EQUI-SELECT SERIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
APRIL 1, 1996
This Statement of Additional Information (this "Statement") contains
information which may be of interest to investors but which is not included in
the Prospectus of Equi-Select Series Trust (the "Trust"). This Statement is
not a prospectus and is only authorized for distribution when accompanied or
preceded by the Prospectus of the Trust dated April 1, 1996. This Statement
should be read together with the Prospectus. Investors may obtain a free copy
of the Prospectus by calling Equitable Life Insurance Company of Iowa ("Life
Company") at (800) 344-6864. Not all Portfolios described in this Prospectus
may be available for investment.
TABLE OF CONTENTS
PAGE
DEFINITIONS
INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST
INVESTMENT RESTRICTIONS
MANAGEMENT OF THE TRUST
DETERMINATION OF NET ASSET VALUE
TAXES
DIVIDENDS AND DISTRIBUTIONS
PERFORMANCE INFORMATION
SHAREHOLDER COMMUNICATIONS
ORGANIZATION AND CAPITALIZATION
PORTFOLIO TURNOVER
CUSTODIAN
LEGAL COUNSEL
INDEPENDENT AUDITORS
SHAREHOLDER LIABILITY
DESCRIPTION OF NRSRO RATINGS
FINANCIAL STATEMENTS
EQUI-SELECT SERIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
DEFINITIONS
The "Trust" -- Equi-Select Series Trust.
"Adviser" -- Equitable Investment Services, Inc.,
the Trust's investment adviser.
INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST
The Trust currently offers shares of beneficial interest of ten series (the
"Portfolios") with separate investment objectives and policies. The
investment objectives and policies of each of the Portfolios of the Trust are
described in the Prospectus. This Statement contains additional information
concerning certain investment practices and investment restrictions of the
Trust.
Shares of the Trust are sold only to insurance company separate accounts to
fund the benefits of variable annuity contracts owned by their respective
contractholders. Certain Portfolios of the Trust may not be available in
connection with a particular contract or in a particular state. Investors
should consult the separate account prospectus of the specific insurance
product that accompanies the Trust prospectus for information on any
applicable restrictions or limitations with respect to the Portfolios of the
Trust.
Except as described below under "Investment Restrictions", the investment
objectives and policies described in the Prospectus and in this Statement are
not fundamental, and the Trustees may change the investment objectives and
policies of a Portfolio without an affirmative vote of shareholders of the
Portfolio.
Except as otherwise noted below, the following descriptions of certain
investment policies and techniques are applicable to all of the Portfolios.
OPTIONS
Each Portfolio other than the Money Market Portfolio may purchase put and call
options on portfolio securities in which they may invest that are traded on a
U.S. or foreign securities exchange or in the over-the-counter market.
COVERED CALL OPTIONS. Each Portfolio other than the Money Market
Portfolio may write covered call options on portfolio securities to realize a
greater current return through the receipt of premiums than it would realize
on portfolio securities alone. Such option transactions may also be used as a
limited form of hedging against a decline in the price of securities owned by
the Portfolio.
A call option gives the holder the right to purchase, and obligates the
writer to sell, a security at the exercise price at any time before the
expiration date. A call option is "covered" if the writer, at all times while
obligated as a writer, either owns the underlying securities (or comparable
securities satisfying the cover requirements of the securities exchanges), or
has the right to acquire such securities through immediate conversion of
portfolio securities.
In return for the premium received when it writes a covered call option,
the Portfolio gives up some or all of the opportunity to profit from an
increase in the market price of the securities covering the call option during
the life of the option. The Portfolio retains the risk of loss should the
price of such securities decline. If the option expires unexercised, the
Portfolio realizes a gain equal to the premium, which may be offset by a
decline in price of the underlying security. If the option is exercised, the
Portfolio realizes a gain or loss equal to the difference between the
Portfolio's cost for the underlying security and the proceeds of sale
(exercise price minus commissions) plus the amount of the premium.
A Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. A Portfolio may
enter into closing purchase transactions in order to free itself to sell the
underlying security or to write another call on the security, realize a profit
on a previously written call option, or protect a security from being called
in an unexpected market rise. Any profits from a closing purchase transaction
may be offset by a decline in the value of the underlying security.
Conversely, because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security,
any loss resulting from a closing purchase transaction is likely to be offset
in whole or in part by unrealized appreciation of the underlying security
owned by the Trust.
COVERED PUT OPTIONS. Each Portfolio other than the Money Market
Portfolio may write covered put options in order to enhance its current
return. Such options transactions may also be used as a limited form of
hedging against an increase in the price of securities that the Portfolio
plans to purchase. A put option gives the holder the right to sell, and
obligates the writer to buy, a security at the exercise price at any time
before the expiration date. A put option is "covered" if the writer
segregates cash and high-grade short-term debt obligations or other
permissible collateral equal to the price to be paid if the option is
exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, the Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes
the risk that it may be required to purchase the underlying security for an
exercise price higher than its then current market value, resulting in a
potential capital loss unless the security later appreciates in value.
A Portfolio may terminate a put option that it has written before it
expires by a closing purchase transaction. Any loss from this transaction may
be partially or entirely offset by the premium received on the terminated
option.
PURCHASING PUT AND CALL OPTIONS. Each Portfolio other than the Money
Market Portfolio may also purchase put options to protect portfolio holdings
against a decline in market value. This protection lasts for the life of the
put option because the Portfolio, as a holder of the option, may sell the
underlying security at the exercise price regardless of any decline in its
market price. In order for a put option to be profitable, the market price of
the underlying security must decline sufficiently below the exercise price to
cover the premium and transaction costs that the Portfolio must pay. These
costs will reduce any profit the Portfolio might have realized had it sold the
underlying security instead of buying the put option.
Each Portfolio other than the Money Market Portfolio may purchase call
options to hedge against an increase in the price of securities that the
Portfolio wants ultimately to buy. Such hedge protection is provided during
the life of the call option since the Portfolio, as holder of the call option,
is able to buy the underlying security at the exercise price regardless of any
increase in the underlying security's market price. In order for a call
option to be profitable, the market price of the underlying security must rise
sufficiently above the exercise price to cover the premium and transaction
costs. These costs will reduce any profit the Portfolio might have realized
had it bought the underlying security at the time it purchased the call
option. A Portfolio may also purchase put and call options to enhance its
current return.
OPTIONS ON FOREIGN SECURITIES. The Trust may, on behalf of each of the
Portfolios other than the Money Market Portfolio, purchase and sell options on
foreign securities if in the opinion of the Adviser or Sub-Adviser of the
particular Portfolio the investment characteristics of such options,
including the risks of investing in such options, are consistent with the
Portfolio's investment objectives. It is expected that risks related to such
options will not differ materially from risks related to options on U.S.
securities. However, position limits and other rules of foreign exchanges
may differ from those in the U.S. In addition, options markets in some
countries, many of which are relatively new, may be less liquid than
comparable markets in the U.S.
RISKS INVOLVED IN THE SALE OF OPTIONS. Options transactions involve
certain risks, including the risks that a Portfolio's Adviser or Sub-Adviser
will not forecast interest rate or market movements correctly, that a
Portfolio may be unable at times to close out such positions, or that
hedging transactions may not accomplish their purpose because of imperfect
market correlations. The successful use of these strategies depends on
the ability of a Portfolio's Sub-Adviser to forecast market and interest
rate movements correctly.
An exchange-listed option may be closed out only on an exchange which
provides a secondary market for an option of the same series. There is no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. If no secondary market were to
exist, it would be impossible to enter into a closing transaction to close out
an option position. As a result, a Portfolio may be forced to continue to
hold, or to purchase at a fixed price, a security on which it has sold an
option at a time when a Portfolio's Adviser or Sub-Adviser believes it is
inadvisable to do so.
Higher than anticipated trading activity or order flow or other
unforeseen events might cause The Options Clearing Corporation or an exchange
to institute special trading procedures or restrictions that might restrict a
Portfolio's use of options. The exchanges have established limitations on the
maximum number of calls and puts of each class that may be held or written by
an investor or group of investors acting in concert. It is possible that the
Trust and other clients of the Adviser or a Sub-Adviser may be considered
such a group. These position limits may restrict the Trust's ability to
purchase or sell options on particular securities.
Options which are not traded on national securities exchanges may be
closed out only with the other party to the option transaction. For that
reason, it may be more difficult to close out unlisted options than listed
options. Furthermore, unlisted options are not subject to the protection
afforded purchasers of listed options by The Options Clearing Corporation.
Government regulations, particularly the requirements for qualification
as a "regulated investment company" under the Internal Revenue Code, may also
restrict the Trust's use of options.
SPECIAL EXPIRATION PRICE OPTIONS
Certain of the Portfolios may purchase over-the-counter ("OTC") puts and calls
with respect to specified securities ("special expiration price options")
pursuant to which the Portfolios in effect may create a custom index relating
to a particular industry or sector that the Adviser or a Sub-Adviser
believes will increase or decrease in value generally as a group. In
exchange for a premium, the counterparty, whose performance is guaranteed
by a broker-dealer, agrees to purchase (or sell) a specified number of
shares of a particular stock at a specified price and further agrees to
cancel the option at a specified price that decreases straight line over
the term of the option. Thus, the value of the special expiration price
option is comprised of the market value of the applicable underlying security
relative to the option exercise price and the value of the remaining premium.
However, if the value of the underlying security increases (or decreases)
by a prenegotiated amount, the special expiration price option is
canceled and becomes worthless. A portion of the dividends during the term
of the option is applied to reduce the exercise price if the options are
exercised. Brokerage commissions and other transaction costs will reduce
these Portfolios' profits if the special expiration price options are
exercised. A Portfolio will not purchase special expiration price options
with respect to more than 25% of the value of its net assets, and will limit
premiums paid for such options in accordance with state securities laws.
LEAPS AND BOUNDS
The Value + Growth Portfolio may purchase certain long-term exchange-traded
equity options called Long-Term Equity Anticipation Securities ("LEAPs") and
Buy-Right Options Unitary Derivatives ("BOUNDs"). LEAPs provide a holder the
opportunity to participate in the underlying securities' appreciation in
excess of a fixed dollar amount. BOUNDs provide a holder the opportunity to
retain dividends on the underlying security while potentially participating in
the underlying securities' capital appreciation up to a fixed dollar amount.
The Value + Growth Portfolio will not purchase these options with respect to
more than 25% of the value of its net assets, and will limit the premiums paid
for purchasing such options in accordance with the most restrictive applicable
state securities laws.
LEAPs are long-term call options that allow holders the opportunity to
participate in the underlying securities' appreciation in excess of a
specified strike price, without receiving payments equivalent to any cash
dividends declared on the underlying securities. A LEAP holder will be
entitled to receive a specified number of shares of the underlying stock upon
payment of the exercise price, and therefore the LEAP will be exercisable at
any time the price of the underlying stock is above the strike price. However,
if at expiration the price of the underlying stock is at or below the strike
price, the LEAP will expire worthless.
BOUNDs are long-term options which are expected to have the same economic
characteristics as covered call options, with the added benefits that BOUNDs
can be traded in a single transaction and are not subject to early exercise.
Covered call writing is a strategy by which an investor sells a call option
while simultaneously owning the number of shares of the stock underlying the
call. BOUND holders are able to participate in a stock's price appreciation up
to but not exceeding a specified strike price while receiving payments
equivalent to any cash dividends declared on the underlying stock. At
expiration, a BOUND holder will receive a specified number of shares of the
underlying stock for each BOUND held if, on the last day of trading, the
underlying stock closes at or below the strike price. However, if at
expiration the underlying stock closes above the strike price, the BOUND
holder will receive a payment equal to a multiple of the BOUND's strike price
for each BOUND held. The terms of a BOUND are not adjusted because of cash
distributions to the shareholders of the underlying security. BOUNDs are
subject to the position limits for equity options imposed by the exchanges on
which they are traded.
The settlement mechanism for BOUNDs operates in conjunction with that of the
corresponding LEAPs. For example, if at expiration the underlying stock closes
at or below the strike price, the LEAP will expire worthless, and the holder
of a corresponding BOUND will receive a specified number of shares of stock
from the writer of the BOUND. If, on the other hand, the LEAP is "in the
money" at expiration, the holder of the LEAP is entitled to receive a
specified number of shares of the underlying stock from the LEAP writer upon
payment of the strike price, and the holder of a BOUND on such stock is
entitled to the cash equivalent of a multiple of the strike price from the
writer of the BOUND. An investor holding both a LEAP and a corresponding
BOUND, where the underlying stock closes above the strike price at expiration,
would be entitled to receive a multiple of the strike price from the writer of
the BOUND and, upon exercise of the LEAP, would be obligated to pay the same
amount to receive shares of the underlying stock. LEAPs are American-style
options (exercisable at any time prior to expiration) whereas BOUNDs are
European-style options (exercisable only on the expiration date).
FUTURES CONTRACTS
The Trust may, on behalf of each Portfolio that may invest in debt securities,
other than the Money Market Portfolio, buy and sell futures contracts on debt
securities of the type in which the Portfolio may invest and on indexes of
debt securities. In addition, the Trust may, on behalf of each Portfolio that
may invest in equity securities, purchase and sell stock index futures for
hedging and non-hedging purposes. The Trust may also, for hedging and
non-hedging purposes, purchase and write options on futures contracts of the
type which such Portfolios are authorized to buy and sell and may engage in
related closing transactions. All such futures and related options will, as
may be required by applicable law, be traded on exchanges that are licensed
and regulated by the Commodity Futures Trading Commission ("CFTC").
FUTURES ON DEBT SECURITIES AND RELATED OPTIONS. A futures contract on a
debt security is a binding contractual commitment which, if held to maturity,
will result in an obligation to make or accept delivery, during a particular
month, of securities having a standardized face value and rate of return. By
purchasing futures on debt securities -- assuming a "long" position -- the
Trust will legally obligate itself on behalf of the Portfolios to accept the
future delivery of the underlying security and pay the agreed price. By
selling futures on debt securities -- assuming a "short" position -- it will
legally obligate itself to make the future delivery of the security against
payment of the agreed price. Open futures positions on debt securities will
be valued at the most recent settlement price, unless that price does not in
the judgment of persons acting at the direction of the Trustees as to the
valuation of the Trust's assets reflect the fair value of the contract, in
which case the positions will be valued by or under the direction of the
Trustees or such persons.
