As filed with the Securities and Exchange Commission
on January 22, 1996
Registration Nos. 33-79166
811-8522
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 3 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 4 [X]
(Check appropriate box or boxes.)
EQUI-SELECT SERIES TRUST
_________________________________________________
(Exact name of registrant as specified in charter)
699 Walnut Street
Des Moines, Iowa 50309
________________________________________ __________
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (800) 344-6860
John A. Merriman, Esq.
Assistant Secretary and General Counsel
Equitable Investment Services, Inc.
604 Locust Street
Des Moines, Iowa 50309
(Name and Address of Agent For Service)
Copies to:
Raymond A. O'Hara III, Esq. and G. Thomas Sullivan, Esq.
Blazzard, Grodd & Hasenauer, P.C. Nyemaster, Goode, McLaughlin,
P.O. Box 5108 Voigts, West, Hansell & O'Brien
Westport, CT 06881 1900 Hub Tower
(203) 226-7866 699 Walnut Street
Des Moines, Iowa 50309
It is proposed that this filing will become effective (check appropriate box)
___ immediately upon filing pursuant to paragraph (b)
___ on (date) pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(1)
___ on (date) pursuant to paragraph (a)(1)
_X_ 75 days after filing pursuant to paragraph (a)(2)
___ on (date) pursuant to paragraph (a)(2) of rule 485.
appropriate, check the following box:
___ this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has declared that it has registered an indefinite number or amount
of securities under the Securities Act of 1933 pursuant to Investment Company
Act Rule 24f-2 and the Rule 24f-2 Notice for Registrant's fiscal year 1995
will be filed on or before February 29, 1996.
EQUI-SELECT SERIES TRUST
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CROSS REFERENCE SHEET
(as required by Rule 404 (c))
PART A
N-1A
- --------
Item No. Location
- -------- ------------------------
1. Cover Page. . . . . . . . . . . . . . . . Cover Page
2. Synopsis. . . . . . . . . . . . . . . . . Summary
3. Condensed Financial Information . . . . . Financial Highlights
4. General Description of Registrant . . . . Cover Page; The Trust;
Investment Objectives
and Policies of the
Portfolios; Additional
Information; Appendix
5. Management of the Fund. . . . . . . . . . Management of the Trust;
Additional Information
6. Capital Stock and Other Securities. . . . Sales and Redemptions;
Net Asset Value; Tax
Status, Dividends and
Distributions;
Additional Information
7. Purchase of Securities Being Offered. . . The Trust; Net Asset
Value; Sales and
Redemptions
8. Redemption or Repurchase. . . . . . . . . Redemptions; Net
Asset Value
9. Pending Legal Proceedings . . . . . . . . Not Applicable
PART B
10. Cover Page . . . . . . . . . . . . . . . . Cover Page
11. Table of Contents. . . . . . . . . . . . . Cover Page
12. General Information and History . . . . . Not Applicable
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CROSS REFERENCE SHEET (cont'd)
(as required by Rule 404 (c))
PART B (CONT'D)
N-1A
- --------
Item No. Location
- -------- --------------------------
13. Investment Objectives and Policies . . . . Investment Objectives and
Policies of the Trust;
Investment Restrictions;
Portfolio Turnover
14. Management of the Fund . . . . . . . . . . Management of the Trust
15. Control Persons and Principal Holders of
Securities . . . . . . . . . . . . . . . Management of the Trust
16. Investment Advisory and Other Services . . Management of the Trust;
Independent Auditors;
Custodian
17. Brokerage Allocation . . . . . . . . . . . Management of the Trust
(Brokerage and Research
Services)
18. Capital Stock and Other Securities . . . . Sales and Redemptions;
Net Asset Value; Tax
Status, Dividends and
Distributions;
Organization and
Capitalization;
Additional Information
19. Purchase, Redemption and Pricing of
Securities Being Offered . . . . . . . . Determination of Net
Asset Value; Sales and
Redemptions
20. Tax Status . . . . . . . . . . . . . . . . Taxes; Dividends and
Distributions
21. Underwriters . . . . . . . . . . . . . . . Not Applicable
22. Calculations of Yield Quotations of Money
Market Funds . . . . . . . . . . . . . Performance Information
23. Financial Statements . . . . . . . . . . . Financial Statements
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PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of the Registration Statement.
EXPLANATORY NOTE
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This Registration Statement contains twelve Portfolios of the Equi-Select
Series Trust. Two versions of Prospectuses will be created from this
Registration Statement. The distribution system for each version of the
Prospectus is different. One version of the Prospectus will contain the
twelve Portfolios of the Equi-Select Series Trust. The other version of the
Prospectus will contain only the Research Portfolio, OTC Portfolio and Total
Return Portfolio of the Equi-Select Series Trust. These Prospectuses will be
filed with the Commission pursuant to Rule 497.
The Registrant undertakes to update this Explanatory Note each time a
Post-Effective Amendment is filed. The following Prospectuses were filed
pursuant to Rule 497 regarding this Registration Statement:
1. On June 23, 1995, a prospectus was filed pursuant to Rule 497 which
contained the ten Portfolios of Equi-Select Series Trust.
2. On June 28, 1995, a prospectus was filed pursuant to Rule 497 which
contained only the Research Portfolio of Equi-Select Series Trust.
==============================================================================
PART A
EQUI-SELECT SERIES TRUST
699 WALNUT STREET
DES MOINES, IOWA 50309
Equi-Select Series Trust (the "Trust") is an open-end, series management
investment company which currently offers shares of beneficial interest of ten
of its twelve series (the "Portfolios"), each of which has a different
investment objective and represents the entire interest in a separate
portfolio of investments. The ten available Portfolios are: Advantage
Portfolio, Growth & Income Portfolio, International Fixed Income Portfolio,
International Stock Portfolio, Money Market Portfolio, Mortgage-Backed
Securities Portfolio, OTC Portfolio, Research Portfolio, Total Return
Portfolio and Value + Growth Portfolio. These Portfolios are currently
available to the public only through certain variable annuity contracts ("VA
Contracts") issued by Equitable Life Insurance Company of Iowa ("Life
Company"). Shares of the Government Securities Portfolio and the Short-Term
Bond Portfolio are no longer offered for sale.
This Prospectus sets forth concisely the information about the Trust that a
prospective investor should know before investing. Please read it carefully
and retain it for future reference. A Statement of Additional Information
("SAI") dated April 1, 1996 is available without charge upon request and may
be obtained by calling the Life Company at (800) 344-6864 or by writing to the
Life Company, P.O. Box 9271, Des Moines, Iowa 50306-9271. Some of the
discussions contained in this Prospectus refer to the more detailed
descriptions contained in the SAI, which is incorporated by reference into
this Prospectus and has been filed with the Securities and Exchange
Commission.
PURCHASERS SHOULD BE AWARE THAT AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO
ASSURANCE THAT THE MONEY MARKET PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
PROSPECTUS DATED APRIL 1, 1996
TABLE OF CONTENTS
PAGE
SUMMARY
The Trust
Investment Adviser and Sub-Advisers
The Portfolios
Investment Risks
Sales and Redemptions
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
Portfolios Seeking Current Income
Advantage Portfolio
Short-Term Bond Portfolio
Government Securities Portfolio
Debt Obligations
Foreign Securities and Currencies
Repurchase Agreements
Derivative Instruments
When-Issued Securities
Illiquid Securities
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities
Mortgage Dollar Rolls and Reverse Repurchase Agreements
Portfolio Turnover
Money Market Portfolio
Mortgage-Backed Securities Portfolio
Portfolios Seeking Capital Growth
International Stock Portfolio
OTC Portfolio
Research Portfolio
Value + Growth Portfolio
Portfolios Seeking Total Return
International Fixed Income Portfolio
Total Return Portfolio
Growth & Income Portfolio
MANAGEMENT OF THE TRUST
Investment Adviser
Advisory Fee Waiver and Expense Cap
Expenses of the Trust
Sub-Advisers
SALES AND REDEMPTIONS
NET ASSET VALUE
PERFORMANCE INFORMATION
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
ADDITIONAL INFORMATION
APPENDIX
SUMMARY
THE TRUST
The Trust is an open-end management investment company established as a
Massachusetts business trust under a Declaration of Trust dated May 11, 1994.
Each Portfolio issues a separate class of shares. The Declaration of Trust
permits the Trustees to issue an unlimited number of full or fractional shares
of each class of stock.
Each Portfolio has distinct investment objectives and policies. (See
"Investment Objectives and Policies of the Portfolios.") Additional Portfolios
may be added to the Trust in the future. This Prospectus will be supplemented
to reflect the addition of new Portfolios.
INVESTMENT ADVISER AND SUB-ADVISERS
Subject to the authority of the Board of Trustees of the Trust, Equitable
Investment Services, Inc. (the "Adviser") serves as the Trust's investment
adviser and has responsibility for the overall management of the investment
strategies and policies of the Portfolios. The Adviser has engaged
Sub-Advisers for certain of the Portfolios to make investment decisions and
place orders. The Sub-Advisers for these Portfolios are:
SUB-ADVISER NAME OF PORTFOLIO
Credit Suisse Investment Management Limited International Fixed Income
Strong Capital Management, Inc. International Stock
Massachusetts Financial Services Company OTC
Research
Total Return
Robertson, Stephens & Company Growth & Income
Investment Management, L.P. Value + Growth
The Sub-Advisory Agreement dated July 21, 1994, between the Adviser and Strong
Capital Management, Inc. has been terminated, effective as of June __, 1996
for the International Stock Portfolio.
For additional information concerning the Adviser and the Sub-Advisers,
including a description of advisory and sub-advisory fees, see "Management of
the Trust."
THE PORTFOLIOS
ADVANTAGE PORTFOLIO. The Advantage Portfolio seeks current income with a
very low degree of share-price fluctuation. The Portfolio invests primarily
in ultra short-term, investment-grade debt obligations, and its average
effective maturity will normally be one year or less.
GOVERNMENT SECURITIES PORTFOLIO. The Government Securities Portfolio
seeks total return by investing for a high level of current income with a
moderate degree of share-price fluctuation. The Portfolio normally invests at
least 80% of its total assets in U.S. government securities.
GROWTH & INCOME PORTFOLIO. The Growth & Income Portfolio seeks long-term
total return by investing in equity securities and debt securities, focusing
on small- and mid-cap companies that offer potential for capital appreciation,
current income, or both.
INTERNATIONAL FIXED INCOME PORTFOLIO. The International Fixed Income
Portfolio seeks to provide high total return. Under normal conditions, at
least 65% of the Portfolio's total assets will be invested in fixed income
securities of issuers whose principal activities are outside of the U.S. or
foreign currency denominated fixed income securities of U.S. issuers. Under
normal conditions, the Portfolio's Sub-Adviser expects that the Portfolio
generally will be invested in at least six different countries, including the
U.S., although the Portfolio may at times invest all of its assets in a single
country.
INTERNATIONAL STOCK PORTFOLIO. The International Stock Portfolio seeks
capital growth. The Portfolio invests at least 65% of the Portfolio's total
assets in the equity securities of issuers located outside the United States.
MONEY MARKET PORTFOLIO. The Money Market Portfolio seeks to achieve
maximum current income, consistent with the preservation of capital and the
maintenance of liquidity. The Portfolio will seek to achieve this objective
by investing exclusively in certain U.S. dollar-denominated money market
instruments maturing in 397 days or less.
MORTGAGE-BACKED SECURITIES PORTFOLIO. The Mortgage-Backed Securities
Portfolio seeks to obtain a high current return, consistent with safety of
principal, by investing, under normal conditions, at least 65% of the
Portfolio's total assets in mortgage-backed securities including those
representing an undivided ownership interest in a pool of mortgages, e.g.,
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC")
Certificates.
OTC PORTFOLIO. The primary investment objective of the OTC Portfolio is
to seek to obtain long-term growth of capital. The Portfolio seeks to achieve
this objective by investing at least 65% of its assets, under normal
circumstances, in securities principally traded on the over-the-counter (OTC)
securities market. The Portfolio is intended for investors who understand and
are willing to accept the risks entailed in seeking long-term growth of
capital. The Portfolio may invest 10% or more of its total assets in foreign
securities (not including American Depositary Receipts ("ADRs"); however,
under normal market conditions, the Portfolio expects to invest less than 35%
of its total assets in foreign securities. The Portfolio may invest up to 10%
of its total assets in emerging markets or countries with limited or
developing capital markets. (See "Appendix--Foreign Investments" and the SAI
for a discussion of the risks involved in foreign investing.) The Portfolio
may invest a portion of its assets in lower-grade corporate debt securities
commonly known as "junk bonds." Investors should be aware that such
investments involve a significant degree of risk. (See "Appendix--Lower-Rated
Securities" and the SAI for a discussion of the risks involved in investing in
lower-rated securities.)
RESEARCH PORTFOLIO. The Research Portfolio seeks to provide long-term
growth of capital and future income by investing a substantial portion of its
assets in common stocks or securities convertible into common stocks of
companies believed to possess better than average prospects for long-term
growth. A smaller proportion of the assets may be invested in bonds,
short-term obligations, preferred stocks or common stocks whose principal
characteristic is income production rather than growth. The Portfolio may
invest up to 20% (and generally expects to invest between 10% and 20%) of its
total assets in foreign securities (not including American Depositary
Receipts). (See "Appendix--Foreign Investments" and the SAI for a discussion
of the risks involved in foreign investing.) The Portfolio may invest up to
10% of its assets in lower-grade corporate debt securities commonly known as
"junk bonds." Investors should be aware that such investments involve a
significant degree of risk. (See "Appendix--Lower-Rated Securities" and the
SAI for a discussion of the risks involved in investing in lower-rated
securities.)
SHORT-TERM BOND PORTFOLIO. The Short-Term Bond Portfolio seeks total
return by investing for a high level of current income with a low degree of
share-price fluctuation. The Portfolio invests primarily in short- and
intermediate-term, investment grade debt obligations, and its average
portfolio maturity will normally be between one and three years.
TOTAL RETURN PORTFOLIO. The Total Return Portfolio primarily seeks to
obtain above-average income (compared to a portfolio entirely invested in
equity securities) consistent with the prudent employment of capital. The
Portfolio's secondary objective is to take advantage of opportunities for
growth of capital and income. Under normal market conditions, at least 25% of
the Portfolio's assets will be invested in fixed income securities and at
least 40% and no more than 75% of the Portfolio's assets will be invested in
equity securities, which include: common and preferred stocks; securities such
as bonds, warrants or rights that are convertible into stock; and depository
receipts for those securities. The Portfolio may invest up to 20% (and
generally expects to invest between 10% and 20%) of its total assets in
foreign securities (not including American Depositary Receipts). (See
"Appendix--Foreign Investments" and the SAI for a discussion of the risks
involved in foreign investing.) The Portfolio may invest a portion of its
assets in lower-grade corporate debt securities commonly known as "junk
bonds." Investors should be aware that such investments involve a significant
degree of risk. (See "Appendix--Lower-Rated Securities" and the SAI for a
discussion of the risks involved in investing in lower-rated securities.)
VALUE + GROWTH PORTFOLIO. The Value + Growth Portfolio seeks capital
appreciation by investing primarily in mid-cap growth companies with favorable
relationships between price/earnings ratios and growth rates, in sectors
offering the potential for above-average returns.
The investment objectives of a Portfolio and policies and restrictions
specifically cited as fundamental may not be changed without the approval of a
majority of the outstanding shares of that Portfolio. Other investment
policies and practices described in this Prospectus and the SAI are not
fundamental, and the Board of Trustees may change them without shareholder
approval. A complete list of investment restrictions, including those
restrictions which cannot be changed without shareholder approval, is
contained in the SAI. There is no assurance that a Portfolio will meet its
stated objective.
INVESTMENT RISKS
The value of a Portfolio's shares will fluctuate with the value of the
underlying securities in its portfolio, and in the case of debt securities,
with the general level of interest rates. When interest rates decline, the
value of an investment portfolio invested in fixed-income securities can be
expected to rise. Conversely, when interest rates rise, the value of an
investment portfolio invested in fixed-income securities can be expected to
decline. In the case of foreign currency denominated securities, these trends
may be offset or amplified by fluctuations in foreign currencies. Investments
by a Portfolio in foreign securities may be affected by adverse political,
diplomatic, and economic developments, changes in foreign currency exchange
rates, taxes or other assessments imposed on distributions with respect to
those investments, and other factors affecting foreign investments generally.
