ACCESS PERSONS WHO ARE NOT EMPLOYEES OF ALLIANCE
Every Access Person who is not an Employee of Alliance, shall report
to the Compliance Officer the information described in Section 6(a)
and (b) as well as 6(e) below with respect to transactions in any
Security in which such Access Person has, or by reason of such
transaction acquires, any Beneficial Ownership in the Security;
provided, however, that such Access Person is not required to make a
report with respect to transactions effected in any account over which
the Access Person does not have any direct or indirect influence or
control, including such an account in which an Access Person has any
Beneficial Ownership.
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<PAGE>
(D) REPORT CONTENTS
Every report of a non-Employee Access Person required by Section 6(d)
(b) above shall be in writing and shall be delivered not later than
ten days after the end of the calendar quarter in which a transaction
to which the report relates was effected, and shall contain the
following information:
(i) the date of the transaction, the title and the number of shares,
and the principal amount of each Security involved;
(ii) the nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition);
(iii) the price at which the transaction was effected; and
(iv) the name of the broker, dealer or bank with or through whom the
transaction was effected.
(E) REPORT REPRESENTATIONS
Any such report may contain a statement that the report is not to be
construed as an admission by the person making the report that he or
she has any direct or indirect Beneficial Ownership in the Security to
which the report relates.
(F) MAINTENANCE OF REPORTS
The Compliance Officer shall maintain the information required by
Section 6 and such other records, if any, as are required by Rule
17j-1 under the Investment Company Act and Rule 204-2 under the
Advisers Act. All reports furnished pursuant to this Section will be
kept confidential, subject to the rights of inspection by the
Compliance Officer, the Transaction Compliance Committee, the
Securities and Exchange Commission and by other third parties pursuant
to applicable law.
7. ANNUAL VERIFICATIONS
Each person subject to this Code and Statement must certify annually that
he or she has read and understands this Code and Statement, recognizes that
he or she is subject thereto and has complied with its provisions and
disclosed or reported all personal Securities transactions required to be
disclosed or reported by this Code and Statement. Such certificates and
reports are to be given to the Compliance Officer.
8. SANCTIONS
Upon learning of a violation of this Code and Statement, any member of the
Alliance Group, with the advice of the Compliance Officer, may impose such
sanctions as it deems appropriate, including, among other things, censure,
suspension or termination of service. Individuals subject
18
<PAGE>
to this Code and Statement who fail to comply with this Code and Statement
may also be violating the federal securities laws or other federal and
state laws. Any such person who is suspected of violating this Code and
Statement should be reported immediately to the Compliance Officer.
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<PAGE>
CERTIFICATION
I hereby acknowledge receipt of the Code of Ethics and Statement of
Policy and Procedures Regarding Personal Securities Transactions (the "Code and
Statement") of Alliance Capital Management L.P. and its Subsidiaries. I certify
that I have read and understand the Code and Statement and recognize that I am
subject to its provisions. I also certify that I have complied with the
requirements of the Code and Statement and have disclosed or reported all
personal securities transactions required to be disclosed or reported pursuant
to the Code and Statement.
Name _________________________________
(please print)
Signature _________________________________
Date _________________________________
20
<PAGE>
APPENDIX A
ALLIANCE CAPITAL MANAGEMENT L.P.
EMPLOYEE COMPLIANCE STATEMENT
I hereby certify that I have read and understand the Code of
Ethics and Statement of Policy and Procedures Regarding Personal Securities
Transactions (the "Code and Statement"), dated August 1999 and hereby agree, in
consideration of my continued employment by Alliance Capital Management L.P. or
one of its subsidiaries, to comply with the policies and procedures contained in
the Code and Statement.
1. In connection therewith, I agree to:
a. file with the Compliance Officer and maintain on a current basis a
list of all Personal Accounts (as defined in paragraph 2(h) of the
Code and Statement);
b. arrange to have duplicate trade confirmations and periodic statements
for each Personal Account submitted to the Compliance Officer directly
by the securities firm maintaining the Account(s); and
c. be personally responsible for determining if any security transaction
for my Personal Account(s) is prohibited by the Code and Statement or
any other Alliance policy statement.