Positions taken in the futures markets are not normally held to maturity,
but are instead liquidated through offsetting transactions which may result in
a profit or a loss. While futures positions taken by the Trust on behalf of a
Portfolio will usually be liquidated in this manner, the Trust may instead
make or take delivery of the underlying securities whenever it appears
economically advantageous to the Portfolio to do so. A clearing corporation
associated with the exchange on which futures are traded assumes
responsibility for such closing transactions and guarantees that the Trust's
sale and purchase obligations under closed-out positions will be performed at
the termination of the contract.
Hedging by use of futures on debt securities seeks to establish more
certainly than would otherwise be possible the effective rate of return on
portfolio securities. A Portfolio may, for example, take a "short" position
in the futures market by selling contracts for the future delivery of debt
securities held by the Portfolio (or securities having characteristics similar
to those held by the Portfolio) in order to hedge against an anticipated rise
in interest rates that would adversely affect the value of the Portfolio's
portfolio securities. When hedging of this character is successful, any
depreciation in the value of portfolio securities may substantially be offset
by appreciation in the value of the futures position.
On other occasions, the Portfolio may take a "long" position by
purchasing futures on debt securities. This would be done, for example, when
the Trust expects to purchase for the Portfolio particular securities when it
has the necessary cash, but expects the rate of return available in the
securities markets at that time to be less favorable than rates currently
available in the futures markets. If the anticipated rise in the price of the
securities should occur (with its concomitant reduction in yield), the
increased cost to the Portfolio of purchasing the securities may be offset, at
least to some extent, by the rise in the value of the futures position taken
in anticipation of the subsequent securities purchase.
Successful use by the Trust of futures contracts on debt securities is
subject to the ability of a Portfolio's Adviser or Sub-Adviser to predict
correctly movements in the direction of interest rates and other factors
affecting markets for debt securities. For example, if a Portfolio has hedged
against the possibility of an increase in interest rates which would adversely
affect the market prices of debt securities held by it and the prices of such
securities increase instead, the Portfolio will lose part or all of the
benefit of the increased value of its securities which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily maintenance margin requirements, and thus the
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
The Trust may purchase and write put and call options on certain debt
futures contracts, as they become available. Such options are similar to
options on securities except that options on futures contracts give the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put) at a specified exercise price at any time during the
period of the option. As with options on securities, the holder or writer of
an option may terminate his position by selling or purchasing an option of the
same series. There is no guarantee that such closing transactions can be
effected. The Trust will be required to deposit initial margin and
maintenance margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements, and, in addition, net option
premiums received will be included as initial margin deposits. See "Margin
Payments" below. Compared to the purchase or sale of futures contracts, the
purchase of call or put options on futures contracts involves less potential
risk to the Trust because the maximum amount at risk is the premium paid for
the options plus transactions costs. However, there may be circumstances when
the purchase of call or put options on a futures contract would result in a
loss to the Trust when the purchase or sale of the futures contracts would
not, such as when there is no movement in the prices of debt securities. The
writing of a put or call option on a futures contract involves risks similar
to those risks relating to the purchase or sale of futures contracts.
INDEX FUTURES CONTRACTS AND OPTIONS. The Trust may invest in debt index
futures contracts and stock index futures contracts, and in related options.
A debt index futures contract is a contract to buy or sell units of a
specified debt index at a specified future date at a price agreed upon when
the contract is made. A unit is the current value of the index. Debt index
futures in which the Trust presently expects to invest are not now available,
although the Trust expects such futures contracts to become available in the
future. A stock index futures contract is a contract to buy or sell units of
a stock index at a specified future date at a price agreed upon when the
contract is made. A unit is the current value of the stock index.
The following example illustrates generally the manner in which index
futures contracts operate. The Standard & Poor's 100 Stock Index (the "S&P
100 Index") is composed of 100 selected common stocks, most of which are
listed on the New York Stock Exchange. The S&P 100 Index assigns relative
weightings to the common stocks included in the Index, and the Index
fluctuates with changes in the market values of those common stocks. In the
case of the S&P 100 Index, contracts are to buy or sell 100 units. Thus, if
the value of the S&P 100 Index were $180, one contract would be worth $18,000
(100 units x $180). The stock index futures contract specifies that no
delivery of the actual stocks making up the index will take place. Instead,
settlement in cash must occur upon the termination of the contract, with the
settlement being the difference between the contract price and the actual
level of the stock index at the expiration of the contract. For example, if a
Portfolio enters into a futures contract to buy 100 units of the S&P 100 Index
at a specified future date at a contract price of $180 and the S&P 100 Index
is at $184 on that future date, the Portfolio will gain $400 (100 units x gain
of $4). If the Portfolio enters into a futures contract to sell 100 units of
the stock index at a specified future date at a contract price of $180 and the
S&P 100 Index is at $182 on that future date, the Portfolio will lose $200
(100 units x loss of $2).
The Trust does not presently expect to invest in debt index futures
contracts. Stock index futures contracts are currently traded with respect to
the S&P 100 Index on the Chicago Mercantile Exchange, and with respect to
other broad stock market indexes, such as the New York Stock Exchange
Composite Stock Index, which is traded on the New York Futures Exchange, and
the Value Line Composite Stock Index, which is traded on the Kansas City Board
of Trade, as well as with respect to narrower "sub-indexes" such as the S&P
100 Energy Stock Index and the New York Stock Exchange Utilities Stock Index.
A Portfolio may purchase or sell futures contracts with respect to any stock
indexes. Positions in index futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures.
In order to hedge a Portfolio's investments successfully using futures
contracts and related options, the Trust must invest in futures contracts with
respect to indexes or sub-indexes the movements of which will, in its
judgment, have a significant correlation with movements in the prices of the
Portfolio's securities.
Options on index futures contracts are similar to options on securities
except that options on index futures contracts give the purchaser the right,
in return for the premium paid, to assume a position in an index futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the holder would assume the
underlying futures position and would receive a variation margin payment of
cash or securities approximating the increase in the value of the holder's
option position. If an option is exercised on the last trading day prior to
the expiration date of the option, the settlement will be made entirely in
cash based on the difference between the exercise price of the option and the
closing level of the index on which the futures contract is based on the
expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
As an alternative to purchasing and selling call and put options on index
futures contracts, each of the Portfolios which may purchase and sell index
futures contracts may purchase and sell call and put options on the underlying
indexes themselves to the extent that such options are traded on national
securities exchanges. Index options are similar to options on individual
securities in that the purchaser of an index option acquires the right to buy
(in the case of a call) or sell (in the case of a put), and the writer
undertakes the obligation to sell or buy (as the case may be), units of an
index at a stated exercise price during the term of the option. Instead of
giving the right to take or make actual delivery of securities, the holder of
an index option has the right to receive a cash "exercise settlement amount".
This amount is equal to the amount 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 a fixed "index multiplier".
A Portfolio may purchase or sell options on stock indices in order to
close out its outstanding positions in options on stock indices which it has
purchased. A Portfolio may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on an index involves less potential risk to the Trust
because the maximum amount at risk is the premium paid for the options plus
transactions costs. The writing of a put or call option on an index involves
risks similar to those risks relating to the purchase or sale of index futures
contracts.
MARGIN PAYMENTS. When a Portfolio purchases or sells a futures contract,
it is required to deposit with the Custodian an amount of cash, U.S. Treasury
bills, or other permissible collateral equal to a small percentage of the
amount of the futures contract. This amount is known as "initial margin".
The nature of initial margin is different from that of margin in security
transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to the Trust upon termination of the contract,
assuming the Trust satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market". These payments are called "variation
margin" and are made as the value of the underlying futures contract
fluctuates. For example, when a Portfolio sells a futures contract and the
price of the underlying debt security rises above the delivery price, the
Portfolio's position declines in value. The Portfolio then pays the broker a
variation margin payment equal to the difference between the delivery price of
the futures contract and the value of the index underlying the futures
contract. Conversely, if the price of the underlying index falls below the
delivery price of the contract, the Portfolio's futures position increases in
value. The broker then must make a variation margin payment equal to the
difference between the delivery price of the futures contract and the value of
the index underlying the futures contract.
When a Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to
the Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.
SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS
LIQUIDITY RISKS. Positions in futures contracts may be closed out only
on an exchange or board of trade which provides a secondary market for such
futures. Although the Trust intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract or at any particular
time. If there is not a liquid secondary market at a particular time, it may
not be possible to close a futures position at such time and, in the event of
adverse price movements, a Portfolio would continue to be required to make
daily cash payments of variation margin. However, in the event financial
futures are used to hedge portfolio securities, such securities will not
generally be sold until the financial futures can be terminated. In such
circumstances, an increase in the price of the portfolio securities, if any,
may partially or completely offset losses on the financial futures.
In addition to the risks that apply to all options transactions, there
are several special risks relating to options on futures contracts. The
ability to establish and close out positions in such options will be subject
to the development and maintenance of a liquid secondary market. It is not
certain that such a market will develop. Although a Portfolio generally will
purchase only those options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange
will exist for any particular option or at any particular time. In the event
that no such market exists for particular options, it might not be possible to
effect closing transactions in such options with the result that a Portfolio
would have to exercise the options in order to realize any profit.
HEDGING RISKS. There are several risks in connection with the use by a
Portfolio of futures contracts and related options as a hedging device. One
risk arises because of the imperfect correlation between movements in the
prices of the futures contracts and options and movements in the underlying
securities or index or movements in the prices of the Trust's securities which
are the subject of the hedge. A Portfolio's Adviser or Sub-Adviser
will, however, attempt to reduce this risk by purchasing and selling, to
the extent possible, futures contracts and related options on securities and
indexes the movements of which will, in its judgment, correlate closely with
movements in the prices of the underlying securities or index and the Trust's
portfolio securities sought to be hedged.
Successful use of futures contracts and options by a Portfolio for
hedging purposes is also subject to a Portfolio's Adviser's or Sub-Adviser's
ability to predict correctly movements in the direction of the market. It
is possible that, where a Portfolio has purchased puts on futures contracts
to hedge its portfolio against a decline in the market, the securities or
index on which the puts are purchased may increase in value and the value of
securities held in the portfolio may decline. If this occurred, the
Portfolio would lose money on the puts and also experience a decline in
value in its portfolio securities. In addition, the prices of futures, for
a number of reasons, may not correlate perfectly with movements in the
underlying securities or index due to certain market distortions. First,
all participants in the futures market are subject to margin deposit
requirements. Such requirements may cause investors to close futures
contracts through offsetting transactions which could distort the normal
relationship between the underlying security or index and futures markets.
Second, the margin requirements in the futures markets are less onerous than
margin requirements in the securities markets in general, and as a result
the futures markets may attract more speculators than the securities markets
do. Increased participation by speculators in the futures markets may
also cause temporary price distortions. Due to the possibility of price
distortion, even a correct forecast of general market trends by a
Portfolio's Adviser or Sub-Adviser may still not result in a successful
hedging transaction over a very short time period.
OTHER RISKS. Portfolios will incur brokerage fees in connection with
their futures and options transactions. In addition, while futures contracts
and options on futures will be purchased and sold to reduce certain risks,
those transactions themselves entail certain other risks. Thus, while a
Portfolio may benefit from the use of futures and related options,
unanticipated changes in interest rates or stock price movements may result in
a poorer overall performance for the Portfolio than if it had not entered into
any futures contracts or options transactions. Moreover, in the event of an
imperfect correlation between the futures position and the portfolio position
which is intended to be protected, the desired protection may not be obtained
and the Portfolio may be exposed to risk of loss.
INDEXED SECURITIES
Certain of the Portfolios may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. Gold-indexed securities, for example, typically provide for a
maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than
U.S. dollar-denominated securities of equivalent issuers. Currency-indexed
securities may be positively or negatively indexed; that is, their maturity
value may increase when the specified currency value increases, resulting in a
security whose price characteristics are similar to a put option on the
underlying currency. Currency-indexed securities also may have prices that
depend on the values of a number of different foreign currencies relative to
each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, commodity or other instrument to which
they are indexed, and also may be influenced by interest rate changes in the
U.S. and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may
decline substantially if the issuer's creditworthiness deteriorates. Recent
issuers of indexed securities have included banks, corporations, and certain
U.S. Government agencies.
FORWARD COMMITMENTS
The Trust may, on behalf of each Portfolio, enter into contracts to purchase
securities for a fixed price at a future date beyond customary settlement time
("forward commitments") if the Portfolio holds, and maintains until the
settlement date in a segregated account, cash or high-grade debt obligations
in an amount sufficient to meet the purchase price, or if the Portfolio enters
into offsetting contracts for the forward sale of other securities it owns.
Forward commitments may be considered securities in themselves, and involve a
risk of loss if the value of the security to be purchased declines prior to
the settlement date, which risk is in addition to the risk of decline in the
value of the Portfolio's other assets. Where such purchases are made through
dealers, the Portfolio relies on the dealer to consummate the sale. The
dealer's failure to do so may result in the loss to the Portfolio of an
advantageous yield or price.
Although a Portfolio will generally enter into forward commitments with the
intention of acquiring securities for its portfolio or for delivery pursuant
to options contracts it has entered into, a Portfolio may dispose of a
commitment prior to settlement if a Portfolio's Adviser or Sub-Adviser
deems it appropriate to do so. A Portfolio may realize short-term profits
or losses upon the sale of forward commitments.
REPURCHASE AGREEMENTS
On behalf of each Portfolio, the Trust may enter into repurchase agreements.
A repurchase agreement is a contract under which the Portfolio acquires a
security for a relatively short period (usually not more than one week)
subject to the obligation of the seller to repurchase and the Portfolio to
resell such security at a fixed time and price (representing the Portfolio's
cost plus interest). It is the Trust's present intention to enter into
repurchase agreements only with member banks of the Federal Reserve System and
securities dealers meeting certain criteria as to creditworthiness and
financial condition established by the Trustees of the Trust and only with
respect to obligations of the U.S. government or its agencies or
instrumentalities or other high-quality, short-term debt obligations.