High-yielding fixed-income securities, which are commonly known as "junk
bonds", are subject to greater market fluctuations and risk of loss of income
and principal than investments in lower yielding fixed-income securities.
Certain of the Portfolios intend to employ, from time to time, certain
investment techniques which are designed to enhance income or total return or
hedge against market or currency risks but which themselves involve additional
risks. These techniques include options on securities, futures, options on
futures, options on indexes, options on foreign currencies, foreign currency
exchange transactions, lending of securities and when-issued securities and
delayed-delivery transactions. The Portfolios may have higher-than-average
portfolio turnover which may result in higher-than-average brokerage
commissions and transaction costs.
The investment strategies and portfolio investments of the Growth & Income
Portfolio and Value + Growth Portfolio will differ from those of most other
mutual funds. Robertson, Stephens & Company Investment Management, L.P., the
Sub-Adviser to each of these two Portfolios, seeks aggressively to identify
favorable securities, economic and market sectors, and investment
opportunities that other investors and investment advisers may not have
identified. When Robertson, Stephens & Company Investment Management, L.P.
identifies such an investment opportunity, it may devote more of a Portfolio's
assets to pursuing that opportunity, or at different times, than many other
mutual funds, and may select investments for a Portfolio that would be
inappropriate for less aggressive mutual funds.
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of the Life Company as a
funding vehicle for the VA Contracts offered by the Life Company. No fee is
charged upon the sale or redemption of the Trust's shares. Expenses of the
Trust are passed through to the separate accounts of the Life Company, and
therefore, are ultimately borne by VA Contract owners. In addition, other
fees and expenses are assessed by the Life Company at the separate account
level. (See the Prospectus for the VA Contract for a description of all fees
and charges relating to the VA Contract.)
FINANCIAL HIGHLIGHTS
EQUI-SELECT SERIES TRUST
The following tables include selected data, derived from the Financial
Statements, for a share outstanding throughout the period shown for each of
the Portfolios. The tables should be read in conjunction with the Financial
Statements and notes thereto included in the Trust's Annual Report to
Shareholders which are included in the Statement of Additional Information in
reliance upon the report of _______________, independent auditors.
Further information about the performance of the Trust is contained in the
Trust's December 31, 1995 Annual Report which may be obtained without charge
by calling the Life Company at (800) 344-6864.
EQUI-SELECT SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OF STOCK OUTSTANDING FOR EACH OF THE PERIODS
THROUGH DECEMBER 31, 1995
[To be filed by Amendment]
Money Market Portfolio
Mortgage-Backed Securities Portfolio
International Fixed Income Portfolio
OTC Portfolio
Research Portfolio
Total Return Portfolio
Advantage Portfolio
Government Securities Portfolio
International Stock Portfolio
Short-Term Bond Portfolio
The Growth & Income and Value + Growth Portfolios have not yet commenced
investment operations.
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
Each Portfolio of the Trust has a different investment objective or objectives
which it pursues through separate investment policies as described below. The
differences in objectives and policies among the Portfolios can be expected to
affect the return of each Portfolio and the degree of market and financial
risk to which each Portfolio is subject. An investment in a single Portfolio
should not be considered a complete investment program. The investment
objective(s) and policies of each Portfolio, unless otherwise specifically
stated, are non-fundamental and may be changed by the Trustees of the Trust
without a vote of the shareholders. Such changes may result in a Portfolio
having an investment objective(s) which differs from that which an investor
may have considered at the time of investment. There is no assurance that any
Portfolio will achieve its objective(s). United States Treasury Regulations
applicable to portfolios that serve as the funding vehicles for variable
annuity and variable life insurance contracts generally require that such
portfolios invest no more than 55% of the value of their assets in one
investment, 70% in two investments, 80% in three investments, and 90% in four
investments. The Portfolios intend to comply with the requirements of these
Regulations.
In order to comply with regulations which may be issued by the U.S. Treasury,
the Trust may be required to limit the availability or change the investment
policies of one or more Portfolios or to take steps to liquidate one or more
Portfolios. The Trust will not change any fundamental investment policy of a
Portfolio without a vote of shareholders of that Portfolio.
Except as otherwise noted herein, if the securities rating of a debt security
held by a Portfolio declines below the minimum rating for securities in which
the Portfolio may invest, the Portfolio will not be required to dispose of the
security, but the Portfolio's Adviser or Sub-Adviser will consider whether
continued investment in the security is consistent with the Portfolio's
investment objective.
In implementing its investment objectives and policies, each Portfolio uses a
variety of instruments, strategies and techniques which are described in more
detail in the Appendix and the SAI. With respect to each Portfolio's
investment policies, use of the term "primarily" means that under normal
circumstances, at least 65% of such Portfolio's assets will be invested as
indicated. A description of the ratings systems used by the following
nationally recognized statistical rating organizations ("NRSROs") is also
contained in the SAI: Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Corporation ("S&P"), Duff & Phelps, Inc. ("Duff"), Fitch Investors
Service, Inc. ("Fitch"), Thomson Bankwatch, Inc., IBCA Limited and IBCA Inc.
New instruments, strategies and techniques, however, are evolving continually
and the Trust reserves authority to invest in or implement them to the extent
consistent with its investment objectives and policies. If new instruments,
strategies or techniques would involve a material change to the information
contained herein, they will not be purchased or implemented until this
Prospectus is appropriately supplemented.
PORTFOLIOS SEEKING CURRENT INCOME
ADVANTAGE PORTFOLIO
The Advantage Portfolio seeks current income with a very low degree of
share-price fluctuation.
The Portfolio invests primarily in ultra short-term investment grade debt
obligations. The Portfolio is designed for investors who seek higher yields
than money market funds generally offer and who are willing to accept some
modest principal fluctuation in order to achieve that objective. Because its
share price will vary, the Portfolio is not an appropriate investment for
those whose primary objective is absolute principal stability.
The Portfolio's investments include a combination of high-quality money
market instruments, as well as securities with longer maturities and debt
obligations of lower quality. Under normal market conditions, it is
anticipated that the Portfolio will maintain an average effective portfolio
maturity of one year or less.
Under normal market conditions, at least 75% of the Portfolio's total
assets will be invested in investment-grade debt obligations which generally
include a range of obligations from those in the highest rating category to
those rated medium-quality (e.g., BBB- or higher by Standard & Poor's Ratings
Group or "S&P") by at least one of the NRSROs. The Portfolio may also invest
up to 25% of its total assets in non-investment-grade debt obligations that
are rated in the fifth-highest rating category (e.g., BB by S&P) by at least
one of the NRSROs or unrated securities of comparable quality. In general,
non-investment-grade securities are regarded as predominantly speculative with
respect to the capacity of the issuer to pay interest and repay principal.
However, because these securities compose the tier immediately below
investment-grade, they are considered the least speculative
non-investment-grade securities. (See "Investment Policies and
Risks--Advantage, Short-Term Bond and Government Securities Portfolios" and
"Fundamentals of Fixed-Income Investing--Advantage, Short-Term Bond and
Government Securities Portfolios--Credit Quality.")
SHORT-TERM BOND PORTFOLIO
The Short-Term Bond Portfolio seeks total return by investing for a high
level of current income with a low degree of share-price fluctuation.
The Portfolio is designed for investors who are willing to accept some
fluctuation in principal in order to pursue a higher level of income than is
generally available from money market securities. Because its share price
will vary, the Portfolio is not an appropriate investment for those whose
primary objective is absolute principal stability.
The Portfolio invests primarily in short- and intermediate-term,
investment-grade debt obligations. Under normal market conditions at least
65% of the Portfolio's total assets will be invested in debt obligations, such
as corporate and U.S. government debt obligations. The Portfolio's
dollar-weighted average portfolio maturity will be between one and three years
under normal market conditions.
Under normal market conditions, at least 95% of the Portfolio's total
assets will be invested in investment-grade debt obligations, which include a
range of securities from those in the highest rating category to those rated
medium-quality (e.g., BBB- or higher by S&P) by at least one of the NRSROs.
The Portfolio may also invest up to 5% of its total assets in
noninvestment-grade debt obligations and other high-yield (high-risk)
securities (e.g., those rated C- or better by S&P) by at least one of the
NRSROs. (See "Investment Policies and Risks--Advantage, Short-Term Bond and
Government Securities Portfolios" and "Fundamentals of Fixed-Income
Investing--Advantage, Short-Term Bond and Government Securities Portfolios".)
GOVERNMENT SECURITIES PORTFOLIO
The Government Securities Portfolio seeks total return by investing for a
high level of current income with a moderate degree of share-price
fluctuation.
The Portfolio is designed for long-term investors who want to pursue
higher income than shorter-term securities generally provide, who are willing
to accept the fluctuation in principal associated with longer-term securities,
and who seek the low credit risk that U.S. government securities generally
carry.
Under normal market conditions, at least 80% of the Portfolio's total
assets will be invested in U.S. government securities. The balance of the
Portfolio's assets may be invested in other investment-grade debt obligations.
While there are no maturity restrictions on the portfolio, it is anticipated
that the Portfolio's average portfolio maturity will normally be between 5 and
10 years.
FUNDAMENTALS OF FIXED INCOME INVESTING--ADVANTAGE, SHORT-TERM BOND AND
GOVERNMENT SECURITIES PORTFOLIOS
The return and risk potential of each of the Advantage, Short-Term Bond and
Government Securities Portfolios depends in part on the maturity and
credit-quality characteristics of the underlying investments in its portfolio.
In general, longer-maturity fixed income securities carry higher yields and
greater price volatility than shorter-term fixed income securities.
Similarly, fixed income securities issued by less creditworthy entities tend
to carry higher yields than those with higher credit ratings. (See
"Investment Policies and Risks--Advantage, Short-Term Bond and Government
Securities Portfolios" for a more detailed discussion of the principals and
risks associated with fixed-income securities.)
Issuers of debt obligations have a contractual obligation to pay interest at a
specified rate ("coupon rate") on specified dates and to repay principal
("face value" or "par value") on a specified maturity date. Certain debt
obligations (usually intermediate- and long-term obligations) have provisions
that allow the issuer to redeem or "call" the obligation before its maturity.
Issuers are most likely to call such debt obligations during periods of
falling interest rates. As a result, a Portfolio may be required to invest
the unanticipated proceeds of the called obligations at lower interest rates,
which may cause the Portfolio's income to decline.
Although the net asset values of the Advantage, Short-Term Bond and Government
Securities Portfolios are expected to fluctuate, the Adviser actively manages
each Portfolio's portfolio and adjusts its average portfolio maturity
according to its interest rate outlook while seeking to avoid or reduce, to
the extent possible, any negative changes in net asset value.
When the Adviser determines market conditions warrant a temporary defensive
position, the Advantage, Short-Term Bond and Government Securities Portfolios
may each invest without limitation in cash and short-term fixed income
securities.
PRICE VOLATILITY. The market value of debt obligations is affected by
changes in prevailing interest rates. The market value of a debt obligation
generally reacts inversely to interest-rate changes, meaning, when prevailing
interest rates decline, an obligation's price usually rises, and when
prevailing interest rates rise, an obligation's price usually declines. A
fund portfolio consisting primarily of debt obligations will react similarly
to changes in interest rates.
MATURITY. In general, the longer the maturity of a debt obligation, the
higher its yield and the greater its sensitivity to changes in interest rates.
Conversely, the shorter the maturity, the lower the yield but the greater the
price stability. Commercial paper is generally considered the shortest form
of debt obligation. Notes, whose original maturities are two years or less,
are considered short-term obligations. The term "bond" generally refers to
securities with maturities longer than two years. Bonds with maturities of
three years or less are considered short-term, bonds with maturities between
three and seven years are considered intermediate-term, and bonds with
maturities greater than seven years are considered long-term.
Maturity may be calculated in several ways. In determining a Portfolio's
weighted average portfolio maturity, a Portfolio will consider a security to
have a maturity equal to its stated maturity (or redemption date if it has
been called for redemption), except that it may consider (i) variable rate
securities to have a maturity equal to the period remaining until the next
readjustment in the interest rate, unless subject to a demand feature, (ii)
variable rate securities subject to a demand feature to have a remaining
maturity equal to the longer of (a) the next readjustment in the interest rate
or (b) the period remaining until the principal can be recovered through
demand, and (iii) floating rate securities subject to a demand feature to have
a maturity equal to the period remaining until the principal can be recovered
through demand.
A Portfolio's average portfolio maturity represents an average based on the
actual stated maturity dates of the debt securities in the Portfolio's
portfolio, except that (i) variable-rate securities are deemed to mature at
the next interest-rate adjustment date, (ii) debt securities with put features
are deemed to mature at the next put-exercise date, (iii) the maturity of
mortgage-backed securities is determined on an "expected life" basis, and (iv)
securities being hedged with futures contracts may be deemed to have a longer
maturity, in the case of purchases of futures contracts, and a shorter
maturity, in the case of sales of futures contracts, than they would otherwise
be deemed to have.
A Portfolio's average "effective portfolio maturity" will be calculated in
nearly the same manner as average portfolio maturity, which is explained
above. However, for the purpose of calculating average effective portfolio
maturity, a security that is subject to redemption at the option of the issuer
on a particular date (the "call date") which is prior to the security's stated
maturity may be deemed to mature on the call date rather than on its stated
maturity date. The call date of a security will be used to calculate average
effective portfolio maturity when the Adviser reasonably anticipates, based
upon information available to it, that the issuer will exercise its right to
redeem the security. The Adviser may base its conclusion on such factors as
the interest rate paid on the security compared to prevailing market rates,
the amount of cash available to the issuer of the security, events affecting
the issuer of the security, and other factors that may compel or make it
advantageous for the issuer to redeem a security prior to its stated maturity.
CREDIT QUALITY. The values of the debt obligations may also be affected
by changes in the credit rating or financial condition of their issuers.
Generally, the lower the quality rating of an obligation, the higher the
degree of risk as to the payment of interest and return of principal. To
compensate investors for taking on such increased risk, those issuers deemed
to be less creditworthy generally must offer their investors higher interest
rates than do issuers with better credit ratings.
In conducting its credit research and analysis, the Adviser considers both
qualitative and quantitative factors to evaluate the creditworthiness of
individual issuers. The Adviser also relies, in part, on credit ratings
compiled by a number of NRSROs. See the SAI for a description of bond ratings.
INVESTMENT-GRADE DEBT OBLIGATIONS. Debt obligations rated in the
highest- through the medium-quality categories are commonly referred to as
"investment-grade" debt obligations and include the following:
- U.S. government securities (See "Types of Portfolio
Securities--Government Securities" below);
- commercial paper rated in one of the three highest rating categories
(e.g., A-3 or higher by S&P);
- short-term notes rated in one of the two highest rating categories
(e.g., SP-2 or higher by S&P);
- short-term bank obligations in one of the three highest categories by
any NRSRO (e.g., A-3 or higher by S&P), with respect to obligations maturing
in one year or less;
- bonds or bank obligations rated in one of the four highest rating
categories (e.g., rated BBB- or higher by S&P);
- unrated debt obligations determined by the Adviser to be of comparable
quality; and
- repurchase agreements involving investment-grade debt obligations.
Investment-grade debt obligations are generally believed to have relatively
low degrees of credit risk. However, medium-quality debt obligations, while
considered investment-grade, may have some speculative characteristics, since
their issuers' capacity for repayment may be more vulnerable to adverse
economic conditions or changing circumstances than that of higher-rated
issuers.
All ratings are determined at the time of investment. Any subsequent rating
downgrade of a debt obligation will be monitored by the Adviser to consider
what action, if any, a Portfolio should take consistent with its investment
objective.