2. The following Personal Account(s) are maintained at the broker-dealer(s)
and/or financial institution(s) named below (if none write "none"):
a. registered in my name at the following BROKER-DEALER(S) AND/OR
FINANCIAL INSTITUTION(S):
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------
b. registered in the name of my spouse at the following BROKER-DEALER(S)
AND/OR FINANCIAL INSTITUTION(S):
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------
21
<PAGE>
c. registered in the name of a family member who resides with me at the
following BROKER-DEALER(S) AND/OR FINANCIAL INSTITUTION(S):
<TABLE>
<CAPTION>
<S> <C>
name of family member name of broker-dealer and/or financial institution(s)
=================== =========================================
------------------- -----------------------------------------
d. registered in the name of any other person who resides with me and is
financially dependent on me at the following BROKER-DEALER(S) AND/OR
FINANCIAL INSTITUTION(S):
name of person name of broker-dealer and/or financial institution(s)
==================== =========================================
-------------------- -----------------------------------------
e. registered in the name of any other person who does not reside with
me, but who is financially dependent on me, at the following
BROKER-DEALER(S) AND/OR FINANCIAL INSTITUTION(S):
name of person name of broker-dealer and/or financial institution(s)
==================== =========================================
-------------------- -----------------------------------------
3. I have investment discretion over the following other account(s) at the
following BROKER-DEALER(S) AND/OR FINANCIAL INSTITUTION(S) (do not list
Client accounts):
name and description of account name of broker-dealer and/or financial institution(s)
=============================== ================================
------------------------------- --------------------------------
</TABLE>
4. I will notify the Compliance Officer if a Personal Account is opened or
closed. If the answers to paragraphs a through e of Section 2 above are all
"none", I certify that neither I nor any member of my family who resides
with me, any other person who resides with me currently and is financially
dependent on me, or any other person who is financially dependent on me
maintains a BROKERAGE ACCOUNT OR OTHER TYPE OF FINANCIAL ACCOUNT.
- ----------------------- -------------------------
Date Employee Signature
-------------------------
Type or print name
21
POWER OF ATTORNEY
WHEREAS, the undersigned is a trustee of Touchstone Variable Series
Trust (the "Trust"); and
WHEREAS, the Trust proposes to file with the Securities and Exchange
Commission, pursuant to the provisions of the Securities Act of 1933, as
amended, a Post-Effective Amendment to its Registration Statement on Form N-1A
(the "Post-Effective Amendment");
NOW THEREFORE, the undersigned hereby constitutes and appoints Jill T.
McGruder and Edward S. Heenan, each of them individually and with full powers of
substitution, as his true and lawful attorney in fact and agent to execute and
file, in his name and on his behalf in any and all capacities, the
Post-Effective Amendment (and the prospectus, statement of additional
information and exhibits included therein and any supplement to any of the
foregoing) and thereafter to execute and file any additional post-effective
amendment or amendments, amended prospectus or prospectuses, amended statement
or statements of additional information, amended exhibits or any supplements to
any of the foregoing (collectively, the "Related Filings").
The undersigned hereby gives and grants to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite and necessary to be done in and about the premises as fully to all
intents and purposes as he might or could do if personally present at the doing
thereof. The undersigned hereby ratifies and confirms as his own act and deed
all that said attorneys may or shall lawfully do or cause to be done by virtue
hereof. Each attorney in fact and agent has, and may exercise, all of the powers
conferred hereby.
The authority hereby granted is limited to the execution and filing of
the Post-Effective Amendment and the Related Filings and, unless earlier revoked
by the undersigned or expressly extended by the undersigned in writing, shall
remain in force and effective only until the Post-Effective Amendment and the
Related Filings shall have become effective.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this
_________ day of April, 2000.
/s/ Phillip R. Cox
-----------------------
Phillip R. Cox, Trustee
POWER OF ATTORNEY
WHEREAS, the undersigned is a trustee of Touchstone Variable Series
Trust (the "Trust"); and
WHEREAS, the Trust proposes to file with the Securities and Exchange
Commission, pursuant to the provisions of the Securities Act of 1933, as
amended, a Post-Effective Amendment to its Registration Statement on Form N-1A
(the "Post-Effective Amendment");
NOW THEREFORE, the undersigned hereby constitutes and appoints Jill T.
McGruder and Edward S. Heenan, each of them individually and with full powers of
substitution, as his true and lawful attorney in fact and agent to execute and
file, in his name and on his behalf in any and all capacities, the
Post-Effective Amendment (and the prospectus, statement of additional
information and exhibits included therein and any supplement to any of the
foregoing) and thereafter to execute and file any additional post-effective
amendment or amendments, amended prospectus or prospectuses, amended statement
or statements of additional information, amended exhibits or any supplements to
any of the foregoing (collectively, the "Related Filings").
The undersigned hereby gives and grants to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite and necessary to be done in and about the premises as fully to all
intents and purposes as he might or could do if personally present at the doing
thereof. The undersigned hereby ratifies and confirms as his own act and deed
all that said attorneys may or shall lawfully do or cause to be done by virtue
hereof. Each attorney in fact and agent has, and may exercise, all of the powers
conferred hereby.
The authority hereby granted is limited to the execution and filing of
the Post-Effective Amendment and the Related Filings and, unless earlier revoked
by the undersigned or expressly extended by the undersigned in writing, shall
remain in force and effective only until the Post-Effective Amendment and the
Related Filings shall have become effective.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this
_________ day of April, 2000.
/s/ Nelson Schwab, Jr.
---------------------------
Nelson Schwab, Jr., Trustee
POWER OF ATTORNEY
WHEREAS, the undersigned is a trustee of Touchstone Variable Series
Trust (the "Trust"); and
WHEREAS, the Trust proposes to file with the Securities and Exchange
Commission, pursuant to the provisions of the Securities Act of 1933, as
amended, a Post-Effective Amendment to its Registration Statement on Form N-1A
(the "Post-Effective Amendment");
NOW THEREFORE, the undersigned hereby constitutes and appoints Jill T.