Repurchase agreements may also be viewed as loans made by a Portfolio which
are collateralized by the securities subject to repurchase. The Adviser
and Sub-Advisers will monitor such transactions to ensure that the value
of the underlying securities will be at least equal at all times to the
total amount of the repurchase obligation, including the interest factor.
If the seller defaults, a Portfolio could realize a loss on the sale of the
underlying security to the extent that the proceeds of sale including accrued
interest are less than the resale price provided in the agreement including
interest. In addition, if the seller should be involved in bankruptcy
or insolvency proceedings, a Portfolio may incur delay and costs in selling
the underlying security or may suffer a loss of principal and interest
if a Portfolio is treated as an unsecured creditor and required to
return the underlying collateral to the seller's estate.
LEVERAGE
Leveraging a Portfolio creates an opportunity for increased net income but, at
the same time, creates special risk considerations. For example, leveraging
may exaggerate changes in the net asset value of a Portfolio's shares and in
the yield on a Portfolio's portfolio. Although the principal of such
borrowings will be fixed, a Portfolio's assets may change in value during the
time the borrowing is outstanding. Leveraging will create interest expenses
for a Portfolio, which can exceed the income from the assets retained. To the
extent the income derived from securities purchased with borrowed funds
exceeds the interest these Portfolios will have to pay, each Portfolio's net
income will be greater than if leveraging were not used. Conversely, if the
income from the assets retained with borrowed funds is not sufficient to cover
the cost of leveraging, the net income of the Portfolio will be less than if
leveraging were not used, and therefore the amount available for distribution
to stockholders as dividends will be reduced.
REVERSE REPURCHASE AGREEMENTS
The Trust may, on behalf of each of the Portfolios, enter into reverse
repurchase agreements, which involve the sale by the Portfolio of securities
held by it with an agreement to repurchase the securities at an agreed upon
price, date, and interest payment. The Portfolios will use the proceeds of
the reverse repurchase agreements to purchase securities either maturing, or
under an agreement to resell, at a date simultaneous with or prior to the
expiration of the reverse repurchase agreement. A Portfolio will use reverse
repurchase agreements when the interest income to be earned from the
investment of the proceeds of the transaction is greater than the interest
expense of the reverse repurchase transaction. Reverse repurchase agreements
into which the Portfolios will enter require that the market value of the
underlying security and other collateral equal or exceed the repurchase price
(including interest accrued on the security), and require the Portfolios to
provide additional collateral if the market value of such security falls below
the repurchase price at any time during the term of the reverse repurchase
agreement. At all times that a reverse repurchase agreement is outstanding,
the Portfolio will maintain cash, liquid high grade debt obligations, or U.S.
Government securities, as the case may be, in a segregated account at its
custodian with a value at least equal to its obligations under the agreement.
In addition to the general risks involved in leveraging, reverse repurchase
agreements involve the risk that, in the event of the bankruptcy or insolvency
of the Portfolio's counterparty, the Portfolio would be unable to recover the
security which is the subject of the agreement, the amount of cash or other
property transferred by the counterparty to the Portfolio under the agreement
prior to such insolvency or bankruptcy is less than the value of the security
subject to the agreement, or the Portfolio may be delayed or prevented, due to
such insolvency or bankruptcy, from using such cash or property or may be
required to return it to the counterparty or its trustee or receiver.
WHEN-ISSUED SECURITIES
The Trust may, on behalf of each Portfolio, from time to time purchase
securities on a "when-issued" basis. Debt securities are often issued on this
basis. The price of such securities, which may be expressed in yield terms,
is fixed at the time a commitment to purchase is made, but delivery and
payment for the when-issued securities take place at a later date. Normally,
the settlement date occurs within one month of the purchase. During the
period between purchase and settlement, no payment is made by a Portfolio and
no interest accrues to the Portfolio. To the extent that assets of a
Portfolio are held in cash pending the settlement of a purchase of securities,
that Portfolio would earn no income. While the Trust may sell its right to
acquire when-issued securities prior to the settlement date, the Trust intends
actually to acquire such securities unless a sale prior to settlement appears
desirable for investment reasons. At the time a Portfolio makes the
commitment to purchase a security on a when-issued basis, it will record the
transaction and reflect the amount due and the value of the security in
determining the Portfolio's net asset value. The market value of the
when-issued securities may be more or less than the purchase price payable at
the settlement date. Each Portfolio will establish a segregated account in
which it will maintain cash and U.S. Government Securities or other high-grade
debt obligations at least equal in value to commitments for when-issued
securities. Such segregated securities either will mature or, if necessary,
be sold on or before the settlement date.
LOANS OF PORTFOLIO SECURITIES
The Trust may lend the portfolio securities of any Portfolio, provided: (1)
the loan is secured continuously by collateral consisting of U.S. Government
Securities, cash, or irrevocable letters of credit adjusted daily to have
market value at least equal to the current market value of the securities
loaned; (2) the Trust may at any time call the loan and regain the securities
loaned; (3) the Trust will receive any interest or dividends paid on the
loaned securities; and (4) the aggregate market value of securities of any
Portfolio loaned will not at any time exceed 20% (25% with respect to the
Money Market Portfolio) of the total assets of the Portfolio taken at value.
In addition, it is anticipated that the Portfolio may share with the borrower
some of the income received on the collateral for the loan or that it will be
paid a premium for the loan. Before the Portfolio enters into a loan, a
Portfolio's Adviser or Sub-Adviser considers all relevant facts and
circumstances including the creditworthiness of the borrower. The risks
in lending portfolio securities, as with other extensions of credit, consist
of possible delay in recovery of the securities or possible loss of
rights in the collateral should the borrower fail financially. Although
voting rights, or rights to consent, with respect to the loaned securities
pass to the borrower, the Trust retains the right to call the loans at
any time on reasonable notice, and it will do so in order that the
securities may be voted by the Trust if the holders of such securities are
asked to vote upon or consent to matters materially affecting the investment.
The Trust will not lend portfolio securities to borrowers affiliated with
the Trust.
EUROPEAN AND AMERICAN DEPOSITARY RECEIPTS
Each of the Portfolios, other than the Money Market Portfolio, may invest in
foreign securities by purchasing American Depositary Receipts ("ADRs") and
also may purchase securities of foreign issuers in foreign markets and
purchase European Depositary Receipts ("EDRs") or other securities convertible
into securities or issuers based in foreign countries. These securities may
not necessarily be denominated in the same currency as the securities into
which they may be converted. Generally, ADRs, in registered form, are
denominated in U.S. dollars and are designed for use in the U.S. securities
markets, while EDRs, in bearer form, may be denominated in other currencies
and are designed for use in European securities markets. ADRs are receipts
typically issued by a U.S. Bank or trust company evidencing ownership of the
underlying securities. EDRs are European receipts evidencing similar
arrangements. For purposes of the Portfolio's investment policies, ADRs and
EDRs are deemed to have the same classification as the underlying securities
they represent. Thus, an ADR or EDR representing ownership of common stock
will be treated as common stock.
ADR facilities may be established as either "unsponsored" or "sponsored."
While ADRs issued under these two types of facilities are in some respects
similar, there are distinctions between them relating to the rights and
obligations of ADR holders and the practices of market participants. A
depository may establish an unsponsored facility without participation by (or
even necessarily the acquiescence of) the issuer of the deposited securities,
although typically the depository requests a letter of non-objection from such
issuer prior to the establishment of the facility. Holders of unsponsored ADRs
generally bear all the costs of such facilities. The depository usually
charges fees upon the deposit and withdrawal of the deposited securities, the
conversion of dividends into U.S. dollars, the disposition of non-cash
distribution, and the performance of other services. The depository of an
unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited
securities or to pass through voting rights to ADR holders in respect of the
deposited securities. Sponsored ADR facilities are created in generally the
same manner as unsponsored facilities, except that the issuer of the deposited
securities enters into a deposit agreement with the depository. The deposit
agreement sets out the rights and responsibilities of the issuer, the
depository and the ADR holders. With sponsored facilities, the issuer of the
deposited securities generally will bear some of the costs relating to the
facility (such as dividend payment fees of the depository), although ADR
holders continue to bear certain other costs (such as deposit and withdrawal
fees). Under the terms of most sponsored arrangements, depositories agree to
distribute notices of shareholder meetings and voting instructions, and to
provide shareholder communications and other information to the ADR holders at
the request of the issuer of the deposited securities.
FOREIGN SECURITIES
Investments in foreign securities may involve considerations different from
investments in domestic securities due to limited publicly available
information, non-uniform accounting standards, lower trading volume and
possible consequent illiquidity, greater volatility in price, the possible
imposition of withholding or confiscatory taxes, the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest, expropriation of assets, nationalization, or other adverse political
or economic developments. Foreign companies may not be subject to auditing
and financial reporting standards and requirements comparable to those which
apply to U.S. companies. Foreign brokerage commissions and other fees are
generally higher than in the United States. It may also be more difficult to
obtain and enforce a judgment against a foreign issuer.
In addition, to the extent that any Portfolio's foreign investments are not
United States dollar-denominated, the Portfolio may be affected favorably or
unfavorably by changes in currency exchange rates or exchange control
regulations and may incur costs in connection with conversion between
currencies.
In determining whether to invest in securities of foreign issuers, the
Adviser or Sub-Adviser of a Portfolio will consider the likely impact
of foreign taxes on the net yield available to the Portfolio and its
shareholders. Income received by a Portfolio from sources within foreign
countries may be reduced by withholding and other taxes imposed by such
countries. 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 a Portfolio's
assets to be invested in various countries is not known, and tax laws and
their interpretations may change from time to time and may change without
advance notice. Any such taxes paid by a Portfolio will reduce its net
income available for distribution to shareholders.
FOREIGN CURRENCY TRANSACTIONS
The Trust may engage in currency exchange transactions, on behalf of its
Portfolios which may invest in foreign securities, to protect against
uncertainty in the level of future foreign currency exchange rates and to
increase current return. The Trust may engage in both "transaction hedging"
and "position hedging".
When it engages in transaction hedging, the Trust enters into foreign currency
transactions with respect to specific receivables or payables of a Portfolio
generally arising in connection with the purchase or sale of its portfolio
securities. The Trust will engage in transaction hedging when it desires to
"lock in" the U.S. dollar price of a security it has agreed to purchase or
sell, or the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. By transaction hedging the Trust will attempt to protect a
Portfolio against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the applicable foreign currency
during the period between the date on which the security is purchased or sold
or on which the dividend or interest payment is declared, and the date on
which such payments are made or received.
The Trust may purchase or sell a foreign currency on a spot (i.e., cash) basis
at the prevailing spot rate in connection with transaction hedging. The Trust
may also enter into contracts to purchase or sell foreign currencies at a
future date ("forward contracts") and purchase and sell foreign currency
futures contracts.
For transaction hedging purposes the Trust may also purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures
contract gives the Trust the right to assume a short position in the futures
contract until expiration of the option. A put option on currency gives the
Trust the right to sell a currency at a specified exercise price until the
expiration of the option. A call option on a futures contract gives the Trust
the right to assume a long position in the futures contract until the
expiration of the option. A call option on currency gives the Trust the right
to purchase a currency at the exercise price until the expiration of the
option. The Trust will engage in over-the-counter transactions only when
appropriate exchange-traded transactions are unavailable and when, in the
opinion of the Portfolio's Adviser or Sub-Adviser, the pricing mechanism and
liquidity are satisfactory and the participants are responsible parties
likely to meet their contractual obligations.
When it engages in position hedging, the Trust enters into foreign currency
exchange transactions to protect against a decline in the values of the
foreign currencies in which securities held by a Portfolio are denominated or
are quoted in their principle trading markets or an increase in the value of
currency for securities which a Portfolio expects to purchase. In connection
with position hedging, the Trust may purchase put or call options on foreign
currency and foreign currency futures contracts and buy or sell forward
contracts and foreign currency futures contracts. The Trust may also purchase
or sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange transactions
and the value of the portfolio securities involved will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the values of those securities
between the dates the currency exchange transactions are entered into and the
dates they mature.
It is impossible to forecast with precision the market value of a Portfolio's
portfolio securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for the Trust to purchase
additional foreign currency on behalf of a Portfolio on the spot market (and
bear the expense of such purchase) if the market value of the security or
securities being hedged is less than the amount of foreign currency the Trust
is obligated to deliver and if a decision is made to sell the security or
securities and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received
upon the sale of the portfolio security or securities of a Portfolio if the
market value of such security or securities exceeds the amount of foreign
currency the Trust is obligated to deliver on behalf of the Portfolio.
To offset some of the costs to a Portfolio of hedging against fluctuations in
currency exchange rates, the Trust may write covered call options on those
currencies.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can
achieve at some future point in time. Additionally, although these techniques
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, they tend to limit any potential gain which might result from the
increase in the value of such currency.
A Portfolio may also seek to increase its current return by purchasing and
selling foreign currency on a spot basis, and by purchasing and selling
options on foreign currencies and on foreign currency futures contracts, and
by purchasing and selling foreign currency forward contracts.
CURRENCY FORWARD AND FUTURES CONTRACTS. A forward foreign currency
exchange contract involves an obligation 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 as agreed by the parties, at a price set at the time of the
contract. In the case of a cancelable forward contract, the holder has the
unilateral right to cancel the contract at maturity by paying a specified fee.
The contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. A foreign currency futures contract is a
standardized contract for the future delivery of a specified amount of a
foreign currency at a future date at a price set at the time of the contract.
Foreign currency futures contracts traded in the United States are designed by
and traded on exchanges regulated by the CFTC, such as the New York Mercantile
Exchange.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a predetermined date in a given month.
Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are
traded directly between currency traders so that no intermediary is required.
A forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Trust may either
accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts and related options may
be closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although the Trust intends to purchase
or sell foreign currency futures contracts and related options only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a secondary market on an exchange or board
of trade will exist for any particular contract or option or at any particular
time. In such event, it may not be possible to close a futures or related
option position and, in the event of adverse price movements, the Trust would
continue to be required to make daily cash payments of variation margin on its
futures positions.