HIGH-YIELD (HIGH-RISK) SECURITIES. High-yield (high-risk) securities,
also referred to as "junk bonds," are those securities that are rated lower
than investment-grade and unrated securities of comparable quality. Although
these securities generally offer higher yields than investment-grade
securities with similar maturities, lower-quality securities involve greater
risks, including the possibility of default or bankruptcy. In general, they
are regarded to be predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal. Other potential risks
associated with investing in high-yield securities include:
- substantial market-price volatility resulting from changes in interest
rates, changes in or uncertainty about economic conditions, and changes in the
actual or perceived ability of the issuer to meet its obligations;
- greater sensitivity of highly leveraged issuers to adverse economic
changes and individual-issuer developments;
- subordination to the prior claims of other creditors;
- additional Congressional attempts to restrict the use or limit the tax
and other advantages of these securities; and
- adverse publicity and changing investor perceptions about these
securities.
As with any other asset in a Portfolio's portfolio, any reduction in the value
of such securities as a result of the factors listed above would be reflected
in the net asset value of the Portfolio. In addition, a Portfolio that
invests in lower-quality securities may incur additional expenses to the
extent it is required to seek recovery upon a default in the payment of
principal and interest on its holdings. As a result of the associated risks,
successful investments in high-yield, high-risk securities will be more
dependent on the Adviser's credit analysis than generally would be the case
with investments in investment-grade securities.
The market for high-yield (high-risk) securities initially grew during a
period of economic expansion and has experienced mixed results thereafter. It
is uncertain how the high-yield market will perform during a prolonged period
of rising interest rates. A prolonged economic downturn or a prolonged period
of rising interest rates could adversely affect the market for these
securities, increase their volatility, and reduce their value and liquidity.
In addition, lower-quality securities tend to be less liquid than
higher-quality debt securities because the market for them is not as broad or
active. If market quotations are not available, these securities will be
valued in accordance with procedures established by the Trust's Board of
Trustees. Judgment may, therefore, play a greater role in valuing these
securities. The lack of a liquid secondary market may have an adverse effect
on market price and a Portfolio's ability to sell particular securities.
INVESTMENT POLICIES AND RISKS--ADVANTAGE, SHORT-TERM BOND AND GOVERNMENT
SECURITIES PORTFOLIOS
In addition to the investment policies described above (and subject to certain
restrictions described herein), the Advantage, Short-Term Bond and Government
Securities Portfolios may invest in some or all of the following securities
and may employ some or all of the following investment techniques, some of
which may present special risks as described below. A more complete
discussion of certain of these securities and investment techniques and the
associated risks is contained in the Appendix and the SAI.
DEBT OBLIGATIONS
The Advantage, Short-Term Bond and Government Securities Portfolios may invest
in any debt obligations. A Portfolio's authority to invest in certain types
of debt obligations may be restricted or subject to objective investment
criteria, as described above.
TYPES OF OBLIGATIONS. Debt obligations include (i) corporate debt
securities, including bonds, debentures, and notes; (ii) bank obligations,
such as certificates of deposit, banker's acceptances, and time deposits of
domestic and foreign banks and their subsidiaries and branches, and domestic
savings and loan associations (in amounts in excess of the insurance coverage
(currently $100,000 per account) provided by the Federal Deposit Insurance
Corporation); (iii) commercial paper (including variable-amount master demand
notes); (iv) repurchase agreements; (v) loan interests; (vi) foreign debt
obligations issued by foreign issuers traded either in foreign markets or in
domestic markets through depositary receipts; (vii) convertible
securities--debt obligations of corporations convertible into or exchangeable
for equity securities or debt obligations that carry with them the right to
acquire equity securities, as evidenced by warrants attached to such
securities, or acquired as part of units of the securities; (viii) preferred
stocks--securities that represent an ownership interest in a corporation and
that give the owner a prior claim over common stock on the Company's earnings
or assets; (ix) U.S. government securities; (x) mortgage-backed securities,
collateralized mortgage obligations, and similar securities; and (xi)
municipal obligations.
GOVERNMENT SECURITIES. U.S. government securities are issued or
guaranteed by the U.S. government or its agencies or instrumentalities.
Securities issued by the government include U.S. Treasury obligations, such as
Treasury bills, notes, and bonds. Securities issued or guaranteed by
government agencies or instrumentalities include the following:
- the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration, and
the Government National Mortgage Association, including GNMA pass-through
certificates, whose securities are supported by the full faith and credit of
the United States;
- the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of the
agency to borrow from the U.S. Treasury;
- the Federal National Mortgage Association, whose securities are
supported by the discretionary authority of the U.S. government to purchase
certain obligations of the agency or instrumentality; and
- the Student Loan Marketing Association, the Interamerican Development
Bank, and International Bank for Reconstruction and Development, whose
securities are supported only by the credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
MORTGAGE- AND ASSET-BACKED SECURITIES. Mortgage-backed securities
represent direct or indirect participation in, or are secured by and payable
from, mortgage loans secured by real property, and include single- and
multi-class pass-through securities and collateralized mortgage obligations.
Such securities may be issued or guaranteed by U.S. government agencies or
instrumentalities or by private issuers, generally originators in mortgage
loans, including savings associations, mortgage bankers, commercial banks,
investment bankers, and special purpose entities (collectively, "private
lenders"). Mortgage-backed securities issued by private lenders may be
supported by pools of mortgage loans or other mortgage-backed securities that
are guaranteed, directly or indirectly, by the U.S. government or one of its
agencies or instrumentalities, or they may be issued without any governmental
guarantee of the underlying mortgage assets but with some form of
non-governmental credit enhancement.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. However, the underlying assets are not first lien
mortgage loans or interests therein; rather they include assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various type of property and receivables from credit
card or other revolving credit arrangements. Payments or distributions of
principal and interest on asset-backed securities may be supported by
non-governmental credit enhancements similar to those utilized in connection
with mortgage-backed securities. (See "Appendix.")
The yield characteristics of mortgage- and asset-backed securities differ from
those of traditional debt obligations. Among the principal differences are
that interest and principal payments are made more frequently on mortgage- and
asset-backed securities, usually monthly, and that principal may be prepaid at
any time because the underlying mortgage loans or other assets generally may
be prepaid at any time. As a result, if a Portfolio purchases these
securities at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect of increasing the yield to maturity.
Conversely, if a Portfolio purchases these securities at a discount, a
prepayment rate that is faster than expected will increase yield to maturity,
while a prepayment rate that is slower than expected will reduce yield to
maturity. Accelerated prepayments on securities purchased by a Portfolio at a
premium also impose a risk of loss of principal because the premium may not
have been fully amortized at the time the principal is prepaid in full. The
market for privately issued mortgage- and asset-backed securities is smaller
and less liquid than the market for government sponsored mortgage-backed
securities.
LOAN INTERESTS. The Advantage and Short-Term Bond Portfolios may each
invest a portion of their assets in loan interests, which are interests in
amounts owned by a corporate, governmental or other borrower to lenders or
lending syndicates. Loan interests purchased by a Portfolio may have a
maturity of any number of days or years and may be secured or unsecured. Loan
interests, which may take the form of participation interests in, assignments
of, or novations of a loan, may be acquired from U.S. and foreign banks,
insurance companies, finance companies or other financial institutions that
have made loans or are members of a lending syndicate or from the holders of
loan interests. Loan interests involve the risk of loss in case of default or
bankruptcy of the borrower and, in the case of participation interests,
involve a risk of insolvency of the agent lending bank or other financial
intermediary. Loan interests are not rated by any NRSROs and are, at present,
not readily marketable and may be subject to contractual restrictions on
resale.
FOREIGN SECURITIES AND CURRENCIES
The Advantage and Short-Term Bond Portfolios each may invest up to 25% of
their total assets directly in foreign securities. The Advantage and
Short-Term Bond Portfolios may also invest in foreign securities through
depositary receipts without regard to this limitation. However, the Adviser
currently intends to invest not more than 25% of a Portfolio's total assets in
foreign securities, including both direct investments and investments made
through depositary receipts. Depositary receipts are generally issued by
banks or trust companies and evidence ownership of underlying foreign
securities. (See "Appendix--Foreign Investments" and the SAI for a discussion
of the risks involved in foreign investing.)
Foreign investments involve special risks, including:
- expropriation, confiscatory taxation, and withholding taxes on
dividends and interest;
- less extensive regulation of foreign brokers, securities markets, and
issuers;
- less publicly available information and different accounting standards;
- costs incurred in conversions between currencies, possible delays in
settlement in foreign securities markets, limitations on the use or transfer
of assets (including suspension of the ability to transfer currency from a
given country), and difficulty of enforcing obligations in other countries;
and
- diplomatic developments and political or social instability.
Foreign economies may differ favorably or unfavorably from the U.S. economy in
various respects, including growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. Many foreign securities
are less liquid and their prices more volatile than comparable U.S.
securities. Although the Portfolios generally invest only in securities that
are regularly traded on recognized exchanges or in over-the-counter markets,
from time to time foreign securities may be difficult to liquidate rapidly
without adverse price effects. Certain costs attributable to foreign
investing, such as custody charges and brokerage costs, are higher than those
attributable to domestic investing. Because most foreign securities are
denominated in non-U.S. currencies, the investment performance of the
Advantage and Short-Term Bond Portfolios could to a certain extent be
significantly affected by changes in foreign currency exchange rates. The
value of a Portfolio's assets denominated in foreign currencies will increase
or decrease in response to fluctuations in the value of those foreign
currencies relative to the U.S. dollar. Currency exchange rates can be
volatile at times in response to supply and demand in the currency exchange
markets, international balances of payments, governmental intervention,
speculation, and other political and economic conditions.
The Advantage and Short-Term Bond Portfolios may purchase and sell foreign
currency on a spot basis and may engage in forward currency contracts,
currency options, and futures transactions for hedging or any other lawful
purpose. (See "Derivative Instruments.")
REPURCHASE AGREEMENTS
Each of the Advantage, Short-Term Bond and Government Securities Portfolios
may enter into repurchase agreements with certain banks and non-bank dealers.
(See "Appendix--Repurchase Agreements.") Each Portfolio will not invest more
than 10% of its net assets in repurchase agreements maturing in more than
seven days. (See "Illiquid Securities" below.)
DERIVATIVE INSTRUMENTS
The Advantage, Short-Term Bond and Government Securities Portfolios may use
derivative instruments for any lawful purpose, including hedging, risk
management, or enhancing returns, but not for speculation. Derivative
instruments are securities or agreements whose value is derived from the value
of some underlying asset, for example, securities, reference indexes, or
commodities. Options, futures, and options on futures transactions are
considered derivative transactions. Derivatives generally have investment
characteristics that are based upon either forward contracts (under which one
party is obligated to buy and the other party is obligated to sell an
underlying asset at a specific price on a specified date) or option contracts
(under which the holder of the option has the right but not the obligation to
buy or sell an underlying asset at a specified price on or before a specified
date). Consequently, the change in value of a forward-based derivative
generally is roughly proportional to the change in value of the underlying
asset. In contrast, the buyer of an option-based derivative generally will
benefit from favorable movements in the price of the underlying asset but is
not exposed to corresponding losses due to adverse movements in the value of
the underlying asset. The seller of an option-based derivative generally will
receive fees or premiums but generally is exposed to losses due to changes in
the value of the underlying asset. Derivative transactions may include
elements of leverage and, accordingly, the fluctuation of the value of the
derivative transaction in relation to the underlying asset may be magnified.
In addition to options, futures, and options on futures transactions,
derivative transactions may include short sales against the box, in which a
Portfolio sells a security it owns for delivery at a future date; swaps in
which the two parties agree to exchange a series of cash flows in the future,
such as interest-rate payments; interest-rate caps, under which, in return for
a premium, one party agrees to make payments to the other to the extent that
interest rates exceed a specified rate, or "cap"; and interest-rate floors,
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates fall below a specified level, or
"floor." Derivative transactions may also include forward currency contracts
and foreign currency exchange-related securities. (See "Appendix" and the SAI
for further information with respect to these investments and transactions.)
In connection with its futures and options on futures transactions, the
Advantage, Short-Term Bond and Government Securities Portfolios are subject to
certain restrictions on such transactions under the Commodity Exchange Act
and, accordingly, a Portfolio will use futures and options on futures
transactions solely for bona fide hedging transactions (within the meaning of
the Commodity Exchange Act). However, each Portfolio may, in addition to bona
fide hedging transactions, use futures and options on futures transactions if
the aggregate initial margin and premiums required to establish such
positions, less the amount by which any such options positions are in the
money (within the meaning of the Commodity Exchange Act), do not exceed 5% of
the Portfolio's net assets. In addition, the Portfolios follow certain other
restrictions concerning their options, futures, and options on futures
transactions and, accordingly, (i) the aggregate value of securities that
underlie call options on securities written by a Portfolio or obligations that
underlie put options on securities written by a Portfolio, determined as of
the date the options are written, will not exceed 50% of a Portfolio's net
assets; (ii) the aggregate premiums paid on all options purchased by a
Portfolio and which are being held will not exceed 20% of a Portfolio's net
assets; (iii) a Portfolio will not purchase put or call options, other than
hedging positions, if, as a result thereof, more than 5% of its total assets
would be so invested; and (iv) the aggregate margin deposits required on all
futures and options on futures transactions being held will not exceed 5% of a
Portfolio's total assets.
WHEN-ISSUED SECURITIES
Each of the Advantage, Short-Term Bond and Government Securities Portfolios
may invest without limitation in securities purchased on a when-issued or
delayed delivery basis. (See "Appendix--When Issued Securities and Delayed
Delivery Transactions.")
ILLIQUID SECURITIES
The Advantage, Short-Term Bond and Government Securities Portfolios may each
invest up to 10% of their net assets in illiquid securities. (See
"Appendix--Illiquid Securities"). Illiquid securities are those securities
that are not readily marketable, including restricted securities and
repurchase obligations maturing in more than seven days. Certain restricted
securities which may be resold to institutional investors under Rule 144A
under the Securities Act of 1933 and Section 4(2) commercial paper, may be
determined to be liquid under guidelines adopted by the Board of Trustees of
the Trust.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
The Advantage, Short-Term Bond and Government Securities Portfolios may invest
without limitation in zero-coupon, step-coupon, and pay-in-kind securities.
These securities are debt securities that do not make regular cash interest
payments. Zero-coupon and step-coupon securities are sold at a deep discount
to their face value. Pay-in-kind securities pay interest through the issuance
of additional securities. Because such securities do not pay current cash
income, the price of these securities can be volatile when interest rates
fluctuate. While these securities do not pay current cash income, federal
income tax law requires the holders of zero-coupon, step-coupon, and
pay-in-kind securities to include in income each year the portion of the
original issue discount (or deemed discount and other non-cash income) on such
securities accruing that year. In order to continue to qualify for treatment
as a "regulated investment company" under the Internal Revenue Code and avoid
a certain excise tax, each Portfolio may be required to distribute a portion
of such discount and income and may be required to dispose of other portfolio
securities, which may occur in periods of adverse market prices, in order to
generate cash to meet these distribution requirements.
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
The Advantage, Short-Term Bond and Government Securities Portfolios may engage
in reverse repurchase agreements to facilitate portfolio liquidity, a practice
common in the mutual fund industry or for arbitrage transactions discussed
below. In a reverse repurchase agreement, the Portfolio would sell a security
and enter into an agreement to repurchase the security at a specified future
date and price. The Portfolio generally retains the right to interest and
principal payments on the security. Since the Portfolio receives cash upon
entering into a reverse repurchase agreement, it may be considered a
borrowing. When required by SEC guidelines, a Portfolio will set aside
permissible liquid assets in a segregated account to secure its obligation to
repurchase the security.
Each of the Advantage, Short-Term Bond and Government Securities Portfolios
may also enter into mortgage dollar rolls, in which the Portfolio would sell
mortgage-backed securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While a Portfolio would forego principal and interest
paid on the mortgage-backed securities during the roll period, the Portfolio
would be compensated by the difference between the current sales price and the
lower price for the future purchase as well as by any interest earned on the
proceeds of the initial sale. The Portfolio also could be compensated through
the receipt of fee income equivalent to a lower forward price. When required
by SEC guidelines, a Portfolio would set aside permissible liquid assets in a
segregated account to secure its obligation for the forward commitment to buy
mortgage-backed securities. Mortgage dollar roll transactions may be
considered a borrowing by the Portfolios. (See "Appendix--Dollar Roll
Transactions and Reverse Repurchase Agreements.")