McGruder and Edward S. Heenan, each of them individually and with full powers of
substitution, as his true and lawful attorney in fact and agent to execute and
file, in his name and on his behalf in any and all capacities, the
Post-Effective Amendment (and the prospectus, statement of additional
information and exhibits included therein and any supplement to any of the
foregoing) and thereafter to execute and file any additional post-effective
amendment or amendments, amended prospectus or prospectuses, amended statement
or statements of additional information, amended exhibits or any supplements to
any of the foregoing (collectively, the "Related Filings").
The undersigned hereby gives and grants to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite and necessary to be done in and about the premises as fully to all
intents and purposes as he might or could do if personally present at the doing
thereof. The undersigned hereby ratifies and confirms as his own act and deed
all that said attorneys may or shall lawfully do or cause to be done by virtue
hereof. Each attorney in fact and agent has, and may exercise, all of the powers
conferred hereby.
The authority hereby granted is limited to the execution and filing of
the Post-Effective Amendment and the Related Filings and, unless earlier revoked
by the undersigned or expressly extended by the undersigned in writing, shall
remain in force and effective only until the Post-Effective Amendment and the
Related Filings shall have become effective.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this
_________ day of April, 2000.
/s/ Robert E. Stautberg
Robert E. Stautberg, Trustee
POWER OF ATTORNEY
WHEREAS, the undersigned is a trustee of Touchstone Variable Series
Trust (the "Trust"); and
WHEREAS, the Trust proposes to file with the Securities and Exchange
Commission, pursuant to the provisions of the Securities Act of 1933, as
amended, a Post-Effective Amendment to its Registration Statement on Form N-1A
(the "Post-Effective Amendment");
NOW THEREFORE, the undersigned hereby constitutes and appoints Jill T.
McGruder and Edward S. Heenan, each of them individually and with full powers of
substitution, as his true and lawful attorney in fact and agent to execute and
file, in his name and on his behalf in any and all capacities, the
Post-Effective Amendment (and the prospectus, statement of additional
information and exhibits included therein and any supplement to any of the
foregoing) and thereafter to execute and file any additional post-effective
amendment or amendments, amended prospectus or prospectuses, amended statement
or statements of additional information, amended exhibits or any supplements to
any of the foregoing (collectively, the "Related Filings").
The undersigned hereby gives and grants to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite and necessary to be done in and about the premises as fully to all
intents and purposes as he might or could do if personally present at the doing
thereof. The undersigned hereby ratifies and confirms as his own act and deed
all that said attorneys may or shall lawfully do or cause to be done by virtue
hereof. Each attorney in fact and agent has, and may exercise, all of the powers
conferred hereby.
The authority hereby granted is limited to the execution and filing of
the Post-Effective Amendment and the Related Filings and, unless earlier revoked
by the undersigned or expressly extended by the undersigned in writing, shall
remain in force and effective only until the Post-Effective Amendment and the
Related Filings shall have become effective.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this
_________ day of April, 2000.
/s/ Joseph S. Stern, Jr.
-----------------------------
Joseph S. Stern, Jr., Trustee
POWER OF ATTORNEY
WHEREAS, the undersigned is a trustee of Touchstone Variable Series
Trust (the "Trust"); and
WHEREAS, the Trust proposes to file with the Securities and Exchange
Commission, pursuant to the provisions of the Securities Act of 1933, as
amended, a Post-Effective Amendment to its Registration Statement on Form N-1A
(the "Post-Effective Amendment");
NOW THEREFORE, the undersigned hereby constitutes and appoints Jill T.
McGruder and Edward S. Heenan, each of them individually and with full powers of
substitution, as his true and lawful attorney in fact and agent to execute and
file, in his name and on his behalf in any and all capacities, the
Post-Effective Amendment (and the prospectus, statement of additional
information and exhibits included therein and any supplement to any of the
foregoing) and thereafter to execute and file any additional post-effective
amendment or amendments, amended prospectus or prospectuses, amended statement
or statements of additional information, amended exhibits or any supplements to
any of the foregoing (collectively, the "Related Filings").
The undersigned hereby gives and grants to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite and necessary to be done in and about the premises as fully to all
intents and purposes as he might or could do if personally present at the doing
thereof. The undersigned hereby ratifies and confirms as his own act and deed
all that said attorneys may or shall lawfully do or cause to be done by virtue
hereof. Each attorney in fact and agent has, and may exercise, all of the powers
conferred hereby.
The authority hereby granted is limited to the execution and filing of
the Post-Effective Amendment and the Related Filings and, unless earlier revoked
by the undersigned or expressly extended by the undersigned in writing, shall
remain in force and effective only until the Post-Effective Amendment and the
Related Filings shall have become effective.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this
_________ day of April, 2000.
/s/ William J. Williams
----------------------------
William J. Williams, Trustee