FOREIGN CURRENCY OPTIONS. Options on foreign currencies operate
similarly to options on securities, and are traded primarily in the
over-the-counter market, although options on foreign currencies have recently
been listed on several exchanges. Such options will be purchased or written
only when a Portfolio's Adviser or Sub-Adviser believes that a liquid
secondary market exists for such options. There can be no assurance that
a liquid secondary market will exist for a particular option at any specific
time. Options on foreign currencies are affected by all of those factors
which influence exchange rates and investments generally.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency
transactions occurring in the interbank market involve substantially larger
amounts than those that may be involved in the use of foreign currency
options, investors may be disadvantaged by having to deal in an odd lot market
(generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last-sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller transactions (less than $1 million) where rates may be less favorable.
The interbank market in foreign currencies is a global, around-the-clock
market. To the extent that the U.S. options markets are closed while the
markets for the underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be reflected in
the U.S. options markets.
FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to the Trust
at one rate, while offering a lesser rate of exchange should the Trust desire
to resell that currency to the dealer.
SWAPS, CAPS, FLOORS AND COLLARS . Among the Strategic Transactions into
which certain of the Portfolios may enter are interest rate, currency and
index swaps and other types of available swap agreements, such as caps, floors
and collars. A Portfolio will enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a duration management
technique or to protect against any increase in the price of securities a
Portfolio anticipates purchasing at a later date. A Portfolio will use these
transactions as hedges and not as speculative investments and will not sell
interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Portfolio may be obligated to pay.
Interest rate swaps involve the exchange by the Portfolio with another party
of their respective commitments to pay or receive interest, e.g., an exchange
of floating rate payments for fixed rate payments with respect to a notional
amount of principal. A currency swap is an agreement to exchange cashflows on
a notional amount of two or more currencies based on the relative value
differential among them. An index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices.
The purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase
of a floor entitles the purchaser to receive payments on a notional principal
amount from the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is a
combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors and collars are entered into for good faith hedging
purposes, the Adviser, the Sub-Advisers and the Portfolios believe such
obligations do not constitute senior securities under the Investment
Company Act of 1940, as amended, and, accordingly, will not treat them
as being subject to its borrowing restrictions. If there is a default
by the counterparty, the Portfolio may have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps, floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, accordingly, they are
less liquid than swaps.
With respect to swaps, the Portfolio will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate with its custodian an amount of cash
or liquid high-grade securities having a value equal to the accrued excess.
Caps, floors and collars require segregation of assets with a value equal to a
Portfolio's net obligation, if any.
ZERO-COUPON DEBT SECURITIES AND PAY-IN-KIND SECURITIES
Zero-coupon securities in which a Portfolio may invest are debt obligations
which are generally issued at a discount and payable in full at maturity, and
which do not provide for current payments of interest prior to maturity.
Zero-coupon securities usually trade at a deep discount from their face or par
value and are subject to greater market value fluctuations from changing
interest rates than debt obligations of comparable maturities which make
current distributions of interest. As a result, the net asset value of shares
of a Portfolio investing in zero-coupon securities may fluctuate over a
greater range than shares of other Portfolios of the Trust and other mutual
funds investing in securities making current distributions of interest and
having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly by the
U.S. Treasury or other short-term debt obligations, and longer-term bonds or
notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment brokerage firm. A number of
securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and resold
them in custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves
are held in book-entry form at the Federal Reserve Bank or, in the case of
bearer securities (i.e., unregistered securities which are owned ostensibly by
the bearer or holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of
zero-coupon securities by accounting separately for the beneficial ownership
of particular interest coupons and corpus payments on Treasury securities
through the Federal Reserve book-entry record-keeping system. The Federal
Reserve program as established by the Treasury Department is known as "STRIPS"
or "Separate Trading of Registered Interest and Principal of Securities."
Under the STRIPS program, a Portfolio will be able to have its beneficial
ownership of U.S. Treasury zero-coupon securities recorded directly in the
book-entry record-keeping system in lieu of having to hold certificates or
other evidences of ownership of the underlying U.S. Treasury securities.
When debt obligations have been stripped of their unmatured interest coupons
by the holder, the stripped coupons are sold separately. The principal or
corpus is sold at a deep discount because the buyer receives only the right to
receive a future fixed payment on the security and does not receive any rights
to periodic cash interest payments. Once stripped or separated, the corpus
and coupons may be sold separately. Typically, the coupons are sold
separately or grouped with other coupons with like maturity dates and sold in
such bundled form. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero-coupon
securities issued directly by the obligor.
Zero-coupon securities allow an issuer to avoid the need to generate cash to
meet current interest payments. Even though zero-coupon securities do not pay
current interest in cash, a Portfolio is nonetheless required to accrue
interest income on them and to distribute the amount of that interest at least
annually to shareholders. Thus, a Portfolio could be required at times to
liquidate other investments in order to satisfy its distribution requirement.
A Portfolio also may purchase pay-in-kind securities. Pay-in-kind securities
pay all or a portion of their interest or dividends in the form of additional
securities.
VARIABLE- OR FLOATING-RATE SECURITIES
Certain of the Portfolios may invest in securities which offer a variable or
floating rate of interest. Variable-rate securities provide for automatic
establishment of a new interest rate at fixed intervals (e.g., daily, monthly,
semi-annually, etc.). Floating-rate securities provide for automatic
adjustment of the interest rate whenever some specified interest rate index
changes. The interest rate on variable- or floating-rate securities is
ordinarily determined by reference to or is a percentage of a bank's prime
rate, the 90-day U.S. Treasury bill rate, the rate of return on commercial
paper or bank certificates of deposit, an index of short-term interest rates,
or some other objective measure.
Variable- or floating-rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par. In many
cases, the demand feature can be exercised at any time on 7 days' notice; in
other cases, the demand feature is exercisable at any time on 30 days' notice
or on similar notice at intervals of not more than one year. Some securities
which do not have variable or floating interest rates may be accompanied by
puts producing similar results and price characteristics.
Variable-rate demand notes include master demand notes which are obligations
that permit a Portfolio to invest fluctuating amounts, which may change daily
without penalty, pursuant to direct arrangements between the Portfolio as
lender, and the borrower. The interest rates on these notes fluctuate from
time to time. The issuer of such obligations normally has a corresponding
right, after a given period, to prepay in its discretion the outstanding
principal amount of the obligations plus accrued interest upon a specified
number of days' notice to the holders of such obligations. The interest rate
on a floating-rate demand obligation is based on a known lending rate, such as
a bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable-rate demand obligation is adjusted
automatically at specified intervals. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided by
banks. Because these obligations are direct lending arrangements between the
lender and borrower, it is not contemplated that such instruments will
generally be traded, and there generally is not an established secondary
market for these obligations, although they are redeemable at face value.
Accordingly, where these obligations are not secured by letters of credit or
other credit support arrangements, the Portfolio's right to redeem is
dependent on the ability of the borrower to pay principal and interest on
demand. Such obligations frequently are not rated by credit rating agencies.
If not so rated, a Portfolio may invest in them only if the Portfolio's
Adviser or Sub-Adviser determines that, at the time of investment, the
obligations are of comparable quality to the other obligations in which the
Portfolio may invest. The Adviser or Sub-Adviser, on behalf of a Portfolio,
will consider on an ongoing basis the creditworthiness of the issuers of the
floating- and variable-rate demand obligations in the Portfolio's portfolio.
LOWER GRADE SECURITIES
Certain of the Portfolios may invest in lower-grade income securities. Such
lower-grade securities are commonly referred to as "junk bonds". Investment
in such securities involves special risks, as described herein. Liquidity
relates to the ability of a Portfolio to sell a security in a timely manner at
a price which reflects the value of that security. As discussed below, the
market for lower grade securities is considered generally to be less liquid
than the market for investment grade securities. The relative illiquidity of
some of a Portfolio's portfolio securities may adversely affect the ability of
the Portfolio to dispose of such securities in a timely manner and at a price
which reflects the value of such security in the Adviser's or Sub-Adviser's
judgment. The market for less liquid securities tends to be more volatile
than the market for more liquid securities and market values of relatively
illiquid securities may be more susceptible to change as a result of adverse
publicity and investor perceptions than are the market values of higher grade,
more liquid securities.
A Portfolio's net asset value will change with changes in the value of its
portfolio securities. If a Portfolio invests in fixed income securities, the
Portfolio's net asset value can be expected to change as general levels of
interest rates fluctuate. When interest rates decline, the value of a
portfolio invested in fixed income securities can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in
fixed income securities can be expected to decline. Net asset value and
market value may be volatile due to a Portfolio's investment in lower grade
and less liquid securities. Volatility may be greater during periods of
general economic uncertainty.
A Portfolio's investments are valued pursuant to guidelines adopted and
periodically reviewed by the Board of Trustees. To the extent that there is
no established retail market for some of the securities in which a Portfolio
may invest, there may be relatively inactive trading in such securities and
the ability of the Adviser or Sub-Adviser to accurately value such
securities may be adversely affected. During periods of reduced market
liquidity and in the absence of readily available market quotations for
securities held in a Portfolio's portfolio, the responsibility of the
Adviser or Sub-Adviser to value the Portfolio's securities becomes more
difficult and the Adviser's or Sub-Adviser's judgment may play a greater
role in the valuation of the Portfolio's securities due to the reduced
availability of reliable objective data. To the extent that a Portfolio
invests in illiquid securities and securities which are restricted as to
resale, the Portfolio may incur additional risks and costs.
Lower grade securities generally involve greater credit risk than higher grade
securities. A general economic downturn or a significant increase in interest
rates could severely disrupt the market for lower grade securities and
adversely affect the market value of such securities. In addition, in such
circumstances, the ability of issuers of lower grade securities to repay
principal and to pay interest, to meet projected financial goals and to obtain
additional financing may be adversely affected. Such consequences could lead
to an increased incidence of default for such securities and adversely affect
the value of the lower grade securities in a Portfolio's portfolio and thus a
Portfolio's net asset value. The secondary market prices of lower grade
securities are less sensitive to changes in interest rates than are those for
higher rated securities, but are more sensitive to adverse economic changes or
individual issuer developments. Adverse publicity and investor perceptions,
whether or not based on rational analysis, may also affect the value and
liquidity of lower grade securities.
Yields on a Portfolio's portfolio securities can be expected to fluctuate over
time. In addition, periods of economic uncertainty and changes in interest
rates can be expected to result in increased volatility of the market prices
of the lower grade securities in a Portfolio's portfolio and thus in the net
asset value of a Portfolio. Net asset value and market value may be volatile
due to a Portfolio's investment in lower grade and less liquid securities.
Volatility may be greater during periods of general economic uncertainty. The
Portfolios may incur additional expenses to the extent they are required to
seek recovery upon a default in the payment of interest or a repayment of
principal on their portfolio holdings, and the Portfolios may be unable to
obtain full recovery thereof. In the event that an issuer of securities held
by a Portfolio experiences difficulties in the timely payment of principal or
interest and such issuer seeks to restructure the terms of its borrowings,
such Portfolio may incur additional expenses and may determine to invest
additional capital with respect to such issuer or the project or projects to
which the Portfolio's portfolio securities relate.
The Portfolios will rely on each Adviser's or Sub-Adviser's judgment,
analysis and experience in evaluating the creditworthiness of an issue.
In this evaluation, the Adviser or Sub-Adviser will take into consideration,
among other things, the issuer's financial resources, its sensitivity to
economic conditions and trends, its operating history, the quality of the
issuer's management and regulatory matters. The Adviser or Sub-Adviser also
may consider, although it does not rely primarily on, the credit ratings
of S&P and Moody's in evaluating fixed-income securities. Such ratings
evaluate only the safety of principal and interest payments, not market
value risk. Additionally, because the creditworthiness of an issuer may
change more rapidly than is able to be timely reflected in changes in
credit ratings, the Adviser or Sub-Adviser continuously monitors the issuers
of such securities held in the Portfolio's portfolio. A Portfolio may,
if deemed appropriate by the Adviser or Sub-Adviser, retain a security
whose rating has been downgraded below B by S&P or below B by
Moody's, or whose rating has been withdrawn.
SHORT SALES
Certain of the Portfolios may seek to hedge investments or realize additional
gains through short sales. Short sales are transactions in which a Portfolio
sells a security it does not own, in anticipation of a decline in the market
value of that security. To complete such a transaction, a Portfolio must
borrow the security to make delivery to the buyer. A Portfolio then is
obligated to replace the security borrowed by purchasing it at the market
price at or prior to the time of replacement. The price at such time may be
more or less than the price at which the security was sold by a Portfolio.
Until the security is replaced, a Portfolio is required to repay the lender
any dividends or interest that accrue during the period of the loan. To borrow
the security, a Portfolio also may be required to pay a premium, which would
increase the cost of the security sold. The net proceeds of the short sale
will be retained by the broker (or by the Trust's custodian in a special
custody account), to the extent necessary to meet margin requirements, until
the short position is closed out. A Portfolio also will incur transaction
costs in effecting short sales.
A Portfolio will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which a Portfolio replaces the borrowed security. A Portfolio will realize a
gain if the security declines in price between those dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount of
the premium, dividends, interest or expenses a Portfolio may be required to
pay in connection with a short sale.
SHORT SALES AGAINST THE BOX
The International Stock Portfolio may sell securities short against the box to
hedge unrealized gains on portfolio securities. Selling securities short
against the box involves selling a security that the Portfolio owns or has the
right to acquire, for delivery at a specified date in the future. If the
Portfolio sells securities short against the box, it may protect unrealized
gains, but will lose the opportunity to profit on such securities if the price
rises.