The mortgage dollar rolls and reverse repurchase agreements entered into by
the Portfolios may be used as arbitrage transactions in which a Portfolio will
maintain an offsetting position in investment-grade debt obligations or
repurchase agreements that mature on or before the settlement date of the
related mortgage dollar roll or reverse repurchase agreement. Since a
Portfolio will receive interest on the securities or repurchase agreements in
which it invests the transaction proceeds, such transactions may involve
leverage. Such securities or repurchase agreements will be high quality and
will mature on or before the settlement date of the mortgage dollar roll or
reverse repurchase agreement.
PORTFOLIO TURNOVER
The annual portfolio turnover rate indicates changes in a Portfolio's
investments and may also be affected by sales of portfolio securities
necessary to meet cash requirements for redemption of shares. The turnover
rate may vary from year to year, as well as within a year. High turnover in
any year will result in the payment by a Portfolio of above average amounts of
transaction costs. The annual portfolio turnover rates for the Advantage,
Short-Term Bond and Government Securities Portfolios are expected to be
between 200% and 300%. (See "Portfolio Turnover" in the SAI.) However, each
Portfolio's portfolio turnover rate may exceed 300% when the Adviser believes
the anticipated benefits of short-term investments outweigh any increase in
transaction costs or increase in capital gains. These rates should not be
considered as limiting factors. The portfolio turnover rates of the
Advantage, Short-Term Bond and Government Securities Portfolios for the period
ended December 31, 1995 are set forth herein under "Financial Highlights."
MONEY MARKET PORTFOLIO
The investment objective of the Money Market Portfolio is to obtain the
maximum current income, consistent with the preservation of capital and the
maintenance of liquidity. It will seek to achieve this objective by investing
exclusively in the following U.S. dollar-denominated money market instruments
having remaining maturities of 397 days or less (as determined by regulations
of the Securities and Exchange Commission (the "Commission") which meet the
Portfolio's quality requirements set forth below:
(1) securities issued or guaranteed as to principal and interest by the
United States Government or by agencies or instrumentalities thereof ("U.S.
Government Securities");
(2) obligations issued or guaranteed by United States banks with total
assets of at least $1 billion (including obligations of foreign branches of
such banks), by United States savings and loan associations or savings banks
with total assets of at least $1 billion and by the 100 largest foreign
commercial banks in terms of total assets;
(3) high quality commercial paper and other high quality short-term
obligations, including variable amount master demand notes and mortgage-backed
and receivable-backed bonds, notes or pass-through certificates, of United
States entities or of foreign corporations and foreign commercial banks issued
in the United States;
(4) obligations of the International Bank for Reconstruction and
Development, other supranational organizations and foreign governments and
their agencies and instrumentalities; and
(5) repurchase agreements pertaining thereto.
INVESTMENT POLICIES AND RISKS--MONEY MARKET PORTFOLIO
The Portfolio will purchase only U.S. dollar-denominated money market
instruments which are "Eligible Securities" (as defined by the Commission) and
which present minimal credit risks as determined by the Portfolio's Adviser
pursuant to guidelines approved and reviewed by the Trust's Board of Trustees
(the "Trustees"). Eligible Securities consist of (i) securities that either
(a) have short-term debt ratings at the time of purchase within the two
highest rating categories assigned by at least two unaffiliated NRSROs (or one
NRSRO if the security was rated by only one NRSRO), or (b) are issued by
issuers with such ratings, and (ii) certain securities that are unrated
(including securities of issuers that have a long-term but not short-term
ratings) but are of comparable quality as determined by the Adviser pursuant
to guidelines approved and reviewed by the Trustees. See the SAI for a
description of applicable NRSRO ratings. Eligible Securities must have
remaining maturities of 397 days or less as determined in accordance with the
rules of the Commission.
UNITED STATES GOVERNMENT SECURITIES. United States Treasury bills, notes
and bonds, all of which are supported by the full faith and credit of the
United States, constitute the principal type of U.S. Government Securities
invested in by the Portfolio. The Portfolio may also invest in separately
traded interest components of securities issued or guaranteed by the United
States Treasury. The Portfolio also invests in instruments issued by United
States Government agencies and instrumentalities which are supported by (a)
the full faith and credit of the United States Treasury, (b) the limited
authority of the issuer to borrow from the United States Treasury, (c) the
authority of the United States Government to purchase certain obligations of
the issuer, or (d) only the credit of the issuer. The United States
Government is not obligated by law to provide financial support to its
agencies and instrumentalities as described in clause (b), (c) or (d) in the
future, other than as set forth above.
OBLIGATIONS OF FINANCIAL INSTITUTIONS. The Portfolio may also invest in
obligations issued or guaranteed by United States banks with total assets of
at least $1 billion (including obligations issued by foreign branches of such
banks), by United States savings and loan associations or savings banks with
total assets of at least $1 billion and by the 100 largest foreign commercial
banks in terms of total assets. Such obligations include certificates of
deposit, commercial paper, bankers' acceptances and fixed time deposits. Bank
obligations may be general obligations of the parent bank or may be limited to
the issuing branch by the terms of the specific obligations or by government
regulation.
Foreign obligations (including obligations of foreign branches of United
States banks) may involve considerations different from investments in
domestic obligations of domestic issuers, due to the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest; the possible imposition of withholding or confiscatory taxes;
expropriation; limited publicly available information; non-
uniform accounting standards, and the fact that it may be more difficult to
obtain and enforce a judgment against a foreign issuer or a foreign branch of
a domestic bank. In addition, foreign banks are not subject to examination by
any United States Government agency or instrumentality. (See
"Appendix--Foreign Investments" and the SAI for a discussion of the risks
involved in foreign investing.)
COMMERCIAL PAPER AND OTHER SHORT-TERM OBLIGATIONS. The commercial paper
and other short-term obligations purchased by the Portfolio, other than those
of bank holding companies, consist of direct obligations of domestic corporate
issuers. The commercial paper and other short-term obligations of United
States bank holding companies purchased by the Portfolio include obligations
issued or guaranteed by bank holding companies with total assets of at least
$1 billion. Commercial paper that is exempt from the Securities Act of 1933
("1933 Act") by virtue of Section 4(2) of such Act may be regarded as
illiquid. A variable amount master demand note differs from ordinary
commercial paper in that it is issued pursuant to a written agreement between
the issuer and the holder, its amount may from time to time be increased by
the holder (subject to an agreed maximum) or decreased by the holder or the
issuer, it is payable on demand, the rate of interest payable on it varies
with an agreed-upon formula and it is not typically rated by a rating agency.
Variable amount master demand notes purchased by the Portfolio will be
regarded as illiquid.
The "other short-term obligations" referred to above in which the Portfolio
may invest include participations in corporate loans. Such loans must be to
corporations in whose commercial paper or other short-term obligations the
Portfolio may invest as described in the preceding paragraph. Any
participation purchased by the Portfolio must be issued by one of the 100
largest banks in the United States. Because the issuing bank does not
guarantee the participation in any way, it is subject to the credit risks
generally associated with the underlying corporate borrower. The secondary
market, if any, for these loan participations is limited and any such
participation purchased by the Portfolio may be regarded as illiquid.
Other short-term obligations" also include participation in, or bonds and
notes backed by, pools of mortgage, credit card, automobile or other types
of receivables. These structured financings will be supported by sufficient
collateral and other credit enhancement, including letters of credit, reserve
funds and guarantees by third parties, to enable such instruments to qualify
as Eligible Securities. The Portfolio will only invest in asset-backed
securities with remaining stated maturities of 397 days or less. Instruments
backed by pools of mortgages and receivables are subject to unscheduled
prepayments of principal prior to maturity. The Portfolio may be adversely
affected by such prepayments to the extent that prepayments of principal must
be reinvested in securities which may have lower yields than the prepaid
obligations. Moreover, prepayments of securities purchased at a premium could
result in a realized loss.
SECURITIES OF THE WORLD BANK, OTHER SUPRANATIONAL ORGANIZATIONS AND
FOREIGN GOVERNMENTS. Obligations of the International Bank for Reconstruction
and Development (also known as the World Bank) and certain other supranational
organizations are supported by subscribed but unpaid commitments of member
countries. There is no assurance that these commitments will be undertaken or
complied with in the future. The Portfolio limits its investments in United
States dollar-denominated obligations of foreign governments and their
agencies and instrumentalities to the commercial paper and other short-term
notes issued or guaranteed by the governments, or agencies and
instrumentalities thereof, that are members of the OECD (Organization for
Economic Co-Operation and Development) and those Latin American countries
whose sovereign issuances qualify as Eligible Securities.
REPURCHASE AGREEMENTS. The Portfolio may invest in repurchase agreements
collateralized by any of the types of securities listed above for the purpose
of realizing additional income. A repurchase agreement is an agreement under
which the Portfolio purchases securities and the seller (a bank or securities
dealer) agrees to repurchase the securities within a particular time at a
specified price. (See "Appendix--Repurchase Agreements.")
REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse
repurchase agreements, under which the Portfolio temporarily transfers
possession of a portfolio security or securities to another party, such as a
bank or broker dealer in return for cash in an amount equal to a percentage of
the portfolio securities' market value, and agrees to repurchase the
securities at a future date. The difference between the amount the Portfolio
receives for the securities and the amount it pays on repurchase is deemed to
be a payment of interest. The Portfolio will use reverse repurchase
agreements as a temporary measure to facilitate redemptions, where liquidation
of portfolio securities is considered disadvantageous or inconvenient. The
Portfolio's use of reverse repurchase agreements may increase the volatility
of its net asset value per share and could also reduce net income (if interest
costs exceed income on the invested proceeds). The Portfolio will not enter
into reverse repurchase agreements in an amount which, when combined with all
other borrowings by the Portfolio, would exceed 33 1/3% of the Portfolio's
total assets, provided that it will not purchase additional investments if
borrowings and reverse repurchase agreements together exceed 5% of the value
of its total assets. In determining whether to enter into a reverse
repurchase agreement with a counterparty, the Adviser will take into account
the creditworthiness of such party. 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 the event the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, the
Portfolio's use of proceeds from the agreement may be restricted pending a
determination by the other party or its trustee or receiver whether to enforce
the Portfolio's obligation to repurchase the securities. The Portfolio's use
of reverse repurchase agreements may increase the volatility of the
Portfolio's net asset value per share. (See "Appendix--Reverse Repurchase
Agreements.")
MANAGEMENT POLICIES. The Portfolio may seek to increase its income by
lending portfolio securities. The Portfolio may also purchase or acquire
"stand-by commitments," "unconditional puts" or "demand features" with respect
to money market investments held in its portfolio. The Portfolio may purchase
portfolio securities in when-issued or delayed delivery transactions. The
Portfolio may invest up to 10% of its assets in securities which are illiquid.
(See "Appendix" for a description of the investments described above.)
In accordance with Rule 2a-7 under the Investment Company Act of 1940, as
amended ("1940 Act"), the Portfolio may not invest more than 5% of its total
assets in securities issued by or subject to puts from any one issuer (except
U.S. Government Securities and repurchase agreements collateralized by such
securities), except that a single investment may exceed such limit if such
security (i) is rated in the highest rating category by the requisite number
of NRSROs or, if unrated, is determined to be of comparable quality and (ii)
is held for not more than three business days. In addition, the Portfolio may
not invest more than 5% of its total assets in securities of issuers not in
the highest rating category as determined by the requisite number of NRSROs
or, if unrated, of comparable quality, with investment in any one such issuer
being limited to not more than 1% of such total assets or $1 million,
whichever is greater. For a description of each NRSRO's rating categories,
see the SAI.
The Portfolio may invest in securities issued by other money market investment
companies. Other investment companies in which the Portfolio may invest
include those for which the Adviser, or any of its affiliates, serves as
investment adviser. Any investments in other investment companies are subject
to applicable limitations under the 1940 Act. (See "Appendix--Investment
Companies"). Such other investment companies will have investment objectives,
policies and restrictions substantially similar to those of the Portfolio and
will be subject to substantially the same risks. In determining whether to
invest Portfolio assets in other investment companies, the Adviser will take
into consideration, among other factors, the advisory fee payable by such
other investment companies.
MORTGAGE-BACKED SECURITIES PORTFOLIO
The investment objective of the Mortgage-Backed Securities Portfolio is to
obtain a high current return, consistent with safety of principal, primarily
through investments in mortgage-backed securities. The Portfolio is
classified as a diversified investment company. Mortgage-Backed Securities
represent interests in, or are secured by and payable from, pools of mortgage
loans, including collateralized mortgage obligations ("CMOs").
Mortgage-Backed Securities may be U.S. Government Mortgage-Backed Securities,
which are issued or guaranteed by a U.S. Government agency or instrumentality
(though not necessarily backed by the full faith and credit of the United
States), such as Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), and Federal Home Loan Mortgage
Corporation ("FHLMC") certificates. Other Mortgage-Backed Securities are
issued by private issuers, generally originators of and investors in mortgage
loans, including savings associations, mortgage bankers, commercial banks,
investment bankers, and special purpose entities. These private
Mortgage-Backed Securities may be supported by U.S. Government Mortgage-Backed
Securities or some form of non-government credit enhancement.
INVESTMENT POLICIES AND RISKS--MORTGAGE-BACKED SECURITIES PORTFOLIO
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The mortgages backing mortgage-related securities include
conventional thirty-year fixed rate mortgages, fifteen-year fixed rate
mortgages, 5 or 7 year balloon payment fixed rate mortgages, graduated payment
mortgages and adjustable rate mortgages. The U.S. government or the issuing
agency guarantees the payment of interest and principal of these securities.
However, the guarantees do not extend to the securities' yield or value, which
are likely to vary inversely with fluctuations in interest rates, nor do the
guarantees extend to the yield or value of the Portfolio's shares. See
"Appendix--Mortgage-Backed Securities." These certificates are in most cases
"pass-through" instruments, through which the holder receives a share of all
interest and principal payments from the mortgages underlying the certificate,
net of certain fees. Because the prepayment characteristics of the underlying
mortgages vary, it is not possible to predict accurately the average life or
realized yield of a particular issue of pass-through certificates.
Mortgage-backed securities are often subject to more rapid repayment than
their stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying mortgage obligations. For example,
securities backed by mortgages with thirty-year maturities are customarily
treated as having average lives of less than 10 years based on expected
prepayments and securities backed by mortgages with fifteen-year maturities
are treated as having average lives of less than 7 years.
While the timing of prepayments of graduated payment mortgages differs
somewhat from that of conventional mortgages, the prepayment experience of
graduated payment mortgages is basically the same as that of the conventional
mortgages of the same maturity dates over the life of the pool. During
periods of declining interest rates, prepayment of mortgages underlying
mortgage-backed securities can be expected to accelerate. When the mortgage
obligations are prepaid, the Portfolio reinvests the prepaid amounts in
securities, the yields of which reflect interest rates prevailing at the time.
Therefore, the Portfolio's ability to maintain a portfolio of high-yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgages. Moreover, prepayments of mortgages which
underlie securities purchased at a premium could result in capital losses.
The principal and interest on GNMA pass-through securities are guaranteed by
GNMA and backed by the full faith and credit of the U.S. Government. FNMA
guarantees full and timely payment of all interest and principal, while FHLMC
guarantees timely payment of interest and ultimate collection of principal of
its pass-through securities. Securities from FNMA and FHLMC are not backed by
the full faith and credit of the United States; however, they are generally
considered to offer minimal credit risks. The yields provided by these
mortgage-related securities historically have exceeded the yields on other
types of U.S. Government securities with comparable maturities, in large
measure due to the risks associated with prepayment, which include, but are
not limited to: (i) reinvestment risk, to the extent that prepayments of
principal must be reinvested in securities which may have lower yields than
the prepaid mortgages and (ii) risk of capital loss resulting from prepayments
of mortgages which underlie securities purchased at a premium.