WARRANTS
Each of the Portfolios that may invest in equity securities may acquire
warrants. Warrants are securities giving the holder the right, but not the
obligation, to buy the stock of an issuer at a given price (generally higher
than the value of the stock at the time of issuance) during a specified period
or perpetually. Warrants may be acquired separately or in connection with the
acquisition of securities. Warrants acquired by a Portfolio in units or
attached to securities are not subject to these restrictions. Warrants do not
carry with them the right to dividends or voting rights with respect to the
securities that they entitle their holder to purchase, and they do not
represent any rights in the assets of the issuer. As a result, warrants may be
considered more speculative than certain other types of investments. In
addition, the value of a warrant does not necessarily change with the value of
the underlying securities, and a warrant ceases to have value if it is not
exercised prior to its expiration date.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions are fundamental and may not be changed
with respect to any Portfolio without the approval of a majority of the
outstanding voting securities of that Portfolio. Under the Investment Company
Act of 1940 and the rules thereunder, "majority of the outstanding voting
securities" of a Portfolio means the lesser of (1) 67% of the shares of that
Portfolio present at a meeting if the holders of more than 50% of the
outstanding shares of that Portfolio are present in person or by proxy, and
(2) more than 50% of the outstanding shares of that Portfolio. Any investment
restrictions which involve a maximum percentage of securities or assets shall
not be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by or on behalf of, a Portfolio, as the
case may be.
ALL PORTFOLIOS (EXCEPT THE GROWTH & INCOME PORTFOLIO AND VALUE + GROWTH
PORTFOLIO)
The Trust may not, on behalf of a Portfolio:
(1) With respect to 75% of its total assets, purchase the securities of
any issuer if such purchase would cause more than 5% of the value of a
Portfolio's total assets to be invested in securities of any one issuer
(except securities issued or guaranteed by the U.S. Government or any agency
or instrumentality thereof), or purchase more than 10% of the outstanding
voting securities of any one issuer; provided that this restriction shall not
apply to the International Fixed Income Portfolio or the OTC Portfolio;
(2) invest more than 25% of the value of its net assets in the securities
(other than U.S. Government Securities), of issuers in a single industry,
except that this policy shall not limit investment by the Money Market
Portfolio in obligations of U.S. banks (excluding their foreign branches);
(3) with respect to all Portfolios except for the Money Market
Portfolio, borrow money except from banks as a temporary measure for
extraordinary or emergency purposes or by entering into reverse repurchase
agreements (each Portfolio of the Trust is required to maintain asset coverage
(including borrowings) of 300% for all borrowings), except that the
Mortgage-Backed Securities Portfolio and the International Fixed Income
Portfolio may also borrow to enhance income; with respect to the Money Market
Portfolio, borrow money except as a temporary measure from banks for
extraordinary or emergency purposes or engage in reverse repurchase agreements
except for such purposes or as a temporary measure to facilitate redemptions
(i.e., not for investment leverage, but only to enable it to satisfy
redemption requests where liquidation of portfolio securities is considered
disadvantageous or inconvenient), and in either event not in excess of an
amount (taking borrowings and reverse repurchase agreements together) equal to
one third of the value of its net assets;
(4) make loans to other persons, except loans of portfolio securities
and except to the extent that the purchase of debt obligations in accordance
with its investment objectives and policies or entry into repurchase
agreements may be deemed to be loans;
(5) purchase or sell any commodity contract, except that each Portfolio
(other than the Money Market Portfolio) may purchase and sell futures
contracts based on debt securities, indexes of securities, and foreign
currencies and purchase and write options on securities, futures contracts
which it may purchase, securities indexes, and foreign currencies and purchase
forward contracts. (Securities denominated in gold or other precious metals
or whose value is determined by the value of gold or other precious metals are
not considered to be commodity contracts.) The OTC, Research and Total Return
Portfolios reserve the freedom of action to hold and to sell real estate or
mineral leases, commodities or commodity contracts acquired as a result of the
ownership of securities. The OTC, Research and Total Return Portfolios will
not purchase securities for the purpose of acquiring real estate or mineral
leases, commodities or commodity contracts (except for options, futures
contracts, options on futures contracts and forward contracts).
(6) underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may
be deemed to be an underwriter under federal securities laws;
(7) purchase or sell real estate, although (with respect to Portfolios
other than the Money Market Portfolio) it may purchase and sell securities
which are secured by or represent interests in real estate, mortgage-related
securities, securities of companies principally engaged in the real estate
industry and participation interests in pools of real estate mortgage loans,
and it may liquidate real estate acquired as a result of default on a
mortgage;
(8) issue any class of securities which is senior to a Portfolio's
shares of beneficial interest except as permitted under the Investment Company
Act of 1940 or by order of the SEC.
VALUE + GROWTH PORTFOLIO
The Trust may not, on behalf of the Portfolio:
(1) purchase or sell commodities or commodity contracts, or interests in
oil, gas, or other mineral leases, or other mineral exploration or development
programs, although it may invest in companies that engage in such businesses
to the extent otherwise permitted by the Portfolio's investment policies and
restrictions and by applicable law, except as required in connection with
otherwise permissible options, futures and commodity activities as described
elsewhere in the Prospectus and this Statement:
(2) purchase or sell real estate, although it may invest in securities
secured by real estate or real estate interests, or issued by companies,
including real estate investment trusts, that invest in real estate or real
estate interests;
(3) make short sales or purchases on margin, although it may obtain
short-term credit necessary for the clearance of purchases and sales of its
portfolio securities and except as required in connection with permissible
options, futures, short selling and leverage activities as described elsewhere
in the Prospectus and this Statement (the short sale restriction is
nonfundamental);
(4) with respect to 75% of its total assets, invest in the securities of
any one issuer (other than the U.S. Government and its agencies and
instrumentalities), if immediately after and as a result of such investment
more than 5% of the total assets of the Portfolio would be invested in such
issuer (the remaining 25% of its total assets may be invested without
restriction except to the extent other investment restrictions may be
applicable);
(5) mortgage, hypothecate, or pledge any of its assets as security for
any of its obligations, except as required for otherwise permissible
borrowings (including reverse repurchase agreements), short sales, financial
options and other hedging activities;
(6) make loans of the Portfolio's assets, including loans of securities
(although it may, subject to the other restrictions or policies stated herein,
purchase debt securities or enter into repurchase agreements with banks or
other institutions to the extent a repurchase agreement is deemed to be a
loan);
(7) borrow money, except from banks for temporary or emergency purposes
or in connection with otherwise permissible leverage activities, and then only
in an amount not in excess of 5% of the Portfolio's total assets (in any case
as determined at the lesser of acquisition cost or current market value and
excluding collateralized reverse repurchase agreements);
(8) underwrite securities of any other company, although it may invest in
companies that engage in such businesses if it does so in accordance with
policies established by the Trust's Board of Trustees, and except to the
extent that the Portfolio may be considered an underwriter within the meaning
of the Securities Act of 1933, as amended, in the disposition of restricted
securities;
(9) invest more than 25% of the value of the Portfolio's total assets in
the securities of companies engaged in any one industry (except securities
issued by the U.S. Government, its agencies and instrumentalities);
(10) issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Portfolio from making any
otherwise permissible borrowings, mortgages or pledges, or entering into
permissible reverse repurchase agreements, and options and futures
transactions;
(11) own, directly or indirectly, more than 25% of the voting securities
of any one issuer or affiliated person of the issuer; and
(12) purchase the securities of other investment companies, except as
permitted by the 1940 Act or as part of a merger, consolidation, acquisition
of assets or similar reorganization transaction.
GROWTH & INCOME PORTFOLIO
The Trust may not, on behalf of the Portfolio:
(1) issue any class of securities which is senior to the Portfolio's
shares of beneficial interest, except that the Portfolio may borrow money to
the extent contemplated by Restriction 3 below;
(2) purchase securities on margin (but a Portfolio may obtain such
short-term credits as may be necessary for the clearance of transactions).
(Margin payments or other arrangements in connection with transactions in
short sales, futures contracts, options, and other financial instruments are
not considered to constitute the purchase of securities on margin for this
purpose);
(3) borrow more than one-third of the value of its total assets less all
liabilities and indebtedness (other than such borrowings) not represented by
senior securities;
(4) act as underwriter of securities of other issuers except to the
extent that, in connection with the disposition of portfolio securities, it
may be deemed to be an underwriter under certain federal securities laws;
(5) as to 75% of the Portfolio's total assets, purchase any security
(other than obligations of the U.S. Government, its agencies or
instrumentalities) if as a result: (i) more than 5% of the Portfolio's total
assets (taken at current value) would then be invested in securities of a
single issuer, or (ii) more than 25% of the Portfolio's total assets (taken at
current value) would be invested in a single industry;
(6) invest in securities of any issuer if any officer or Trustee of the
Trust or any officer or director of the Sub-Adviser owns more than 1/2 of 1%
of the outstanding securities of such issuer, and such officers, Trustees and
directors who own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of such issuer;
(7) make loans, except by purchase of debt obligations or other financial
instruments in which the Portfolio may invest consistent with its investment
policies, by entering into repurchase agreements, or through the lending of
its portfolio securities.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions are non-fundamental and may be changed
by the Trustees of the Trust without shareholder approval. Although
shareholder approval is not necessary, the Trust intends to notify its
shareholders before implementing any material change in any non-fundamental
investment restriction.
ALL PORTFOLIOS (EXCEPT THE GROWTH & INCOME PORTFOLIO AND VALUE + GROWTH
PORTFOLIO)
The Trust may not, on behalf of a Portfolio:
(1) invest more than 10% (except 15% with respect to the International
Fixed Income Portfolio, Mortgage-Backed Securities Portfolio, OTC Portfolio
and Total Return Portfolio) of the net assets of a Portfolio (taken at market
value) in illiquid securities, including repurchase agreements maturing in
more than seven days;
(2) purchase securities on margin, except (with respect to all
Portfolios other than the Money Market Portfolio) such short-term credits as
may be necessary for the clearance of purchases and sales of securities, and
except (with respect to all Portfolios other than the Money Market Portfolio)
that it may make margin payments in connection with options, futures
contracts, options on futures contracts and forward foreign currency contracts
and in connection with swap agreements;
(3) make short sales of securities unless such Portfolio (other than the
Money Market Portfolio) owns an equal amount of such securities or owns
securities which, without payment of any further consideration, are
convertible into or exchangeable for securities of the same issue as, and
equal in amount to, the securities sold short;
(4) make investments for the purpose of gaining control of a company's
management.
VALUE + GROWTH PORTFOLIO
The Trust may not, on behalf of the Portfolio:
(1) except as required in connection with otherwise permissible options
and futures activities, invest more than 5% of the value of the Portfolio's
total assets in rights or warrants (other than those that have been acquired
in units or attached to other securities), or invest more than 2% of its total
assets in rights or warrants that are not listed on the New York or American
Stock Exchange;
(2) participate on a joint basis in any trading account in securities,
although the Sub-Adviser may aggregate orders for the sale or purchase of
securities with other accounts it manages to reduce brokerage costs or to
average prices;
(3) invest, in the aggregate, more than 10% of its net assets in illiquid
securities;
(4) purchase or write put, call, straddle or spread options except as
described in the Prospectus or Statement of Additional Information;
(5) purchase or retain in the Portfolio's portfolio any security if any
officer, trustee or shareholder of the issuer is at the same time an officer,
trustee or employee of the Trust or of its Sub-Adviser and such person owns
beneficially more than 1/2 of 1% of the securities and all such persons owning
more than 1/2 of 1% own in the aggregate more than 5% of the outstanding
securities of the issuer;
(6) invest in real estate limited partnerships or invest more than 10% of
the value of its total assets in real estate investment trusts;
(7) buy or sell physical commodities;
(8) invest or engage in arbitrage transactions;
(9) invest more than 40% of its total assets in the securities of
companies operating exclusively in one foreign country;
(10) purchase securities of other open-end investment companies;
(11) under normal market conditions, invest less than 65% of its total
assets in companies listed on a nationally recognized securities exchange or
traded on the National Association of Securities Dealers Automated Quotation
System.
(12) purchase the securities of any company for the purpose of exercising
management or control;
(13) purchase more than 10% of the outstanding voting securities of any
one issuer; and
(14) invest more than 5% of the value of its total assets in securities
of any issuer which has not had a record, together with its predecessors, of
at least three years of continuous operations.
GROWTH & INCOME PORTFOLIO
The Trust may not, on behalf of the Portfolio:
(1) invest in warrants (other than warrants acquired by the Portfolio as
a part of a unit or attached to securities at the time of purchase) if, as a
result, such investment (valued at the lower of cost or market value) would
exceed 5% of the value of the Portfolio's net assets, provided that not more
than 2% of the Portfolio's net assets may be invested in warrants not listed
on the New York or American Stock Exchanges;
(2) purchase or sell commodities or commodity contracts, except that the
Portfolio may purchase or sell financial futures contracts, options on
financial futures contracts, and futures contracts, forward contracts, and
options with respect to foreign currencies, and may enter into swap
transactions;
(3) purchase securities restricted as to resale if, as a result, (i) more
than 10% of the Portfolio's total assets would be invested in such securities,
or (ii) more than 5% of the Portfolio's total assets (excluding any securities
eligible for resale under Rule 144A under the Securities Act of 1933) would be
invested in such securities;
(4) invest in (a) securities which at the time of such investment are not
readily marketable, (b) securities restricted as to resale, and (c) repurchase
agreements maturing in more than seven days, if, as a result, more than 15% of
the Portfolio's net assets (taken at current value) would then be invested in
the aggregate in securities described in (a), (b), and (c) above;
(5) invest in securities of other registered investment companies, except
by purchases in the open market involving only customary brokerage commissions
and as a result of which not more than 5% of its total assets (taken at
current value) would be invested in such securities, or except as part of a
merger, consolidation, or other acquisition;
(6) invest in real estate limited partnerships;
(7) purchase any security if, as a result, the Portfolio would then have
more than 5% of its total assets (taken at current value) invested in
securities of companies (including predecessors) less than three years old;
(8) purchase or sell real estate or interests in real estate, including
real estate mortgage loans, although it may purchase and sell securities which
are secured by real estate and securities of companies, including limited
partnership interests, that invest or deal in real estate and it may purchase
interests in real estate investment trusts. (For purposes of this restriction,
investments by a Portfolio in mortgage-backed securities and other securities
representing interests in mortgage pools shall not constitute the purchase or
sale of real estate or interests in real estate or real estate mortgage
loans.);
(9) make investments for the purpose of exercising control or management;
(10) invest in interests in oil, gas or other mineral exploration or
development programs or leases, although it may invest in the common stocks of
companies that invest in or sponsor such programs;
(11) acquire more than 10% of the voting securities of any issuer;
(12) invest more than 15%, in the aggregate, of its total assets in the
securities of issuers which, together with any predecessors, have a record of
less than three years continuous operation and securities restricted as to
resale (including any securities eligible for resale under Rule 144A under the
Securities Act of 1933);
(13) purchase or sell puts, calls, straddles, spreads, or any combination
thereof, if, as a result, the aggregate amount of premiums paid or received by
the Portfolio in respect of any such transactions then outstanding would
exceed 5% of its total assets.
MANAGEMENT OF THE TRUST
<TABLE>
<CAPTION>
<S> <C> <C>
Position Held Principal Occupation
Name, Address and Age (1) With the Trust During Past 5 Years
- -------------------------- -------------------- ---------------------------
Paul R. Schlaack* President, Principal President, Chief Executive
2000 Hub Tower Executive Officer Officer and Director
699 Walnut Street and Trustee of Adviser since 1984.
Des Moines, IA 50309
Age: 49
Thomas W. Bedell Trustee Chairman and Chief
Berkley Incorporated Executive Officer of
1 Berkley Drive Berkley, Inc., a
Spirit Lake, IA 51360 manufacturer and marketer
Age: 46 of fishing tackle and
outdoor recreation
products.
J. Michael Earley Trustee President and Chief
665 Locust Street Executive Officer, Bankers
Des Moines, IA 50309 Trust Company, Des Moines,
Age: 50 Iowa since July, 1992;
President and Chief
Executive Officer,
Mid-America Savings Bank,
Waterloo, Iowa from April,
1987 to June, 1992.
R. Barbara Gitenstein Trustee Provost, Drake University
Provost Office since July, 1992; Assistant
202 Old Main Provost, State University
Drake University of New York from August,
2507 University Avenue 1991 to July, 1992;
Des Moines, IA 50311-4505 Associate Provost, State
Age: 48 University of New York -
Oswego from January, 1989
to August, 1991
Stanley B. Seidler Trustee President, Iowa
P.O. Box 1297 Periodicals, Inc., a
3301 McKinley Avenue distributor of books,
Des Moines, IA 50321 periodicals and video
Age: 67 cassettes
Paul E. Larson Treasurer and Executive Vice President,
Age: 43 Principal Financial Treasurer and Chief
Officer Financial Officer of
Equitable of Iowa
Companies, Equitable
American Insurance Company
(since January, 1993) and
USG Annuity & Life Company,
and Executive Vice
President and Chief
Financial Officer of
Equitable Life Insurance
Company of Iowa
John A. Merriman Secretary Secretary and General
Age: 53 Counsel of Equitable of
Iowa Companies, USG Annuity
& Life Company, Equitable
American Insurance Company
(since January, 1993) and
Assistant Secretary and
General Counsel of
Equitable Life Insurance
Company of Iowa
David A. Terwilliger Principal Accounting Vice President and
Age: 38 Officer Controller of Equitable of
Iowa Companies, Equitable
American Insurance Company
(since January, 1993),
Adviser, Equitable Life
Insurance Company of Iowa
and USG Annuity & Life
Company
Dennis D. Hargens Assistant Treasurer Treasurer, Equitable Life
Age: 53 Insurance Company of Iowa
Kimberly K. Krumviede Assistant Vice Managing Director of
Age: 29 President Equitable Investment
Services, Inc. since
February, 1996.
Director - Administration,
Treasurer/Secretary of
Adviser from June, 1994
to January, 1996.
Principal - Research of
Adviser from April, 1994 to
June, 1994; Chief Financial
Officer, Joliet Concrete
Products, Inc., Joliet,
Illinois, from September,
1991 to March, 1994;
Financial Analyst -
Research of Adviser from
June, 1989 to August, 1991
Christopher R. Welp Assistant Vice Assistant Vice President -
Age: 35 President - Finance Equitable Life Insurance
and Tax Company of Iowa
<FN>
____________________
* Interested person of the Trust within the meaning of the 1940 Act.
(1) Unless otherwise indicated, the business address of each listed person is
604 Locust Street, Des Moines, Iowa 50309
</TABLE>
Each Trustee of the Trust who is not an interested person of the Trust or
Adviser or Sub-Adviser receives an annual fee of $6,000 and an additional fee
of $1,500 for each Trustees' meeting attended. With respect to the period
ended December 31, 1995, the Trust paid Trustees' Fees aggregating $47,250.
The following table shows 1995 compensation by Trustee.
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Pension or Total
Aggregate Retirement Estimated Compensation
Compensation Benefits Accrued Annual From Registrant
Name of Person, From As Part of Fund Benefits Upon and Fund Complex
Position Registrant Expenses Retirement Paid to Trustees
- ----------------------- ------------- ----------------- -------------- -----------------
Paul R. Schlaack, N/A N/A N/A N/A
President and
Trustee
Thomas W. Bedell, 11,250 N/A N/A 11,250
Trustee
J. Michael Earley, 12,000 N/A N/A 12,000
Trustee
R. Barbara Gitenstein, 12,000 N/A N/A 12,000
Trustee
Stanley B. Seidler, 12,000 N/A N/A 12,000
Trustee
</TABLE>
SUBSTANTIAL SHAREHOLDERS
Shares of the Portfolios are issued and redeemed in connection with
investments in and payments under certain variable annuity contracts issued
through a separate account of the Life Company. As of February 29, 1996, the
separate account of the Life Company and the Life Company were each known to
the Board of Trustees and the management of the Trust to own of record the
following percentages of the various Portfolios of the Trust.
<TABLE>
<CAPTION>
<S> <C> <C>
Separate Account Life Company
----------------- -------------
Percentage Percentage
----------------- -------------
Portfolio Ownership Ownership
- -------------------------- ----------------- -------------
Advantage 64.58% 35.42%
Government Securities 30.40% 69.60%
International Fixed Income 45.36% 54.64%
International Stock 64.09% 35.91%
Money Market 99.86% 0.14%
Mortgage-Backed Securities 62.85% 37.15%
OTC 99.90% 0.10%
Research 99.94% 0.06%
Short-Term Bond 18.90% 81.10%
Total Return 99.94% 0.06%
</TABLE>
The Growth & Income and Value + Growth Portfolios have not yet commenced
investment operations.
The Declaration of Trust provides that the Trust will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, except if it is determined in the manner specified in the Declaration
of Trust that they have not acted in good faith in the reasonable belief that
their actions were in the best interests of the Trust or that such
indemnification would relieve any officer or Trustee of any liability to the
Trust or its shareholders by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of his or her duties. The Trust, at its
expense, may provide liability insurance for the benefit of its Trustees and
officers.
Under the Investment Advisory Agreement between the Trust and the Adviser (the
"Investment Advisory Agreement"), the Adviser, at its expense, provides the
Portfolios with investment advisory services and advises and assists the
officers of the Trust in taking such steps as are necessary or appropriate to
carry out the decisions of its Trustees regarding the conduct of business of
the Trust and each Portfolio. The fees to be paid under the Investment
Advisory Agreement are set forth in the Trust's prospectus.
Under the Investment Advisory Agreement, the Adviser is obligated to formulate
a continuing program for the investment of the assets of each Portfolio of the
Trust in a manner consistent with each Portfolio's investment objectives,
policies and restrictions and to determine from time to time securities to be
purchased, sold, retained or lent by the Trust and implement those decisions,
subject always to the provisions of the Trust's Declaration of Trust and
By-laws, and of the Investment Company Act of 1940, and subject further to
such policies and instructions as the Trustees may from time to time
establish.
The Investment Advisory Agreement further provides that the Adviser shall
furnish the Trust with office space and necessary personnel, pay ordinary
office expenses, pay all executive salaries of the Trust and furnish, without
expense to the Trust, the services of such members of its organization as may
be duly elected officers or Trustees of the Trust.
Under the Investment Advisory Agreement, the Trust is responsible for all its
other expenses including, but not limited to, the following expenses: legal,
auditing or accounting expenses, Trustees' fees and expenses, insurance
premiums, brokers' commissions, taxes and governmental fees, expenses of issue
or redemption of shares, expenses of registering or qualifying shares for
sale, reports and notices to shareholders, and fees and disbursements of
custodians, transfer agents, registrars, shareholder servicing agents and
dividend disbursing agents, and certain expenses with respect to membership
fees of industry associations.
The Investment Advisory Agreement provides that the Adviser may retain
sub-advisers, at Adviser's own cost and expense, for the purpose of making
investment recommendations and research information available to the Trust.
State Street Bank and Trust Company provides certain accounting, transfer
agency, and other services to the Trust.
The Investment Advisory Agreement provides that neither the Adviser nor any
director, officer or employee of Adviser will be liable for any loss suffered
by the Trust in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations and duties.
The Investment Advisory Agreement may be terminated without penalty by vote of
the Trustees, as to any Portfolio by the shareholders of that Portfolio, or by
Adviser on 60 days written notice. The Agreement also terminates without
payment of any penalty in the event of its assignment. In addition, the
Investment Advisory Agreement may be amended only by a vote of the
shareholders of the affected Portfolio(s), and provides that it will continue
in effect from year to year only so long as such continuance is approved at
least annually with respect to each Portfolio by vote of either the Trustees
or the shareholders of the Portfolio, and, in either case, by a majority of
the Trustees who are not "interested persons" of the Adviser. In each of the
foregoing cases, the vote of the shareholders is the affirmative vote of a
"majority of the outstanding voting securities" as defined in the Investment
Company Act of 1940.
The Adviser has undertaken to reimburse each Portfolio for all operating
expenses, excluding management fees, that exceed .30% of the average daily net
assets of the Money Market, Advantage and Short-Term Bond Portfolios, .50% of
the average daily net assets of the Mortgage-Backed Securities and Government
Securities Portfolios and .75% of the average daily net assets of the
International Stock, International Fixed Income, OTC, Total Return, Research,
Growth & Income and Value + Growth Portfolios. This undertaking is subject to
termination at any time without notice to shareholders. Information concerning
the dollar amounts of advisory fees waived and expenses reimbursed for the
period ended December 31, 1995 is contained in the Prospectus.
For the year ended December 31, 1995, the Adviser was paid advisory fees as
follows: $13,049, Money Market Portfolio; $49,251, Mortgage-Backed Securities
Portfolio; $59,498, International Fixed Income Portfolio; $43,113, OTC
Portfolio; $55,590, Research Portfolio; $54,549, Total Return Portfolio;
$24,385, Advantage Portfolio; $13,542, Government Securities Portfolio;
$61,236 International Stock Portfolio; and $8,830, Short-Term Bond Portfolio.
SUB-ADVISERS
Each of the Sub-Advisers described in the Prospectus serves as Sub-Adviser to
one or more of the Portfolios of the Trust pursuant to separate written
agreements. Certain of the services provided by, and the fees paid to, the
Sub-Advisers are described in the Prospectus under "Management of the Trust -
Sub-Advisers."
BROKERAGE AND RESEARCH SERVICES
Transactions on U.S. stock exchanges, commodities markets, futures markets
and other agency transactions involve the payment by the Trust of negotiated
brokerage commissions. Such commissions vary among different brokers. A
particular broker may charge different commissions according to such factors
as the difficulty and size of the transaction. Transactions in foreign
securities often involve the payment of fixed brokerage commissions, which may
be higher than those in the United States. There is generally no stated
commission in the case of securities traded in the over-the-counter markets,
but the price paid by the Trust usually includes an undisclosed dealer
commission or mark-up. In underwritten offerings, the price paid by the Trust
includes a disclosed, fixed commission or discount retained by the underwriter
or dealer. It is anticipated that most purchases and sales of securities by
funds investing primarily in certain fixed-income securities will be with the
issuer or with underwriters of or dealers in those securities, acting as
principal. Accordingly, those funds would not ordinarily pay significant
brokerage commissions with respect to securities transactions.
It is currently intended that the Adviser or Sub-Advisers will place all
orders for the purchase and sale of portfolio securities for the Trust
and buy and sell securities for the Trust through a substantial number of
brokers and dealers. In so doing, the Adviser or Sub-Advisers will use
their best efforts to obtain for the Trust the best price and execution
available. In seeking the best price and execution, the Adviser or
Sub-Advisers, having in mind the Trust's best interests, will consider all
factors they deem relevant, including, by way of illustration, price, the
size of the transaction, the nature of the market for the security,
the amount of the commission, the timing of the transaction taking into
account market prices and trends, the reputation, experience, and financial
stability of the broker-dealer involved, and the quality of service rendered
by the broker-dealer in other transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional
investors to receive brokerage and research services (as defined in the
Securities Exchange Act of 1934 (the "1934 Act")) from broker-dealers which
execute portfolio transactions for the clients of such advisers and from third
parties with which such broker-dealers have arrangements. Consistent with this
practice, the Adviser or Sub-Advisers may receive brokerage and research
services and other similar services from many broker-dealers with which
they place the Trust's portfolio transactions and from third parties
with which such broker-dealers have arrangements. These services, which in
some cases may also be purchased for cash, include such matters as general
economic and security market reviews, industry and company reviews,
evaluations of securities, and recommendations as to the purchase and
sale of securities. Some of these services may be of value to the
Adviser or Sub-Advisers and/or their affiliates in advising various other
clients (including the Trust), although not all of these services are
necessarily useful and of value in managing the Trust. The management fees
paid by the Trust are not reduced because the Adviser or Sub-Advisers
and/or their affiliates may receive such services.
As permitted by Section 28(e) of the 1934 Act, an Adviser or Sub-Adviser
may cause a Portfolio to pay a broker-dealer which provides "brokerage and
research services" as defined in the 1934 Act to the Adviser or Sub-Adviser
an amount of disclosed commission for effecting a securities transaction for
the Portfolio in excess of the commission which another broker-dealer
would have charged for effecting that transaction provided that the Adviser
or Sub-Adviser determines in good faith that such commission was reasonable
in relation to the value of the brokerage and research services provided by
such broker-dealer viewed in terms of that particular transaction or in terms
of all of the accounts over which investment discretion is so exercised. A
Sub-Adviser's authority to cause a Portfolio to pay any such greater
commissions is also subject to such policies as the Adviser or the Trustees
may adopt from time to time.