Adjustable rate mortgage securities ("ARMs") are a form of pass-through
security representing interests in pools of mortgage loans whose interest
rates are adjusted from time to time. The adjustments usually are determined
in accordance with a predetermined interest rate index and may be subject to
certain limits. The adjustment feature of ARMs tends to make their value less
sensitive to interest rate changes.
CMOs are derivative mortgage-related securities that separate mortgage pools
into different components called classes or "tranches." Each class of a CMO is
issued at a specific fixed or floating coupon rate and has a stated maturity
or final distribution date. Principal prepayments on the collateral pool may
cause the CMOs to be retired substantially earlier than their stated
maturities or final distribution dates. The principal of and interest on the
collateral pool may be allocated among the several classes of a CMO in a
number of different ways. Generally, the purpose of the allocation of the
cash flow of a CMO to the various classes is to obtain a more predictable cash
flow to some of the individual tranches than exists with the underlying
collateral of the CMO. As a general rule, the more predictable the cash flow
is on a CMO tranche, the lower the anticipated yield will be on that tranche
at the time of issuance relative to prevailing market yields on
mortgage-related securities. Certain classes of CMOs may have priority over
others with respect to the receipt of prepayments on the mortgages.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES. Mortgage-related
securities offered by private issuers include pass-through securities for
pools of conventional residential mortgage loans; Mortgage-Backed Bonds which
are considered to be obligations of the institution issuing the bonds and are
collateralized by mortgage loans; and bonds and CMOs, including regular
interests in Real Estate Mortgage Investment Conduits ("REMICs"), which are
collateralized by mortgage-related securities issued by GNMA, FNMA, FHLMC or
by pools of conventional mortgages.
Mortgage-related securities created by private issuers generally offer a
higher rate of interest (and greater credit and interest rate risk) than those
issued by U.S. Government agencies and instrumentalities because they offer no
direct or indirect government guarantees of payments. However, many issuers
or servicers of mortgage-related securities guarantee, or provide insurance
for, timely payment of interest and principal on such securities.
U.S. TREASURY SECURITIES. The Portfolio will also invest in U.S.
Treasury securities, including Bills, Notes, Bonds and other debt securities
issued by the U.S. Treasury. These instruments are direct obligations of the
U.S. government and, as such are backed by the full faith and credit of the
United States Government. They differ primarily in their interest rates, the
lengths of their maturities and the dates of their issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Portfolio will invest in securities issued by agencies
of the U.S. Government or instrumentalities established or sponsored by the
U.S. Government. These obligations, including those which are guaranteed by
Federal agencies or instrumentalities, may or may not be backed by the full
faith and credit of the United States. GNMA obligations are backed by the
full faith and credit of the United States. In the case of securities not
backed by the full faith and credit of the United States, the Portfolio must
look principally to the agency issuing or guaranteeing the obligation for
ultimate repayment and may not be able to assert a claim against the United
States if the agency or instrumentality does not meet its commitments.
Securities in which the Portfolio may invest which are not backed by the full
faith and credit of the United States Government include obligations such as
those issued by FNMA and FHLMC, each of which has the right to borrow from the
United States Treasury to meet its obligations, and obligations under the
Federal Home Loan Bank, the obligations of which may only be satisfied by the
individual credit of the issuing agency. FHLMC and FNMA investments may
include collateralized mortgage obligations.
ADDITIONAL INVESTMENTS. The Portfolio may invest in other fixed income
securities. The Portfolio may invest up to 10% of its total assets in zero
coupon U.S. Government Securities. The Portfolio may invest in repurchase
agreements collateralized by any of the types of securities described above
for the purpose of realizing additional income. The Portfolio may lend its
portfolio securities to banks, brokers, dealers and other financial
institutions that need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. The Portfolio may also lend
its Portfolio securities to increase its income. The Portfolio may purchase
or sell U.S. Government securities (including GNMA, FNMA and FHLMC
Certificates) on a when issued or delayed delivery basis. The Portfolio may
purchase and write put and call options on debt securities and purchase and
sell interest rate futures and related options. The Portfolio may purchase
and sell financial futures contracts and options thereon for certain hedging,
portfolio risk management or yield enhancement purposes. In order to protect
the value of the Portfolio's investments from interest rate fluctuations, the
Portfolio may enter into various hedging transactions, such as interest rate
swaps, and mortgage swaps and the purchase or sale of interest rate caps,
floors and collars.
The Portfolio may enter into reverse repurchase agreements with banks or
broker-dealers, under which the Portfolio sells securities and agrees to
repurchase them at an agreed upon time and at an agreed upon price. The
Portfolio may enter into mortgage "dollar roll" transactions with selected
banks and broker-dealers. The Portfolio will use both reverse repurchase
agreements and dollar roll transactions as sources of funds on a short-term
basis as a means of providing liquidity for redemptions, as well as for
purposes of seeking to enhance income through leverage. This use of leverage
tends to increase the volatility of the Portfolio's net asset value per share
and could also reduce net income (if income costs exceed income on the
invested proceeds). The Portfolio has determined not to use reverse
repurchase agreements or dollar roll transactions in an amount which, when
combined with all other borrowings by the Portfolio, would exceed 33 1/3% of
the Portfolio's total assets; however, the Portfolio may enter into covered
rolls, which do not involve the use of leverage, without regard to such
limitation. (See "Appendix" for a description of each of these investments
and techniques.)
The Portfolio may adjust its portfolio as it deems advisable in view of
prevailing or anticipated market conditions to accomplish the Portfolio's
investment objective. For example, the Portfolio may sell portfolio
securities in anticipation of a movement in interest rates. Frequency of
portfolio turnover will not be a limiting factor if the Portfolio considers it
advantageous to purchase or sell securities. The Adviser anticipates that the
Portfolio's portfolio turnover generally will not exceed 300%. (See
"Portfolio Turnover" in the SAI.) A higher rate of portfolio turnover may
result in correspondingly higher portfolio transaction costs which would have
to be borne directly by the Trust and ultimately by the shareholders. The
portfolio turnover rate of the Portfolio for the period ended December 31,
1995 is set forth herein under "Financial Highlights."
PORTFOLIOS SEEKING CAPITAL GROWTH
INTERNATIONAL STOCK PORTFOLIO
The International Stock Portfolio seeks capital growth. The Portfolio
invests primarily in the equity securities of issuers located outside the
United States.
The Portfolio will invest at least 65% of its total assets in foreign
equity securities, including common stocks, preferred stocks, and securities
that are convertible into common or preferred stocks, such as warrants and
convertible bonds, that are issued by companies whose principal headquarters
are located outside the United States.
Under normal market conditions, the Portfolio expects to invest at least
90% of its total assets in foreign equity securities. The Portfolio may,
however, invest up to 35% of its total assets in equity securities of U.S.
issuers or debt obligations, including intermediate- to long-term debt
obligations of U.S. issuers or foreign-government entities. (See
"Implementation of Policies and Risks--Debt Securities"). When the
Sub-Adviser determines that market conditions warrant a temporary defensive
position, the Portfolio may invest without limitation in cash (U.S. dollars,
foreign currencies, or multicurrency units) and short-term fixed-income
securities. Although the debt obligations in which it invests will be
primarily investment-grade, the Portfolio may invest up to 5% of its total
assets in non-investment grade debt obligations. (See "Appendix--Lower-Rated
Securities" and the SAI for a discussion of the risks involved in investing in
lower-rated securities.)
The Portfolio will normally invest in securities of issuers located in at
least three different countries. The Sub-Adviser expects that the majority of
the Portfolio's investments will be in issuers in the following markets:
Argentina, Australia, Brazil, Chile, Cambodia, the Czech Republic, France,
Germany, Hong Kong, Hungary, India, Indonesia, Italy, Japan, Malaysia, Mexico,
the Netherlands, New Zealand, Norway, Peru, the Philippines, Poland, Russia,
Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, the
United Kingdom and Vietnam. The Portfolio will also invest in other European,
Pacific Rim, and Latin American markets.
As market and global conditions change, the Portfolio will change its
allocations among the countries of the world, and nothing herein will limit
the Portfolio's ability to invest in or avoid any particular countries or
regions. In allocating the Portfolio's assets among various countries, the
Sub-Adviser will seek economic and market environments favorable for capital
appreciation and, with respect to developing countries, economic, political,
and stock-market environments that show signs of stabilizing or improving.
Please see "Implementation of Policies and Risks--International Stock
Portfolio--Foreign Securities and Currencies" for a discussion of the special
risks involved in investing in foreign securities.
In analyzing foreign companies for investment, the Sub-Adviser will
ordinarily look for one or more of the following characteristics in relation
to the company's prevailing stock price:
- prospects for above-average sales and earnings growth and high return
on invested capital;
- overall financial strength, including sound financial and accounting
policies and a strong balance sheet;
- significant competitive advantages, including innovative products and
efficient service;
- effective research, product development, and marketing;
- pricing flexibility;
- stable, capable management; and
- other general operating characteristics that will enable the company to
compete successfully in its marketplace.
INVESTMENT POLICIES AND RISKS--INTERNATIONAL STOCK PORTFOLIO
FOREIGN SECURITIES AND CURRENCIES. The International Stock Portfolio may
invest in foreign securities, either directly or indirectly through the use of
depositary receipts. (See "Appendix--American Depositary Receipts and
European Depositary Receipts.")
Because most foreign securities are denominated in non-U.S. currencies, the
investment performance of the International Stock Portfolio could be
significantly affected by changes in foreign currency exchange rates. The
value of the Portfolio's assets denominated in foreign currencies will
increase or decrease in response to fluctuations in the value of those foreign
currencies relative to the U.S. dollar. Currency exchange rates can be
volatile at times in response to supply and demand in the currency exchange
markets, international balances of payments, governmental intervention,
speculation and other political and economic conditions.
The Portfolio may purchase and sell foreign currency on a spot basis and may
engage in forward currency contracts, currency options, and futures
transactions for hedging or any other lawful purpose. (See "Derivative
Instruments" below for further information with respect to such instruments.)
FOREIGN INVESTMENT COMPANIES. Some of the countries in which the
Portfolio invests may not permit direct investment by outside investors.
Investments in such countries may only be permitted through foreign
government-approved or -authorized investment vehicles, which may include
other investment companies. Investing through such vehicles may involve
frequent or layered fees or expenses and may also be subject to limitation
under the 1940 Act.
DERIVATIVE INSTRUMENTS. Derivative instruments may be used by the
Portfolio for any lawful purpose, including hedging, risk management, or
enhancing returns, but not for speculation. Derivative instruments are
securities or agreements whose value is derived from the value of some
underlying asset, for example, securities, currencies, reference indexes, or
commodities. Options, futures, and options on futures transactions are
considered derivative transactions. Derivatives generally have investment
characteristics that are based upon either forward contracts (under which one
party is obligated to buy and the other party is obligated to sell an
underlying asset at a specific price on a specified date) or option contracts
(under which the holder of the option has the right but not the obligation to
buy or sell an underlying asset at a specified price on or before a specified
date). Consequently, the change in value of a forward-based derivative
generally is roughly proportional to the change in value of the underlying
asset. In contrast, the buyer of an option-based derivative generally will
benefit from favorable movements in the price of the underlying asset but is
not exposed to corresponding losses due to adverse movements in the value of
the underlying asset. The seller of an option-based derivative generally will
receive fees or premiums but generally is exposed to losses due to changes in
the value of the underlying asset. Derivative transactions may include
elements of leverage and, accordingly, the fluctuation of the value of the
derivative transaction in relation to the underlying asset may be magnified.
In addition to options, futures, and options on futures transactions,
derivative transactions may include short sales against the box, in which a
Portfolio sells a security it owns for delivery at a future date; swaps, in
which the two parties agree to exchange a series of cash flows in the future,
such as interest-rate payments; interest-rate caps, under which, in return for
a premium, one party agrees to make payments to the other to the extent that
interest rates exceed a specified rate, or "cap"; and interest-rate floors,
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates fall below a specified level, or
"floor." Derivative transactions may also include forward currency contracts
and foreign currency exchange-related securities. Derivative instruments may
be exchange-traded or traded in over-the-counter transactions between
private parties. Over-the-counter transactions are subject to the credit risk
of the counterparty to the instrument and are less liquid than exchange-traded
derivatives since they often can only be closed out with the other party to
the transaction. When required by SEC guidelines, a Portfolio will set aside
permissible liquid assets or securities positions that substantially correlate
to the market movements of the derivatives transactions in a segregated
account to secure its obligations under derivative transactions. In order to
maintain its required cover for a derivative transaction, a Portfolio may need
to sell portfolio securities at disadvantageous prices or times since it may
not be possible to liquidate a derivative position.
The successful use of derivative transactions by a Portfolio is dependent upon
the Sub-Adviser's ability to correctly anticipate trends in the underlying
asset. To the extent that a Portfolio is engaging in derivative transactions
other than for hedging purposes, the Portfolio's successful use of such
transactions is more dependent upon the Sub-Adviser's ability to correctly
anticipate such trends, since losses in these transactions may not be offset
in gains in the Portfolio's portfolio or in lower purchase prices for assets
it intends to acquire. The Sub-Adviser's prediction of trends in underlying
assets may prove to be inaccurate, which could result in substantial losses to
a Portfolio. Hedging transactions are also subject to risks. If the
Sub-Adviser incorrectly anticipates trends in the underlying asset, a
Portfolio may be in a worse position than if no hedging had occurred. In
addition, there may be imperfect correlation between a Portfolio's derivative
transactions and the instruments being hedged.
ILLIQUID SECURITIES. The Portfolio may invest up to 10% of its net
assets in illiquid securities. Illiquid securities are those securities that
are not readily marketable, including restricted securities and repurchase
obligations maturing in more than seven days. Certain restricted securities
that may be resold to institutional investors pursuant to Rule 144A under the
1933 Act and Section 4(2) commercial paper may be considered liquid under
guidelines adopted by the Trust's Board of Trustees.
SMALL COMPANIES. The Portfolio may, from time to time, invest a
substantial portion of its assets in small companies. While smaller companies
generally have potential for rapid growth, investments in smaller companies
often involve greater risks than investments in larger, more established
companies because smaller companies may lack the management experience,
financial resources, product diversification, and competitive strengths of
larger companies. In addition, in many instances the securities of smaller
companies are traded only over-the-counter or on a regional securities
exchange, and the frequency and volume of their trading is substantially less
than is typical of larger companies. Therefore, the securities of smaller
companies may be subject to greater and more abrupt price fluctuations. When
making large sales, the Portfolio may have to sell portfolio holdings at
discounts from quoted prices or may have to make a series of small sales over
an extended period of time due to the trading volume of smaller company
securities. Investors should be aware that, based on the foregoing factors,
an investment in the Portfolio may be subject to greater price fluctuations
than an investment in a fund that invests primarily in larger, more
established companies. Strong's research efforts may also play a greater role
in selecting securities for the Portfolio than in a fund that invests in
larger, more established companies.
DEBT OBLIGATIONS. Debt obligations in which the Portfolio will invest
will primarily be investment grade debt obligations, although the Portfolio
may invest up to 5% of its assets in non-investment grade debt obligations.
The market value of all debt obligations is affected by changes in the
prevailing interest rates. The market value of such instruments generally
reacts inversely to interest rate changes. If the prevailing interest rates
decline, the market value of debt obligations generally increases. If the
prevailing interest rates increase, the market value of debt obligations
generally decreases. In general, the longer the maturity of a debt
obligation, the greater its sensitivity to changes in interest rates.
Investment-grade debt obligations include:
- bonds or bank obligations rated in one of the four highest rating
categories of any nationally recognized statistical rating organization or
"NRSRO" (e.g., BBB- or higher by S&P);
- U.S. government securities (as defined below);
- commercial paper rated in one of the three highest ratings categories
of any NRSRO (e.g., A-3 or higher by S&P);
- short-term bank obligations that are rated in one of the three highest
categories by any NRSRO (e.g., A-3 or higher by S&P), with respect to
obligations maturing in one year or less;
- repurchase agreements involving investment-grade debt obligations; or
- unrated debt obligations which are determined by the Sub-Adviser to be
of comparable quality.