INVESTMENT DECISIONS. Investment decisions for the Trust and for the
other investment advisory clients of the Adviser or Sub-Advisers are made
with a view to achieving their respective investment objectives and after
consideration of such factors as their current holdings, availability of
cash for investment, and the size of their investments generally.
Frequently, a particular security may be bought or sold for only one client or
in different amounts and at different times for more than one but less than
all clients. Likewise, a particular security may be bought for one or
more clients when one or more other clients are selling the security. In
addition, purchases or sales of the same security may be made for two or
more clients of the Adviser or a Sub-Adviser on the same day. In such event,
such transactions will be allocated among the clients in a manner believed
by the Adviser or Sub-Adviser to be equitable to each. In some cases, this
procedure could have an adverse effect on the price or amount of the
securities purchased or sold by the Trust. Purchase and sale orders for the
Trust may be combined with those of other clients of the Adviser or a
Sub-Adviser in the interest of achieving the most favorable net results for
the Trust.
For the period ended December 31, 1995, the Portfolios paid brokerage
commissions in the following aggregate amounts: International Stock Portfolio,
$76,268; OTC Portfolio, $15,221; Research Portfolio, $26,453; and Total Return
Portfolio, $8,312.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Portfolio is determined daily as of 4:00
p.m. New York time on each day the New York Stock Exchange is open for
trading. The New York Stock Exchange is normally closed on the following
national holidays: New Year's Day, President's Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving, and Christmas.
The value of a foreign security is determined in its national currency as of
the close of trading on the foreign exchange on which it is traded or as of
4:00 p.m. New York time, if that is earlier, and that value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined.
The valuation of the Money Market Portfolio's portfolio securities is based
upon their amortized cost, which does not take into account unrealized
securities gains or losses. This method involves initially valuing an
instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. By using amortized cost
valuation, the Trust seeks to maintain a constant net asset value of $1.00 per
share for the Money Market Portfolio, despite minor shifts in the market value
of its portfolio securities. While this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Money Market Portfolio
would receive if it sold the instrument. During periods of declining interest
rates, the quoted yield on shares of the Money Market Portfolio may tend to be
higher than a like computation made by a fund with identical investments
utilizing a method of valuation based on market prices and estimates of market
prices for all of its portfolio instruments. Thus, if the use of amortized
cost by the Portfolio resulted in a lower aggregate portfolio value on a
particular day, a prospective investor in the Money Market Portfolio would be
able to obtain a somewhat higher yield if he or she purchased shares of the
Money Market Portfolio on that day, than would result from investment in a
fund utilizing solely market values, and existing investors in the Money
Market Portfolio would receive less investment income. The converse would
apply on a day when the use of amortized cost by the Portfolio resulted in a
higher aggregate portfolio value. However, as a result of certain procedures
adopted by the Trust, the Trust believes any difference will normally be
minimal.
The net asset value of the shares of each of the Portfolios other than the
Money Market Portfolio is determined by dividing the total assets of the
Portfolio, less all liabilities, by the total number of shares outstanding.
Securities traded on a national securities exchange or quoted on the NASDAQ
National Market System are valued at their last-reported sale price on the
principal exchange or reported by NASDAQ or, if there is no reported sale, and
in the case of over-the-counter securities not included in the NASDAQ National
Market System, at a bid price estimated by a broker or dealer. Debt
securities, including zero-coupon securities, and certain foreign securities
will be valued by a pricing service. Other foreign securities will be valued
by the Trust's custodian. Securities for which current market quotations are
not readily available and all other assets are valued at fair value as
determined in good faith by the Trustees, although the actual calculations may
be made by persons acting pursuant to the direction of the Trustees.
If any securities held by a Portfolio are restricted as to resale, their fair
value is generally determined as the amount which the Trust could reasonably
expect to realize from an orderly disposition of such securities over a
reasonable period of time. The valuation procedures applied in any specific
instance are likely to vary from case to case. However, consideration is
generally given to the financial position of the issuer and other fundamental
analytical data relating to the investment and to the nature of the
restrictions on disposition of the securities (including any registration
expenses that might be borne by the Trust in connection with such
disposition). In addition, specific factors are also generally considered,
such as the cost of the investment, the market value of any unrestricted
securities of the same class (both at the time of purchase and at the time of
valuation), the size of the holding, the prices of any recent transactions or
offers with respect to such securities, and any available analysts' reports
regarding the issuer.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the
New York Stock Exchange. The values of these securities used in determining
the net asset value of the Trust's shares are computed as of such times.
Also, because of the amount of time required to collect and process trading
information as to large numbers of securities issues, the values of certain
securities (such as convertible bonds and U.S. Government Securities) are
determined based on market quotations collected earlier in the day at the
latest practicable time prior to the close of the Exchange. Occasionally,
events affecting the value of such securities may occur between such times and
the close of the Exchange which will not be reflected in the computation of
the Trust's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value, in the manner described above.
The proceeds received by each Portfolio for each issue or sale of its shares,
and all income, earnings, profits, and proceeds thereof, subject only to the
rights of creditors, will be specifically allocated to such Portfolio, and
constitute the underlying assets of that Portfolio. The underlying assets of
each Portfolio will be segregated on the Trust's books of account, and will be
charged with the liabilities in respect of such Portfolio and with a share of
the general liabilities of the Trust. Expenses with respect to any two or
more Portfolios may be allocated in proportion to the net asset values of the
respective Portfolios except where allocations of direct expenses can
otherwise be fairly made.
TAXES
Each Portfolio of the Trust intends to continue to qualify each year and has
previously elected to be taxed as a regulated investment company under
Subchapter M of the United States Internal Revenue Code of 1986, as amended
(the "Code").
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal
income tax on any of its net investment income or net realized capital gains
that are distributed to the separate account of the Life Company. As a
Massachusetts business trust, a Portfolio under present law will not be
subject to any excise or income taxes in Massachusetts.
In order to qualify as a "regulated investment company," a Portfolio must,
among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities, or foreign currencies, and
other income (including gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities,
or currencies; (b) derive less than 30% of its gross income from the sale or
other disposition of certain assets (including stock and securities) held less
than three months; (c) diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the value of its total assets
consists of cash, cash items, U.S. Government Securities, and other securities
limited generally with respect to any one issuer to not more than 5% of the
total assets of the Portfolio and not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any issuer (other than U.S. Government
Securities). In order to receive the favorable tax treatment accorded
regulated investment companies and their shareholders, moreover, a Portfolio
must in general distribute at least 90% of its interest, dividends, net
short-term capital gain, and certain other income each year.
With respect to investment income and gains received by a Portfolio from
sources outside the United States, such income and gains may be subject to
foreign taxes which are withheld at the source. The effective rate of foreign
taxes in which a Portfolio will be subject depends on the specific countries
in which its assets will be invested and the extent of the assets invested in
each such country and therefore cannot be determined in advance.
A Portfolio's ability to use options, futures, and forward contracts and other
hedging techniques, and to engage in certain other transactions, may be
limited by tax considerations, in particular, the requirement that less than
30% of the Portfolio's gross income be derived from the sale or disposition of
assets held for less than three months. A Portfolio's transactions in
foreign-currency-denominated debt instruments and its hedging activities will
likely produce a difference between its book income and its taxable income.
This difference may cause a portion of the Portfolio's distributions of book
income to constitute returns of capital for tax purposes or require the
Portfolio to make distributions exceeding book income in order to permit the
Trust to continue to qualify, and be taxed under Subchapter M of the Code, as
a regulated investment company.
Under federal income tax law, a portion of the difference between the purchase
price of zero-coupon securities in which a Portfolio has invested and their
face value ("original issue discount") is considered to be income to the
Portfolio each year, even though the Portfolio will not receive cash interest
payments from these securities. This original issue discount (imputed income)
will comprise a part of the net investment income of the Portfolio which must
be distributed to shareholders in order to maintain the qualification of the
Portfolio as a regulated investment company and to avoid federal income tax at
the level of the Portfolio.
It is the policy of each of the Portfolios to meet the requirements of the
Code to qualify as a regulated investment company that is taxed pursuant to
Subchapter M of the Code. One of these requirements is that less than 30% of a
Portfolio's gross income must be derived from gains from sale or other
disposition of securities held for less than three months (with special rules
applying to so-called designated hedges). Accordingly, a Portfolio will be
restricted in selling securities held or considered under Code rules to have
been held less than three months, and in engaging in hedging or other
activities (including entering into options, futures, or short-sale
transactions) which may cause the Trust's holding period in certain of its
assets to be less than three months.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and related regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and regulations. The Code and regulations are subject to change by legislative
or administrative actions. This discussion does not describe in any respect
the tax treatment or offsets of any insurance or other product pursuant to
which investments in the Trust may be made.
DIVIDENDS AND DISTRIBUTIONS
MONEY MARKET PORTFOLIO. The net investment income of the Money Market
Portfolio is determined as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. New York time) on each day on which the Exchange
is open for business. All of the net investment income so determined normally
will be declared as a dividend daily to shareholders of record as of the close
of trading on the Exchange after the purchase and redemption of shares. A
dividend declared on the business day before a weekend or holiday will not
include an amount in respect of the Portfolio's income for the subsequent
non-business day or days. No daily dividend will include any amount of net
income in respect of a subsequent semi-annual accounting period. Dividends
commence on the next business day after the date of purchase. Dividends
declared during any month will be invested as of the close of business on the
last calendar day of that month (or the next business day after the last
calendar day of the month if the last calendar day of the month is a
non-business day) in additional shares of the Portfolio at the net asset value
per share, normally $1.00, determined as of the close of business on that day,
unless payment of the dividend in cash has been requested.
Net income of the Money Market Portfolio consists of all interest income
accrued on portfolio assets less all expenses of the Portfolio and amortized
market premium. Amortized market discount is included in interest income.
The Portfolio does not anticipate that it will normally realize any long-term
capital gains with respect to its portfolio securities.
Normally the Money Market Portfolio will have a positive net income at the
time of each determination thereof. Net income may be negative if an
unexpected liability must be accrued or a loss realized. If the net income of
the Portfolio determined at any time is a negative amount, the net asset value
per share will be reduced below $1.00 unless one or more of the following
steps, for which the Trustees have authority, are taken: (1) reduce the number
of shares in each shareholder's account, (2) offset each shareholder's pro
rata portion of negative net income against the shareholder's accrued dividend
account or against future dividends, or (3) combine these methods in order to
seek to maintain the net asset value per share at $1.00. The Trust may
endeavor to restore the Portfolio's net asset value per share to $1.00 by not
declaring dividends from net income on subsequent days until restoration, with
the result that the net asset value per share will increase to the extent of
positive net income which is not declared as a dividend.
Should the Money Market Portfolio incur or anticipate, with respect to
its portfolio, any unusual or unexpected significant expense or loss which
would affect disproportionately the Portfolio's income for a particular
period, the Trustees would at that time consider whether to adhere to the
dividend policy described above or to revise it in light of the then
prevailing circumstances in order to ameliorate to the extent possible the
disproportionate effect of such expense or loss on then existing shareholders.
Such expenses or losses may nevertheless result in a shareholder's receiving
no dividends for the period during which the shares are held and receiving
upon redemption a price per share lower than that which was paid.
OTHER PORTFOLIOS. Each of the Portfolios other than the Money Market
Portfolio will declare and distribute dividends from net investment income, if
any, and will distribute its net realized capital gains, if any, at least
annually. Both dividends and capital gain distributions will be made in
shares of such Portfolios unless an election is made on behalf of a separate
account to receive dividends and capital gain distributions in cash.
PERFORMANCE INFORMATION
MONEY MARKET PORTFOLIO: The Portfolio's yield is computed by determining the
percentage net change, excluding capital changes, in the value of an
investment in one share of the Portfolio over the base period, and multiplying
the net change by 365/7 (or approximately 52 weeks). The Portfolio's
effective yield represents a compounding of the yield by adding 1 to the
number representing the percentage change in value of the investment during
the base period, raising that sum to a power equal to 365/7, and subtracting 1
from the result.
OTHER PORTFOLIOS:
(a) A Portfolio's yield is presented for a specified 30-day period (the
"base period"). Yield is based on the amount determined by (i) calculating
the aggregate of dividends and interest earned by the Portfolio during the
base period less expenses accrued for that period, and (ii) dividing that
amount by the product of (A) the average daily number of shares of the
Portfolio outstanding during the base period and entitled to receive dividends
and (B) the net asset value per share of the Portfolio on the last day of the
base period. The result is annualized on a compounding basis to determine the
Portfolio's yield. For this calculation, interest earned on debt obligations
held by a Portfolio is generally calculated using the yield to maturity (or
first expected call date) of such obligations based on their market values
(or, in the case of receivables-backed securities such as Ginnie Maes, based
on cost). Dividends on equity securities are accrued daily at their stated
dividend rates.
Total return of a Portfolio for periods longer than one year is determined
by calculating the actual dollar amount of investment return on a $1,000
investment in the Portfolio made at the beginning of each period, then
calculating the average annual compounded rate of return which would produce
the same investment return on the $1,000 investment over the same period.
Total return for a period of one year or less is equal to the actual
investment return on a $1,000 investment in the Portfolio during that period.
Total return calculations assume that all Portfolio distributions are
reinvested at net asset value on their respective reinvestment dates.
From time to time, Adviser may reduce its compensation or assume expenses
in respect of the operations of a Portfolio in order to reduce the Portfolio's
expenses. Any such waiver or assumption would increase a Portfolio's yield
and total return during the period of the waiver or assumption.
SHAREHOLDER COMMUNICATIONS
Owners of VA contracts issued by Life Company for which shares of one or more
Portfolios are the investment vehicle are entitled to receive from the Life
Company unaudited semi-annual financial statements and audited year-end
financial statements certified by the Trust's independent public accountants.
Each report will show the investments owned by the Portfolio and the market
value thereof and will provide other information about the Portfolio and its
operations.
ORGANIZATION AND CAPITALIZATION
The Trust is an open-end investment company established under the laws of The
Commonwealth of Massachusetts by a Declaration of Trust dated May 11, 1994.