All ratings are determined at the time of investment. Any subsequent rating
downgrade of a debt obligation will be monitored by the Sub-Adviser to
consider what action, if any, the Portfolio should take consistent with its
investment objective. Securities rated in the fourth highest category (e.g.,
BBB- by S&P), although considered investment-grade, have speculative
characteristics and may be subject to greater fluctuations in value than
higher-rated securities.
Non-investment-grade debt obligations include:
- securities rated as low as C by S&P or their equivalents;
- commercial paper rated as low as C- by S&P or its equivalents; and
- unrated debt securities judged to be of comparable quality by the
Sub-Adviser.
PORTFOLIO TURNOVER. The annual portfolio turnover rate indicates changes
in the Portfolio's portfolio. The turnover rate may vary from year to year,
as well as within a year. It may also be affected by sales of portfolio
securities necessary to meet cash requirements for redemptions of shares.
High portfolio turnover in any year will result in the payment by shareholders
of above average amounts of taxes on realized investment gains. The
International Stock Portfolio's portfolio turnover rate is expected to exceed
100% , but generally not to exceed 200%. (See "Portfolio Turnover" in the
SAI.) These rates should not be considered as limiting factors. The portfolio
turnover rate of the Portfolio for the period ended December 31, 1995 is set
forth herein under "Financial Highlights."
OTC PORTFOLIO
The investment objective of the OTC Portfolio is to seek to obtain
long-term growth of capital.
INVESTMENT POLICIES AND RISKS - OTC PORTFOLIO
The Portfolio seeks to achieve its objective by investing at least 65% of its
assets, under normal circumstances, in securities principally traded on the
over-the-counter (OTC) securities market. OTC securities tend to be
securities of companies which are smaller or newer than those listed on the
New York or American Stock Exchanges. Issuers of the securities of companies
which are traded on the OTC market include, among others, industrial
corporations, financial service institutions, public utilities, and
transportation companies. OTC securities include both equity and debt
securities (including obligations of the U.S. government). The Portfolio may
also invest in securities of companies that are not traded on the OTC
securities market that represent opportunities for capital appreciation. The
Portfolio will seek to invest in companies that are undervalued relative to
present or future earnings, cash flow or book value. While the Portfolio
intends to invest primarily in equity securities, the Portfolio may also
invest in fixed income securities as described below. Equity securities
include: common and preferred stocks; securities such as bonds, warrants or
rights that are convertible into stock; and depositary receipts for those
securities.
The Portfolio will not purchase a security, under normal circumstances, if it
would result in less than 65% of its assets being invested in OTC securities
(the "65% limitation"). Securities that were principally traded on the OTC
securities market when purchased but which have since been listed on the New
York or American Stock Exchange or a foreign exchange will be considered to
fall within the Portfolio's 65% limitation for 12 months after the date the
security was listed on an exchange.
Debt securities of issuers in which the Portfolio may invest include all types
of long- or short-term debt obligations, such as bonds, debentures, notes and
commercial paper. Fixed income securities in which the Portfolio may invest
include securities in the lower rating categories of recognized rating
agencies (and comparable unrated securities). Fixed income securities in
which the Portfolio may invest also include zero coupon bonds, deferred
interest bonds and bonds on which the interest is payable in kind. Such
investments involve certain risks. See "Appendix--Lower-Rated Securities" and
the SAI for a discussion of the risks involved in investing in lower-rated
securities.
Investing in securities traded on the OTC securities market can involve
greater risk than is customarily associated with investing in securities
traded on the New York or American Stock Exchanges since OTC securities are
generally securities of companies which are smaller or newer than those listed
on the New York or American Stock Exchange. For example, these companies
often have limited product lines, markets, or financial resources, may be
dependent for management on one or a few key persons, and can be more
susceptible to losses. Also, their securities may be thinly traded (and
therefore have to be sold at a discount from current prices or sold in small
lots over an extended period of time), may be followed by fewer investment
research analysts and may be subject to wider price swings and thus may create
a greater risk of loss than securities of larger capitalization or established
companies. Shares of the Portfolio, therefore, are subject to greater
fluctuation in value than shares of a conservative equity fund or of a growth
fund which invests entirely in proven growth stocks. Therefore, the Portfolio
is intended for long-term investors who understand and can accept the risks
entailed in seeking long-term growth of capital. The Portfolio is not meant
to provide a vehicle for those who wish to play short-term swings in the stock
market. Accordingly, an investment in shares of the Portfolio should not be
considered a complete investment program. Each prospective purchaser should
take into account his investment objectives as well as his other investments
when considering the purchase of shares of the Portfolio.
When the Sub-Adviser believes that investing for temporary defensive purposes
is appropriate, such as during periods of unusual market conditions, part or
all of the Portfolio's assets may be temporarily invested in cash (including
foreign currency) or cash equivalent short-term obligations including, but not
limited to, certificates of deposit, commercial paper, short-term notes,
obligations issued or guaranteed by the U.S. government or any of its agencies
or instrumentalities and repurchase agreements.
The Portfolio may invest 10% or more of its total assets in foreign securities
(not including ADRs); however, under normal market conditions, the Portfolio
expects to invest less than 35% of its total assets in foreign securities.
The Portfolio may invest up to 10% of its total assets in emerging markets or
countries with limited or developing capital markets. Investing in securities
of foreign issuers generally involves risks not ordinarily associated with
investing in securities of domestic issuers. (See "Appendix--Foreign
Investments" and the SAI for a discussion of the risks involved in foreign
investing.)
The Portfolio may invest in ADRs which are certificates issued by a U.S.
depository (usually a bank) and represent a specified quantity of shares of an
underlying non-U.S. stock on deposit with a custodian bank as collateral.
Although ADRs are issued by a U.S. depository, they are subject to many of the
risks of foreign securities such as changes in exchange rates and more limited
information about foreign issuers.
The Portfolio may also purchase securities that are not registered under the
Securities Act of 1933 ("1933 Act") ("restricted securities"), including those
that can be offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act ("Rule 144A securities"). The Trust's Board of
Trustees confirms based upon information and recommendations provided by the
Sub-Adviser that a specific Rule 144Aa security is liquid and thus not subject
to the Portfolio's limitation on investing not more than 15% of its net assets
in illiquid investments. The Board of Trustees has adopted guidelines and
delegated to the Sub-Adviser the daily function of determining and monitoring
the liquidity of Rule 144A securities. The Board, however, will retain
sufficient oversight and be ultimately responsible for the determinations.
This investment practice could have the effect of decreasing the level of
liquidity in a Portfolio to the extent that qualified institutional buyers
become for a time uninterested in purchasing Rule 144A securities held in the
investment portfolio.
The Portfolio is classified as a "non-diversified" investment company. As a
result, the Portfolio is limited as to the percentage of its assets which may
be invested in the securities of any one issuer only by its own investment
restrictions and the diversification requirements imposed by the Internal
Revenue Code of 1986, as amended. U.S. Government securities which are
generally considered free of credit risk and are assured as to payment of
principal and interest if held to maturity are not subject to any investment
limitation. Since the Portfolio may invest a relatively high percentage of
its assets in a limited number of issuers, the Portfolio may be more
susceptible to any single economic, political or regulatory occurrence and to
the financial conditions of the issuers in which it invests. For these
reasons, an investment in shares of the Portfolio should not be considered to
constitute a complete investment program.
While it is not generally the Portfolio's policy to invest or trade for
short-term profits, the Portfolio may dispose of a portfolio security whenever
the Sub-Adviser is of the opinion that such security no longer has an
appropriate appreciation potential or when another security appears to offer
relatively greater appreciation potential. Portfolio changes are made without
regard to the length of time a security has been held, or whether a sale would
result in a profit or loss. Therefore, the rate of portfolio turnover is not
a limiting factor when a change in the portfolio is otherwise appropriate. It
is anticipated that the Portfolio's portfolio turnover rate will not exceed
100% during the Portfolio's first fiscal year. (See "Portfolio Turnover" in
the SAI.) The portfolio turnover rate of the Portfolio for the period ended
December 31, 1995 is set forth herein under "Financial Highlights."
ADDITIONAL PORTFOLIO INVESTMENTS AND TRANSACTIONS. The Portfolio may
enter into repurchase agreements to earn additional income on available cash
or as a temporary defensive measure. The Portfolio may seek to increase its
income by lending portfolio securities. The Portfolio may purchase securities
on a "when issued" or on a "forward delivery" basis, which means that the
securities will be delivered to the Portfolio at a future date usually beyond
customary settlement time.
The Portfolio may invest in indexed securities whose value is linked to
foreign currencies, commodities, indices, or other financial indicators. The
Portfolio may enter into mortgage "dollar roll" transactions with selected
banks and broker-dealers.
The Portfolio also may purchase restricted securities, corporate asset-backed
securities, options on securities, options on stock indices, options on
foreign currencies, futures contracts, options on futures contracts and
forward foreign currency exchange contracts.
All of the Portfolio investments and transactions described in this section
are described in greater detail in the Appendix and the SAI.
RESEARCH PORTFOLIO
The investment objective of the Research Portfolio is to provide
long-term growth of capital and future income.
The portfolio securities of the Research Portfolio are selected by the
investment research analysts in the Equity Research Group of the Sub-Adviser.
The Portfolio's assets are allocated to economic sectors (e.g. health care,
technology, consumer staples), and then to industry groups within these
sectors (e.g. within the health care sector, the managed care, drug and
medical supply industries). The allocation by sector and industry is
determined by the analysts acting together as a group. Individual analysts
are then responsible for selecting what they view as the best securities for
capital appreciation and future income within their assigned industries.
While the research analysts are overseen by the Sub-Adviser's Director of
Equity Research, investment decisions are made by the analysts.
INVESTMENT POLICIES AND RISKS - RESEARCH PORTFOLIO
The Portfolio's policy is to invest a substantial proportion of its
assets in the common stocks or securities convertible into common stocks of
companies believed to possess better than average prospects for long-term
growth. A smaller proportion of the assets may be invested in bonds,
short-term obligations, preferred stocks or common stocks whose principal
characteristic is income production rather than growth. Such securities may
also offer opportunities for growth of capital as well as income. In the case
of both growth stocks and income issues, emphasis is placed on the selection
of progressive, well-managed companies. The Portfolio's debt investments, if
any, may consist of "investment grade" securities (e.g., rated Baa or better
by Moody's or BBB or better by S&P or Fitch), and, with respect to no more
than 10% of its net assets, securities in the lower rated categories (e.g.,
rated Ba or lower by Moody's or BB or lower by S&P or Fitch), or securities
which the Sub-Adviser believes to be of similar quality to these lower rated
securities (commonly known as "junk bonds"). For a description of bond
ratings, see the SAI. It is not the Portfolio's policy to rely exclusively on
ratings issued by established credit rating agencies but rather to supplement
such ratings with the Sub-Adviser's own independent and ongoing review of
credit quality. The Portfolio's achievement of its investment objective may
be more dependent on the Sub-Adviser's own credit analysis than in the case of
a fund investing in primarily higher quality bonds. From time to time, the
Portfolio's management will exercise its judgment with respect to the
proportions invested in growth stocks, income-producing securities or cash
(including foreign currency) and cash equivalents depending on its view of
their relative attractiveness.
The Portfolio may enter into repurchase agreements in order to earn additional
income on available cash or as a temporary defensive measure. The Portfolio
may make loans of its fixed income portfolio securities. (See "Appendix" for
a further description of these investments.)
The Portfolio may invest in American Depositary Receipts ("ADRs") which are
certificates issued by a U.S. depository (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. Although ADRs are issued by a U.S. depository,
they are subject to many of the risks of foreign securities such as changes in
exchange rates and more limited information about foreign issuers.
The Portfolio may invest up to 20% (and generally expects to invest between
10% and 20%) of its total assets in foreign securities (not including ADRs).
The Portfolio may invest in emerging markets or countries with limited or
developing capital markets. Investing in securities of foreign issuers
generally involves risks not ordinarily associated with investing in
securities of domestic issuers. (See "Appendix--Foreign Investments" and the
SAI for a discussion of the risks involved in foreign investing.)
As described above, the Portfolio may invest in fixed income (i.e., debt)
securities rated Baa by Moody's or BBB by S&P or Fitch and comparable unrated
securities. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade fixed income securities. (See "Appendix--Lower-Rated Securities" and
the SAI for a discussion of the risks involved in investing in lower-rated
securities.)
The Portfolio may also purchase securities that are not registered under the
Securities Act of 1933 ("1933 Act") ("restricted securities"), including those
that can be offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act ("Rule 144A securities"). The Trust's Board of
Trustees confirms based upon information and recommendations provided by the
Sub-Adviser that a specific Rule 144A security is liquid and thus not subject
to the Portfolio's limitation on investing not more than 10% of its net assets
in illiquid investments. The Board of Trustees has adopted guidelines and has
delegated to the Sub-Adviser the daily function of determining and monitoring
the liquidity of Rule 144A securities. The Board, however, will retain
sufficient oversight and be ultimately responsible for the determinations.
This investment practice could have the effect of decreasing the level of
liquidity in the Portfolio to the extent that qualified institutional buyers
become for a time uninterested in purchasing Rule 144A securities held in the
investment portfolio. Subject to the Portfolio's 10% limitation on
investments in illiquid investments and subject to the diversification
requirements of the Internal Revenue Code of 1986, as amended (the "Code"),
the Portfolio may also invest in restricted securities that may not be sold
under Rule 144A, which presents certain risks. As a result, the Portfolio
might not be able to sell these securities when the Sub-Adviser wishes to do
so, or might have to sell them at less than fair value. In addition, market
quotations are less readily available. Therefore, judgment may at times play
a greater role in valuing these securities than in the case of unrestricted
securities.
While it is not generally the Portfolio's policy to invest or trade for
short-term profits, the Portfolio may dispose of a portfolio security whenever
the Sub-Adviser is of the opinion that such security no longer has an
appropriate appreciation potential or when another security appears to offer
relatively greater appreciation potential. Portfolio changes are made without
regard to the length of time a security has been held, or whether a sale would
result in a profit or loss. Therefore, the rate of portfolio turnover is not
a limiting factor when a change in the portfolio is otherwise appropriate.
(See "Portfolio Turnover" in the SAI.) The portfolio turnover rate of the
Portfolio for the period ended December 31, 1995 is set forth herein under
"Financial Highlights."
VALUE + GROWTH PORTFOLIO
The investment objective of the Value + Growth Portfolio is capital
appreciation. The Portfolio invests primarily in mid-cap growth companies with
favorable relationships between price/earnings ratios and growth rates, in
sectors offering the potential for above-average returns. Mid-cap companies
are companies with market capitalizations ranging from $750 million to
approximately $2 billion, although the Portfolio's investments may include
securities of larger or smaller companies.
INVESTMENT POLICIES AND RISKS - VALUE + GROWTH PORTFOLIO
In selecting investments for the Portfolio, the primary emphasis of Robertson,
Stephens & Company Investment Management, L.P., the Portfolio's Sub-Adviser,
is typically on evaluating a company's management, growth prospects, business
operations, revenues, earnings, cash flows, and balance sheet in relationship
to its share price. Robertson, Stephens & Company Investment Management, L.P.
may select stocks which it believes are undervalued relative to the current
stock price. Undervaluation of a stock can result from a variety of factors,
such as a lack of investor recognition of (1) the value of a business
franchise and continuing growth potential, (2) a new, improved or upgraded
product, service or business operation, (3) a positive change in either the
economic or business condition for a company, (4) expanding or changing
markets that provide a company with either new earnings direction or
acceleration, or (5) a catalyst, such as an impending or potential asset sale
or change in management, that could draw increased investor attention to a
company. Robertson, Stephens & Company Investment Management, L.P. also may
use similar factors to identify stocks which it believes to be overvalued and
may engage in short sales of such securities.
The Portfolio may invest a substantial portion of its assets in securities
issued by small companies. Such companies may offer greater opportunities for
capital appreciation than larger companies, but investments in such companies
may involve certain special risks. See "Appendix - Small Companies" for a
discussion of such risks.
The Portfolio may invest in securities principally traded in foreign markets
and may buy or sell foreign currencies and options and futures contracts on
foreign currencies for hedging purposes in connection with its foreign
investments. The Portfolio also may at times invest a substantial portion of
its assets in securities of issuers in developing countries. The Portfolio may
at times invest a substantial portion of its assets in securities traded in
the over-the-counter markets in such countries and not on any exchange, which
may affect the liquidity of the investment and expose the Portfolio to the
credit risk of its counterparties in trading those investments.
International investing in general may involve greater risks than U.S.
investments. These risks may be intensified in the case of investments in
emerging markets or countries with limited or developing capital markets. (See
"Appendix - Foreign Investments" and the SAI for a discussion of the risks
involved in foreign investing and see "Appendix - Strategic Transactions -
Futures and Options on Futures" and "Options on Foreign Currencies" for a
discussion of the risks involved in investing in foreign currencies, options
and futures contracts.)
The Portfolio may invest in debt securities from time to time if the
Sub-Adviser believes that it might help achieve the Portfolio's objective. The
Portfolio may invest in debt securities to the extent consistent with its
investment policies, although the Sub-Adviser expects that under normal
circumstances, the Portfolio would not likely invest a substantial portion of
its assets in debt securities.
The Portfolio will invest only in securities rated "investment grade" or
considered by the Sub-Adviser to be of comparable quality. Investment grade
securities are rated Baa or higher by Moody's or BBB or higher by S&P.
Securities rated Baa or BBB lack outstanding investment characteristics, have
speculative characteristics, and are subject to greater credit and market
risks than higher-rated securities. Descriptions of the securities ratings
assigned by Moody's and S&P are described in the SAI.
The Portfolio may at times invest in so-called "zero-coupon" bonds and
"payment-in-kind" bonds. Zero-coupon bonds are issued at a significant
discount from face value and pay interest only at maturity rather than at
intervals during the life of the security. Payment-in-kind bonds allow the
issuer, at its option, to make current interest payments on the bonds either
in cash or in additional bonds. The values of zero-coupon bonds and
payment-in-kind bonds are subject to greater fluctuation in response to
changes in market interest rates than bonds which pay interest currently, and
may involve greater credit risk than such bonds. See "Zero Coupon Securities
and Pay-in-Kind Securities" in the SAI.
The Portfolio will not necessarily dispose of a security when its debt rating
is reduced below its rating at the time of purchase, although the Sub-Adviser
will monitor the investment to determine whether continued investment in the
security will assist in meeting the Portfolio's investment objective.
The Portfolio may buy and sell call and put options to hedge against changes
in net asset value or to attempt to realize a greater current return. In
addition, through the purchase and sale of futures contracts and related
options, a Portfolio may at times seek to hedge against fluctuations in net
asset value and to attempt to increase its investment return. Although the
Portfolio will only engage in options and futures transactions for limited
purposes, those transactions involve certain risks which are described in the
Appendix and SAI.
The Portfolio may buy and sell index futures contracts ("index futures") and
options on index futures and on indices for hedging purposes or to increase
its investment return (or may purchase warrants whose value is based on the
value from time to time of one or more foreign securities indices). See the
SAI for a further description of index futures and options including risks.
The Value + Growth Portfolio may purchase long-term exchange-traded equity
options called Long-Term Equity Anticipation Securities ("LEAPS") and
Buy-Write Options Unitary Derivatives ("BOUNDs"). LEAPs provide a holder the
opportunity to participate in the underlying securities' appreciation in
excess of a fixed dollar amount, and BOUNDs provide a holder the opportunity
to retain dividends on the underlying securities 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 such options in accordance with the most restrictive
applicable state securities laws.
The Portfolio may purchase and sell options in the over-the-counter markets
but only when appropriate exchange-traded transactions are unavailable and
when, in the opinion of the Sub-Adviser, the pricing mechanism and liquidity
of the over-the-counter markets are satisfactory and the participants are
responsible parties likely to meet their obligations. (See "Appendix -
Over-the-Counter Options.")
The Portfolio will not purchase futures or options on futures or sell futures
if, as a result, the sum of the initial margin deposits on the Portfolio's
existing futures positions and premiums paid for outstanding options on
futures contracts would exceed 5% of the Portfolio's assets. (For options that
are "in-the-money" at the time of purchase, the amount by which the option is
"in-the-money" is excluded from this calculation.)
At times the Portfolio may invest more than 25% of its assets in securities of
issuers in one or more market sectors such as, for example, the technology
sector. A market sector may be made up of companies in a number of related
industries. The Portfolio would only concentrate its investments in a
particular market sector if the Portfolio's Sub-Adviser were to believe the
investment return available from concentration in that sector justifies any
additional risk associated with concentration in that sector. When the
Portfolio concentrates its investments in a market sector, financial,
economic, business, and other developments affecting issuers in that sector
will have a greater effect on the Portfolio than if it had not concentrated
its assets in that sector.
The Portfolio may lend portfolio securities to broker-dealers and may enter
into repurchase agreements. These transactions must be fully collateralized at
all times, but involve some risk to the Portfolio if the other party should
default on its obligations and the Portfolio is delayed or prevented from
recovering the collateral.
At times, the Portfolio's Sub-Adviser may judge that market conditions make
pursuing the Portfolio's basic investment strategy inconsistent with the best
interests of its shareholders. At such times, the Portfolio's Sub-Adviser may
temporarily use alternative strategies, primarily designed to reduce
fluctuations in the values of the Portfolio's assets. In implementing these
"defensive" strategies, the Portfolio may invest in U.S. Government
securities, other high-quality debt instruments, and other securities the
Portfolio's Sub-Adviser believes to be consistent with the Portfolio's best
interests.
PORTFOLIOS SEEKING TOTAL RETURN
INTERNATIONAL FIXED INCOME PORTFOLIO
The investment objective of the International Fixed Income Portfolio is
to provide high total return. The Portfolio will seek to achieve its
objective by investing in both domestic and foreign debt securities and
related foreign currency transactions. The total return will be sought
through a combination of current income, capital gains and gains in currency
positions.
INVESTMENT POLICIES AND RISKS - INTERNATIONAL FIXED INCOME PORTFOLIO
Under normal market conditions, the Portfolio will invest primarily in: (i)
obligations issued or guaranteed by foreign national governments, their
agencies, instrumentalities, or political subdivisions (including any entity
which is majority owned by such government, agency, instrumentality, or
political subdivision); (ii) U.S. government securities; and (iii) debt
securities issued or guaranteed by supranational organizations, considered to
be "government securities."
The Portfolio may also invest in non-government foreign and domestic debt
securities, including corporate debt securities, bank obligations,
mortgage-backed or asset-backed securities, and repurchase agreements.
As an international portfolio, the Portfolio may invest in securities issued
in any currency and may hold foreign currencies. Under normal conditions, the
Portfolio's Sub-Adviser expects that the Portfolio generally will be invested
in at least six different countries, including the U.S., although the
Portfolio may at times invest all of its assets in a single country.
It is currently anticipated that the Portfolio's assets will be invested
principally within, or in the currencies of, Australia, Canada, Japan, New
Zealand, the United States, Scandinavia, and Western Europe and in securities
denominated in the currencies of those countries or denominated in
multinational currency units, such as the European Currency Unit ("ECU"),
which is a "basket" consisting of specified amounts of the currencies of
certain states of the European Community. The specific amounts of currencies
comprising the ECU may be adjusted by the Council of Ministers of the European
Community to reflect changes in the relative values of the underlying
currencies. Securities of issuers within a given country may be denominated
in the currency of another country. In addition, when the Portfolio's
Sub-Adviser believes that U.S. securities offer superior opportunities for
achieving the Portfolio's investment objective, or for temporary defensive
purposes, the Portfolio may invest substantially all of its assets in
securities of U.S. issuers or securities denominated in U.S. dollars.
The Portfolio may also acquire securities and currency in less developed
countries as well as in developing countries. International investing in
general may involve greater risks than U.S. investments. These risks may be
intensified in the case of investments in emerging markets or countries with
limited or developing capital markets. (See "Appendix--Foreign Investments"
and the SAI for a discussion of the risks involved in foreign investing.)
The Portfolio is also authorized to invest in debt securities of supranational
entities. A supranational entity is an entity designated or supported by the
national government of one or more countries to promote economic
reconstruction or development. Examples of supranational entities include,
among others, the World Bank, the European Investment Bank and the Asian
Development Bank. The Portfolio is further authorized to invest in
"semi-governmental securities," which are debt securities issued by entities
owned by either a national, state or equivalent government or are obligations
of one of such government jurisdictions which are not backed by its full faith
and credit and general taxing powers.
The Portfolio may invest in debt securities of any type of issuer, including
foreign and domestic corporations, the 100 largest foreign commercial banks in
terms of total assets, and other business organizations, domestic and foreign
governments and their political subdivisions, including the U.S. government,
its agencies, and authorities or instrumentalities.
The Portfolio may invest in debt securities with varying maturities. Under
current market conditions, it is expected that the dollar-weighted average
maturity of the Portfolio's debt investments will not exceed 10 years.
Generally, the average maturity of the Portfolio's debt portfolio will be
shorter when interest rates worldwide or in a particular country are expected
to rise, and longer when interest rates are expected to fall.
To protect against credit risk, the Portfolio invests primarily in high-grade
debt securities. At least 65% of the Portfolio's investments will consist of
securities rated within the three highest rating categories of S&P (AAA, AA,
A) or Moody's (Aaa, Aa or A) or if unrated, will be considered by the
Sub-Adviser to be of equivalent quality.
The Portfolio may engage in certain Strategic Transactions, which include
dollar roll transactions, reverse repurchase agreements, interest rate
transactions, options on securities and indexes, futures and options on
futures, options on foreign currencies, foreign exchange transactions and over
the counter options. (See "Appendix--Strategic Transactions".)
The Portfolio is classified as a "non-diversified" investment company. As a
result, the Portfolio is limited as to the percentage of its assets which may
be invested in the securities of any one issuer only by its own investment
restrictions and the diversification requirements imposed by the Internal
Revenue Code of 1986, as amended. U.S. Government securities which are
generally considered free of credit risk and are assured as to payment of
principal and interest if held to maturity are not subject to any investment
limitation. Since the Portfolio may invest a relatively high percentage of
its assets in a limited number of issuers, the Portfolio may be more
susceptible to any single economic, political or regulatory occurrence and to
the financial conditions of the issuers in which it invests. For these
reasons, an investment in shares of the Portfolio should not be considered to
constitute a complete investment program.
The Portfolio's net asset value per share fluctuates, depending on (i) current
worldwide market interest rates, (ii) the value of the currencies in which the
Portfolio's securities are denominated when compared to the U.S. dollar, (iii)
the success of the Sub-Adviser's currency hedging techniques, and (iv) the
creditworthiness of the issuers in which the Portfolio is invested. In
pursuing the Portfolio's investment objective, however, the Sub-Adviser
actively manages the Portfolio in an effort to minimize the effect of such
factors on the Portfolio's net asset value per share. The Sub-Adviser
allocates the Portfolio's investments among those markets, issuers and
currencies which it believes offer the most attractive combination of high
income and principal stability. In evaluating investments for the Portfolio,
the Sub-Adviser analyzes relative yields and the appreciation potential of
securities in particular markets; world interest rates and monetary trends;
economic, political and financial market conditions in different countries;
credit quality; and the relationship of individual foreign currencies to the
U.S. dollar. The Sub-Adviser also relies on internally and externally
generated financial, economic, and credit research to evaluate alternative
investment opportunities.
The Portfolio may adjust its portfolio as it deems advisable in view of
prevailing or anticipated market conditions to accomplish the Portfolio's
investment objective. For example, the Portfolio may sell portfolio
securities in anticipation of a movement in interest rates. Frequency of
portfolio turnover will not be a limiting factor if the Portfolio considers it
advantageous to purchase or sell securities. The Sub-Adviser anticipates that
the Portfolio's portfolio turnover rate generally will not exceed 300%. (See
"Portfolio Turnover" in the SAI.) A higher rate of portfolio turnover may
result in correspondingly higher portfolio transaction costs which would have
to be borne directly by the Trust and ultimately by the shareholders. The
portfolio turnover rate of the Portfolio for the period ended December 31,
1995 is set forth herein under "Financial Highlights."
TOTAL RETURN PORTFOLIO
The primary investment objective of the Total Return Portfolio is to
obtain above-average income (compared to a portfolio entirely invested in
equity securities) consistent with the prudent employment of capital. While
current income is the primary objective, the Portfolio believes that there
should also be a reasonable opportunity for growth of capital and income,
since many securities offering a better than average yield may also possess
growth potential. Thus, in selecting securities for its portfolio, the
Portfolio considers each of these objectives. Under normal market conditions,
at least 25% of the Portfolio's assets will be invested in fixed income
securities and at least 40% and no more than 75% of the Portfolio's assets
will be invested in equity securities.
INVESTMENT POLICIES AND RISKS - TOTAL RETURN PORTFOLIO
The Portfolio's policy is to invest in a broad list of securities,
including short-term obligations. The list may be diversified not only by
companies and industries, but also by type of security. Fixed income
securities and equity securities (which include: common and preferred stocks;
securities such as bonds, warrants or rights that are convertible into stock;
and depository receipts for those securities) may be held by the Portfolio.
Some fixed income securities may also have a call on common stock by means of
a conversion privilege or attached warrants. The Portfolio may vary the
percentage of assets invested in any one type of security in accordance with
the Sub-Adviser's interpretation of economic and money market conditions,
fiscal and monetary policy and underlying security values. The Portfolio's
debt investments may consist of both "investment grade" securities (e.g.,
rated Baa or better by Moody's or BBB or better by S&P or Fitch) and
securities that are unrated or are in the lower rating categories (e.g., rated
Ba or lower by Moody's or BB or lower by S&P or Fitch) (commonly known as
"junk bonds") including up to 20% of its net assets in nonconvertible fixed
income securities that are in these lower rating categories and comparable
unrated securities. Generally, most of the Portfolio's long-term debt
investments will consist of "investment grade" securities. See the SAI for a
description of these ratings. It is not the Portfolio's policy to rely
exclusively on ratings issued by established credit rating agencies but rather
to supplement such ratings with the Sub-Adviser's own independent and ongoing
review of credit quality.
U. S. GOVERNMENT SECURITIES. The Portfolio may also invest in U.S.
government securities, including: (1) U.S. Treasury obligations, which differ
only in their interest rates, maturities and times of issuance: U.S. Treasury
bills (maturities of one year or less); U.S. Treasury notes (maturities of one
to ten years); and U.S. Treasury bonds (generally maturities of greater than
ten years), all of which are backed by the full faith and credit of the U.S.
Government; and (2) obligations issued or guaranteed by U.S. Government
agencies or instrumentalities, some of which are backed by the full faith and
credit of the U.S. Treasury, e.g., direct pass-through certificates of GNMA;
some of which are supported by the right of the issuer to borrow from the U.S.
Government, e.g., obligations of Federal Home Loan Banks; and some of which
are backed only by the credit of the issuer itself, e.g., obligations of the
Student Loan Marketing Association.
MORTGAGE PASS-THROUGH SECURITIES. The Portfolio may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. government (in the case of
securities guaranteed by GNMA); or guaranteed by U.S. government-sponsored
corporations (such as FNMA or FHLMC, which are supported only by the
discretionary authority of the U.S. government to purchase the agency's
obligations). Mortgage pass-through securities may also be issued by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers). See the Appendix for a further discussion of these
securities.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS. Fixed income
securities that the Portfolio may invest in also include zero coupon bonds,
deferred interest bonds and bonds on which the interest is payable in kind
("PIK bonds"). Zero coupon and deferred interest bonds are debt obligations
which are issued or purchased at a significant discount from face value. The
discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity or the first interest payment date at
a rate of interest reflecting the market rate of the security at the time of
issuance. While zero coupon bonds do not require the periodic payment of
interest, deferred interest bonds provide that the issuer thereof may, at its
option, pay interest on such bonds in cash or in the form of additional debt
obligations. Such investments benefit the issuer by mitigating its need for
cash to meet debt service, but also require a higher rate of return to attract
investors who are willing to defer receipt of such cash. Such investments may
experience greater volatility in market value due to changes in interest rates
than debt obligations which make regular payments of interest. The Portfolio
will accrue income on such investments for tax and accounting purposes, as
required, which is distributable to shareholders and which, because no cash is
received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Portfolio's distribution obligations.