Shares entitle their holders to one vote per share, with fractional shares
voting proportionally; however, a separate vote will be taken by each
Portfolio on matters affecting an individual Portfolio. For example, a change
in a fundamental investment policy for the Advantage Portfolio would be voted
upon only by shareholders of the Advantage Portfolio. Additionally, approval
of the Investment Advisory Agreement is a matter to be determined separately
by each Portfolio. Approval by the shareholders of one Portfolio is effective
as to that Portfolio. Shares have noncumulative voting rights. Although the
Trust is not required to hold annual meetings of its shareholders,
shareholders have the right to call a meeting to elect or remove Trustees or
to take other actions as provided in the Declaration of Trust. Shares have no
preemptive or subscription rights, and are transferable. Shares are entitled
to dividends as declared by the Trustees, and if a Portfolio were liquidated,
the shares of that Portfolio would receive the net assets of that Portfolio.
The Trust may suspend the sale of shares at any time and may refuse any order
to purchase shares.
Additional Portfolios may be created from time to time with different
investment objectives or for use as funding vehicles for different variable
life insurance policies or variable annuity contracts. Any additional
Portfolios may be managed by investment advisers or sub-advisers other than
the current Adviser and Sub-Advisers. In addition, the Trustees have the
right, subject to any necessary regulatory approvals, to create more than one
class of shares in a Portfolio, with the classes being subject to different
charges and expenses and having such other different rights as the Trustees
may prescribe and to terminate any Portfolio of the Trust.
PORTFOLIO TURNOVER
The portfolio turnover rate of a Portfolio is defined by the Securities and
Exchange Commission as the ratio of the lesser of annual sales or purchases to
the monthly average value of the portfolio, excluding from both the numerator
and the denominator securities with maturities at the time of acquisition of
one year or less. Under that definition, the Money Market Portfolio would not
calculate portfolio turnover. Portfolio turnover generally involves some
expense to a Portfolio, including brokerage commissions or dealer mark-ups and
other transaction costs on the sale of securities and reinvestment in other
securities.
CUSTODIAN
State Street Bank and Trust Company is the custodian of the Trust's assets.
The custodian's responsibilities include safeguarding and controlling the
Trust's cash and securities, handling the receipt and delivery of securities,
and collecting interest and dividends on the Trust's investments. The Trust
may employ foreign sub-custodians that are approved by the Board of Trustees
to hold foreign assets.
LEGAL COUNSEL
Legal matters in connection with the offering are being passed upon by
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut.
INDEPENDENT AUDITORS
The Trust has selected Ernst & Young LLP, as the independent auditors who will
audit the annual financial statements of the Trust.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations
of the Trust and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the Trust or
the Trustees. The Declaration of Trust provides for indemnification out of a
Portfolio's property for all loss and expense of any shareholder held
personally liable for the obligations of a Portfolio. Thus the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the Portfolio would be unable to meet its
obligations.
DESCRIPTION OF NRSRO RATINGS
DESCRIPTION OF MOODY'S CORPORATE RATINGS
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation 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 the
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 represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are the lowest rated class of bonds. Issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
DESCRIPTION OF S&P CORPORATE RATINGS
AAA -- Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher 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 for bonds 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 the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the least degree of speculation and C the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions. A C rating is typically applied
to debt subordinated to senior debt which is assigned an actual or implied CCC
rating. It may also be used to cover a situation where a bankruptcy petition
has been filed, but debt service payments are continued.
DESCRIPTION OF DUFF CORPORATE RATINGS
AAA - Highest credit quality. The risk factors are negligible being only
slightly more than for risk-free U.S. Treasury debt.
AA - risk is modest but may vary slightly from time to time because of
economic conditions.
A - Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB - Investment grade. Considerable variability in risk during economic
cycles.
BB - Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according
to industry conditions or company fortunes. Overall quality may move up or
down frequently within this category.
B - Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according
to economic cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in quality rating within this category or into a
higher or lower quality rating grade.
SUBSTANTIAL RISK - Well below investment grade securities. May be in
default or have considerable uncertainty as to timely payment of interest,
preferred dividends and/or principal. Protection factors are narrow and risk
can be substantial with unfavorable economic/industry conditions, and/or with
favorable company developments.
DESCRIPTION OF FITCH CORPORATE RATINGS
AAA - Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issues is generally
rated "[-]+."
A - Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and to repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and to repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB - Bonds considered speculative and of low investment grade. The
obligor's ability to pay interest and repay principal is not strong and is
considered likely to be affected over time by adverse economic changes.
B - Bonds considered highly speculative. Bonds in this class are lightly
protected as to the obligor's ability to pay interest over the life of the
issue and repay principal when due.
CCC - Bonds which may have certain identifiable characteristics which, if
not remedied, could lead to the possibility of default in either principal or
interest payments.
CC - Bonds which are minimally protected. Default in payment of interest
and/or principal seems probable.
C - Bonds which are in imminent default in payment of interest or
principal.
DESCRIPTION OF THOMSON BANKWATCH, INC. CORPORATE RATINGS
AAA - Long-term fixed income securities that are rated AAA indicate that
the ability to repay principal and interest on a timely basis is very high.
AA - Long-term fixed income securities that are rated AA indicate a
superior ability to repay principal and interest on a timely basis with
limited incremental risk versus issues rated in the highest category.
TBW may apply plus ("+") and minus ("-") modifiers in the AAA and AA
categories to indicate where within the respective category the issue is
placed.
DESCRIPTION OF IBCA LIMITED AND IBCA INC. CORPORATE RATINGS
AAA - Obligations which are rated AAA are considered to be of the lowest
expectation of investment risk. Capacity for timely repayment of principal
and interest is substantial such that adverse changes in business, economic,
or financial conditions are unlikely to increase investment risk
significantly.
AA - Obligations which are rated AA are considered to be of a very low
expectation of investment risk. Capacity for timely repayment of principal
and interest is substantial. Adverse changes in business, economic, or
financial conditions may increase investment risk albeit not very
significantly.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payments is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted A-1+.
Capacity for timely payment on commercial paper rated A-2 is strong, but the
relative degree of safety is not as high as for issues designated A-1. An A-3
designation indicates an adequate capacity for timely payment. Issues with
this designation, however, are more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations. B
issues are regarded as having only speculative capacity for timely payment. C
issues have a doubtful capacity for payment. D issues are in payment default.
The D rating category is used when interest payments or principal payments
are not made on the due date, even if the applicable grace period has not
expired, unless Standard & Poor's believes that such payments will be made
during such grace period.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
of issuers rated Prime-1 but to a lesser degree. Earnings trend and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained. P-3 issuers 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. Not Prime issuers do not fall within any of the Prime rating
categories.
DESCRIPTION OF DUFF'S COMMERCIAL PAPER RATINGS
The rating Duff-1 is the highest commercial paper rating assigned by Duff
& Phelps. Paper rated Duff-1 is regarded as having very high certainty of
timely payment with excellent liquidity factors which are supported by ample
asset protection. Risk factors are minor. Paper rated Duff-2 is regarded as
having good certainty of timely payment, good access to capital markets and
sound liquidity factors and company fundamentals. Risk factors are small.
DESCRIPTION OF FITCH'S COMMERCIAL PAPER RATINGS
The rating Fitch-1 (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade)
is the second highest commercial paper rating assigned by Fitch which reflects
an assurance of timely payment only slightly less in degree than the strongest
issues.
DESCRIPTION OF IBCA LIMITED AND IBCA INC. COMMERCIAL PAPER RATINGS
A1 - Short-term obligations rated A1 are supported by a very strong
capacity for timely repayment. A plus ("+") sign is added to those issues
determined to possess the highest capacity for timely payment.
A2 - Short-term obligations rated A2 are supported by a strong capacity
for timely repayment, although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
DESCRIPTION OF THOMSON BANKWATCH, INC. COMMERCIAL PAPER RATINGS
TBW-1 - Short-term obligations rated TBW-1 indicate a very high degree of
likelihood that principal and interest will be paid on a timely basis.
TBW-2 - Short-term obligations rated TBW-2 indicate that while the degree
of safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated TBW-1.
FINANCIAL STATEMENTS
The Trust's financial statements and notes thereto for the year ended December
31, 1995, and the report of Ernst & Young LLP, Independent Auditors, with
respect thereto, appear in the Trust's Annual Report for the year ended
December 31, 1995, which is incorporated by reference into this Statement of
Additional Information. The Trust delivers a copy of the Annual Report to
investors along with the Statement of Additional Information. In addition,
the Trust will furnish, without charge, additional copies of such Annual
Report to investors which may be obtained without charge by calling the Life
Company at (800) 344-6864.
A Statement of Assets and Liabilities of each of the Growth & Income and Value
+ Growth Portfolios as of March 21, 1996, and the report of Ernst & Young LLP,
Independent Auditors, with respect thereto, is set forth below.
Statements of Assets and Liabilities
Growth & Income Portfolio and Value + Growth
Portfolio of Equi-Select Series Trust
March 20, 1996
with Report of Independent Auditors
Growth & Income Portfolio and Value + Growth
Portfolio of Equi-Select Series Trust
Statements of Assets and Liabilities
March 20, 1996
Contents
Report of Independent Auditors
Statements of Assets and Liabilities
Notes to Statements of Assets and Liabilities
Report of Independent Auditors
The Board of Trustees and Shareholder
Growth & Income Portfolio and Value + Growth
Portfolio of Equi-Select Series Trust
We have audited the accompanying statements of assets and liabilities of
the Growth & Income Portfolio and the Value + Growth Portfolio of Equi-
Select Series Trust (the "Trust") as of March 20, 1996. These statements
of assets and liabilities are the responsibility of the Trust's management.
Our responsibility is to express an opinion on these statements of assets
and liabilities based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of assets and
liabilities are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the statements of assets and liabilities. Our procedures included
confirmation of cash held as of March 20, 1996, by correspondence with the
custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall statement of assets and liabilities presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the statements of assets and liabilities referred to above
present fairly, in all material respects, the financial position of the
Growth & Income Portfolio and the Value + Growth Portfolio of the Equi-
Select Series Trust at March 20, 1996, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Des Moines, Iowa
March 20, 1996
Growth & Income Portfolio and Value + Growth
Portfolio of Equi-Select Series Trust
Statements of Assets and Liabilities
March 20, 1996
<TABLE>
<CAPTION>
Growth & Value +
Income Growth
Portfolio Portfolio
__________________________
<S> <C> <C>
Assets
Cash in bank $10,000 $10,000
Deferred organizational costs 7,628 7,628
__________________________
Total assets 17,628 17,628
Liabilities - accounts payable to Equitable
Life Insurance Company of Iowa 7,628 7,628
__________________________
Net assets applicable to Capital Stock
outstanding (Note 4) $10,000 $10,000
==========================
Net asset value, redemption price and
offering price per share $10.00 $10.00
=========================
</TABLE>
See accompanying notes.
Growth & Income Portfolio and Value + Growth
Portfolio of Equi-Select Series Trust
Notes to Statements of Assets and Liabilities
March 20, 1996
1. Organization and Significant Accounting Policies
Equi-Select Series Trust ("the Trust") is registered under the Investment
Company Act of 1940, as amended, as a no-load, open-end series management
investment company and operates in the mutual fund industry. The Trust
currently offers shares of beneficial interest of eight of its twelve
portfolios (known as the Advantage, International Fixed Income,
International Stock, Money Market, Mortgage-Backed Securities, OTC,
Research, and Total Return Portfolios). Effective September 22, 1995, the
Trust ceased offering the Government Securities and Short-Term Bond
Portfolios to new investors. On March 20, 1996, Equitable Life Insurance
Company of Iowa made the initial purchase of 1,000 shares of beneficial
interest in each of two new portfolios, the Growth & Income Portfolio and
the Value + Growth Portfolio. It is intended that shares of the Trust will
be sold to certain life insurance companies' separate accounts to fund the
benefits under variable insurance contracts issued by such life insurance
companies, including Equitable Life Insurance Company of Iowa. It is also
expected that Equitable Life Insurance Company of Iowa will provide working
capital during the initial period of operations.
Certain costs incurred in connection with the organization of the Trust
have been deferred and will be amortized on a straight-line basis over a
period of five years.
2. Operations
The Trust has agreed to pay investment advisory fees to Equitable
Investment Services, Inc. ("the Adviser"), an affiliate of Equitable Life
Insurance Company of Iowa, computed at an annual percentage rate of the
Trust's average daily net assets. The rate used in this calculation is
.95% of the first $200 million for the Growth & Income Portfolio, and .95%
of the first $500 million for the Value + Growth Portfolio. The Adviser
has subcontracted the investment advisory services for both portfolios to
Robertson, Stephens & Company Investment Management, L.P.
The annual percentage rates for the advisory fees for each portfolio
generally decrease in layers in excess of amounts set forth above.
The Adviser will absorb the cost of these sub-advisory agreements. In
addition, the Adviser has undertaken to bear, subject to termination at any
time without notice to shareholders, all operating expenses of each portfolio
(excluding compensation of the Adviser) that exceed .75% of each Portfolio's
average daily net assets.
Certain officers and directors of the Trust are also officers of Equitable
Life Insurance Company of Iowa and Equitable Investment Services, Inc.
Growth & Income Portfolio and Value + Growth
Portfolio of Equi-Select Series Trust
Notes to Statements of Assets and Liabilities (continued)
3. Federal Income Taxes
The Trust intends to qualify as a "regulated investment company" under the
Internal Revenue Code and intends to distribute each year substantially all
of its net investment income and realized capital gains to its
shareholders.
4. Capital Stock
The Trust has an unlimited number of shares of beneficial interest
authorized with a par value of $.01 per share. Net assets as of March 20,
1996 consisted of:
<TABLE>
<CAPTION>
Growth & Value +
Income Growth
Portfolio Portfolio
__________________________
<S> <C> <C>
Capital Stock $ 10 $ 10
Additional paid-in capital 9,990 9,990
__________________________
Net assets $10,000 $10,000
==========================
Shares issued and outstanding 1,000 1,000
</TABLE>