AMERICAN DEPOSITARY RECEIPTS. The Portfolio may invest in American
Depositary Receipts ("ADRs") which are certificates issued by a U.S.
depository (usually a bank), that represent a specified quantity of shares of
an underlying non-U.S. stock on deposit with a custodian bank as collateral.
Although ADRs are issued by a U.S. depository, they are subject to many of the
risks of foreign securities such as changes in exchange rates and more limited
information about foreign issuers.
The Portfolio may invest up to 20% (and generally expects to invest between
10% and 20%) of its total assets in foreign securities (including investments
in emerging markets or countries with limited or developing capital markets)
(not including ADRs). Investing in securities of foreign issuers generally
involves risks not ordinarily associated with investing in securities of
domestic issuers. (See "Appendix--Foreign Investments" and the SAI for a
discussion of the risks involved in foreign investing.)
In order to protect the value of the Portfolio's investments from interest
rate fluctuations, the Portfolio may enter into various hedging transactions,
such as interest rate swaps, and the purchase or sale of interest rate caps,
floors and collars. (See the SAI for information relating to these
transactions including related risks.)
The Portfolio may also purchase securities that are not registered under the
1933 Act ("restricted securities"), including those that can be offered and
sold to "qualified institutional buyers" under Rule 144A under the 1933 Act
("Rule 144A securities"). The Trust's Board of Trustees confirms based upon
information and recommendations provided by the Sub-Adviser that a specific
Rule 144A security, is liquid and thus not subject to the Portfolio's
limitation on investing not more than 15% of its net assets in illiquid
investments. The Board of Trustees has adopted guidelines and delegated to
the Sub-Adviser the daily function of determining and monitoring the liquidity
of Rule 144A securities. The Board, however, will retain sufficient oversight
and be ultimately responsible for the determinations. This investment
practice could have the effect of decreasing the level of liquidity in a
Portfolio to the extent that qualified institutional buyers become for a time
uninterested in purchasing Rule 144A securities held in the investment
portfolio. Subject to the Portfolio's 15% limitation on investments in
illiquid investments and subject to the diversification requirements of the
Code, the Portfolio may also invest in restricted securities that may not be
sold under Rule 144A, which presents certain risks. As a result, the
Portfolio might not be able to sell these securities when the Sub-Adviser
wishes to do so, or might have to sell them at less than fair value. In
addition, market quotations are less readily available. Therefore, judgment
may at times play a greater role in valuing these securities than in the case
of unrestricted securities.
While it is not generally the Portfolio's policy to invest or trade for
short-term profits, the Portfolio may dispose of a portfolio security whenever
the Sub-Adviser is of the opinion that such security no longer has an
appropriate appreciation potential or when another security appears to offer
relatively greater appreciation potential. Portfolio changes are made without
regard to the length of time a security has been held, or whether a sale would
result in a profit or loss. Therefore, the rate of portfolio turnover is not
a limiting factor when a change in the portfolio is otherwise appropriate.
(See "Portfolio Turnover" in the SAI.) The portfolio turnover rate of the
Portfolio for the period ended December 31, 1995 is set forth herein under
"Financial Highlights."
ADDITIONAL PORTFOLIO INVESTMENTS AND TRANSACTIONS. The Portfolio may
enter into repurchase agreements to earn additional income on available cash
or as a temporary defensive measure. The Portfolio may seek to increase its
income by lending portfolio securities. The Portfolio may purchase securities
on a "when issued" or on a "delayed delivery" basis, which means that the
securities will be delivered to the Portfolio at a future date usually beyond
customary settlement time.
The Portfolio may invest in indexed securities whose value is linked to
foreign currencies, indices, or other financial indicators. The Portfolio may
enter into mortgage "dollar roll" transactions with selected banks and
broker-dealers. The Portfolio may invest a portion of its assets in loan
participations and other direct indebtedness.
The Portfolio also may purchase restricted securities, corporate asset-backed
securities, options on securities, options on stock indices, options on
foreign currencies, futures contracts, options on futures contracts and
forward foreign currency exchange contracts.
All of the Portfolio investments and transactions described in this section
are described in greater detail in the Appendix and the SAI.
GROWTH & INCOME PORTFOLIO
The investment objective of the Growth & Income Portfolio is long-term total
return. The Portfolio will pursue this objective primarily by investing in
equity and debt securities, focusing on small- and mid-cap companies that
offer the potential for capital appreciation, current income, or both.
The Portfolio will normally invest the majority of its assets in common and
preferred stocks, convertible securities, bonds, and notes. Although the
Portfolio will focus on companies with market capitalizations of up to $3
billion, the Portfolio intends to remain flexible and may invest in securities
of larger companies. The Portfolio may also engage in short sales of
securities it expects to decline in price.
INVESTMENT POLICIES AND RISKS - GROWTH & INCOME PORTFOLIO
Small- and mid-cap companies may present greater opportunities for investment
return, but may also involve greater risks. They may have limited product
lines, markets, or financial resources, or may depend on a limited management
group. Their securities may trade less frequently and in limited volume. As a
result, the prices of these securities may fluctuate more than prices of
securities of larger, widely traded companies. See "Appendix - Small
Companies."
The Portfolio may invest a substantial portion of its assets in securities
issued by small companies. Such companies may offer greater opportunities for
capital appreciation than larger companies, but investments in such companies
may involve certain special risks. See "Appendix - Small Companies" for a
discussion of such risks.
The Portfolio may invest in securities principally traded in foreign markets
and may buy or sell foreign currencies and options and futures contracts on
foreign currencies for hedging purposes in connection with its foreign
investments. The Portfolio also may at times invest a substantial portion of
its assets in securities of issuers in developing countries. The Portfolio may
at times invest a substantial portion of its assets in securities traded in
the over-the-counter markets in such countries and not on any exchange, which
may affect the liquidity of the investment and expose the Portfolio to the
credit risk of its counterparties in trading those investments.
International investing in general may involve greater risks than U.S.
investments. These risks may be intensified in the case of investments in
emerging markets or countries with limited or developing capital markets. (See
"Appendix - Foreign Investments" and the SAI for a discussion of the risks
involved in foreign investing and see "Appendix - Strategic Transactions -
Futures and Options on Futures" and "Options on Foreign Currencies" for a
discussion of the risks involved in investing in foreign currencies, options
and futures contracts.)
The Portfolio may invest without limit in debt securities and other
fixed-income securities. The Portfolio may invest in lower-quality, high
yielding debt securities. Lower-rated debt securities (commonly called "junk
bonds") are considered to be of poor standing and predominantly speculative.
Such investments involve certain risks. See "Appendix - Lower Rated
Securities" and the SAI for a discussion of the risks involved in investing in
lower-rated securities.
The Portfolio may at times invest in so-called "zero-coupon" bonds and
"payment-in-kind" bonds. Zero-coupon bonds are issued at a significant
discount from face value and pay interest only at maturity rather than at
intervals during the life of the security. Payment-in-kind bonds allow the
issuer, at its option, to make current interest payments on the bonds either
in cash or in additional bonds. The values of zero-coupon bonds and
payment-in-kind bonds are subject to greater fluctuation in response to
changes in market interest rates than bonds which pay interest currently, and
may involve greater credit risk than such bonds. See "Zero Coupon Securities
and Pay-in-Kind Securities" in the SAI.
The Portfolio will not necessarily dispose of a security when its debt rating
is reduced below its rating at the time of purchase, although the Sub-Adviser
will monitor the investment to determine whether continued investment in the
security will assist in meeting the Portfolio's investment objective.
The Portfolio may buy and sell call and put options to hedge against changes
in net asset value or to attempt to realize a greater current return. In
addition, through the purchase and sale of futures contracts and related
options, a Portfolio may at times seek to hedge against fluctuations in net
asset value and to attempt to increase its investment return. Although the
Portfolio will only engage in options and futures transactions for limited
purposes, those transactions involve certain risks which are described in the
Appendix and SAI.
The Portfolio may buy and sell index futures contracts ("index futures") and
options on index futures and on indices for hedging purposes or to increase
its investment return (or may purchase warrants whose value is based on the
value from time to time of one or more foreign securities indices). See the
SAI for a further description of index futures and options including risks.
The Portfolio may purchase and sell options in the over-the-counter markets
but only when appropriate exchange-traded transactions are unavailable and
when, in the opinion of the Sub-Adviser, the pricing mechanism and liquidity
of the over-the-counter markets are satisfactory and the participants are
responsible parties likely to meet their obligations. (See "Appendix -
Over-the-Counter Options.")
The Portfolio will not purchase futures or options on futures or sell futures
if, as a result, the sum of the initial margin deposits on the Portfolio's
existing futures positions and premiums paid for outstanding options on
futures contracts would exceed 5% of the Portfolio's assets. (For options that
are "in-the-money" at the time of purchase, the amount by which the option is
"in-the-money" is excluded from this calculation.)
At times the Portfolio may invest more than 25% of its assets in securities of
issuers in one or more market sectors such as, for example, the technology
sector. A market sector may be made up of companies in a number of related
industries. The Portfolio would only concentrate its investments in a
particular market sector if the Portfolio's Sub-Adviser were to believe the
investment return available from concentration in that sector justifies any
additional risk associated with concentration in that sector. When the
Portfolio concentrates its investments in a market sector, financial,
economic, business, and other developments affecting issuers in that sector
will have a greater effect on the Portfolio than if it had not concentrated
its assets in that sector.
The Portfolio may lend portfolio securities to broker-dealers and may enter
into repurchase agreements. These transactions must be fully collateralized at
all times, but involve some risk to the Portfolio if the other party should
default on its obligations and the Portfolio is delayed or prevented from
recovering the collateral.
At times, the Portfolio's Sub-Adviser may judge that market conditions make
pursuing the Portfolio's basic investment strategy inconsistent with the best
interests of its shareholders. At such times, the Portfolio's Sub-Adviser may
temporarily use alternative strategies, primarily designed to reduce
fluctuations in the values of the Portfolio's assets. In implementing these
"defensive" strategies, the Portfolio may invest in U.S. Government
securities, other high-quality debt instruments, and other securities the
Portfolio's Sub-Adviser believes to be consistent with the Portfolio's best
interests.
MANAGEMENT OF THE TRUST
INVESTMENT ADVISER
Under an Investment Advisory Agreement dated October 1, 1994, Equitable
Investment Services, Inc., 699 Walnut Street, Des Moines, Iowa 50309 (the
"Adviser"), manages the business and affairs of the Portfolios and the Trust,
subject to the control of the Trustees.
The Adviser is an Iowa corporation which was incorporated in 1969. The
Adviser is engaged in the business of providing investment advice to
affiliated insurance companies.
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.
The Investment Advisory Agreement also provides that the Adviser shall manage
the Trust's business and affairs and shall provide such services required for
effective administration of the Trust as are not provided by employees or
other agents engaged by the Trust. 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. The Investment Advisory Agreement provides that Adviser may retain
sub-advisers, at the Adviser's own cost and expense, for the purpose of making
investment recommendations and research information available to the Trust.
The Adviser retains sub-advisers for each of the Portfolios except the Money
Market Portfolio, Mortgage-Backed Securities Portfolio, Advantage Portfolio,
Short-Term Bond Portfolio and Government Securities Portfolio. The Adviser
currently performs the portfolio management function for the Money Market,
Mortgage-Backed Securities, Advantage, Short-Term Bond and Government
Securities Portfolios.
Robert F. Bowman is the portfolio manager of the Adviser responsible for the
Money Market Portfolio and is co-manager of the Advantage Portfolio,
Short-Term Bond Portfolio and Government Securities Portfolio. Mr. Bowman was
graduated from Wabash College with a Bachelor of Arts degree in Economics and
from the University of Texas with a Master of Business Administration degree
in Finance. Mr. Bowman currently holds the title of Managing Director at the
Adviser.
Annette F. Shaw is the portfolio manager of the Adviser responsible for the
Mortgage-Backed Securities Portfolio and is the co-manager of the Advantage
Portfolio, Short-Term Bond Portfolio and Government Securities Portfolio. Ms.
Shaw was graduated from Drake University with a Bachelor of Science degree in
Finance. Ms. Shaw also holds the Chartered Financial Analyst (CFA)
designation. Ms. Shaw currently holds the title of Managing Director at the
Adviser.
As full compensation for its services under the Investment Advisory Agreement,
the Trust pays the Adviser a monthly fee at the following annual rates shown
in the table below based on the average daily net assets of each Portfolio.
<TABLE>
<CAPTTION
<S> <C>
PORTFOLIO ADVISORY FEE
(Annual Rate based on average daily net assets
of each Portfolio)
Advantage .50% of first $100 million
.35% of average net assets over and above $100 million
Government Securities .75% of first $200 million
.55% of average net assets over and above $200 million
Growth & Income .95% of first $200 million
.75% of average net assets over and above $200 million
International Fixed Income .85% of first $200 million
.75% of next $300 million
.60% of next $500 million
.55% of next $1 billion
.40% of average net assets over and above $2 billion
International Stock .80% of first $300 million
.55% of average net assets over and above $300 million
Money Market .375% of first $50 million
.35% of average net assets over and above $50 million
Mortgage-Backed Securities .75% of first $200 million
.65% of next $300 million
.55% of next $500 million
.50% of next $1 billion
.40% of average net assets over and above $2 billion
OTC .80% of first $300 million
.55% of average net assets over and above $300 million
Research .80% of first $300 million
.55% of average net assets over and above $300 million
Short-Term Bond .65% of first $100 million
.50% of next $100 million
.45% of next $300 million
.40% of average net assets over and above $500 million
Total Return .80% of first $300 million
.55% of average net assets over and above $300 million
Value + Growth .95% of first $500 million
.75% of average net assets over and above $500 million
</TABLE>
ADVISORY FEE WAIVER AND EXPENSE CAP
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. For the year ended
December 31, 1995, pursuant to a prior undertaking to waive advisory fees and
reimburse expenses for each of the Portfolios (except the Growth & Income and
Value + Growth Portfolios which have not yet commenced investment operations),
the advisory fee waivers amounted to $_________ and Adviser had reimbursed the
Trust $____________ for expenses in excess of the voluntary expense
limitations for that same period.
EXPENSES OF THE TRUST
The organizational expenses of the Trust are being amortized on a
straight-line basis over a period of five years (beginning with the
commencement of operations). If any of the initial shares (purchased by the
Life Company through its contribution of the initial "seed money" to the Trust
totaling $10,000 per Portfolio) are redeemed during the amortization period by
the holder thereof, the redemption proceeds will be reduced by any unamortized
organizational expenses in the same proportion as the number of initial shares
being redeemed bears to the number of initial shares outstanding at the time
of the redemption.
SUB-ADVISERS
In accordance with a Portfolio's investment objective and policies and under
the supervision of Adviser and the Trust's Board of Trustees, a Portfolio's
Sub-Adviser is responsible for the day to day investment management of the
Portfolio, makes investment decisions for the Portfolio and places orders on
behalf of the Portfolio to effect the investment decisions made as provided in
separate Sub-Advisory Agreements among each Sub-Adviser, the Adviser and
(except with respect to the Sub-Advisory Agreement between Strong and the
Adviser) the Trust. The following organizations act as Sub-Advisers to the
Portfolios:
MASSACHUSETTS FINANCIAL SERVICES COMPANY ("MFS"), 500 Boylston Street,
Boston, Massachusetts 02116, is the Sub-Adviser for the OTC Portfolio, the
Research Portfolio and the Total Return Portfolio of the Trust.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts
Investors Trust. Net assets under the management of the MFS organization were
approximately $___ billion on behalf of approximately _____ million investor
accounts as of __________, 1996. As of such date, the MFS organization
managed approximately $___ billion of assets in equity securities and $_____
billion of assets in fixed income securities. Approximately $_____ billion of
assets managed by MFS are invested in securities of foreign issuers and
non-U.S. dollar denominated securities of U.S. issuers. MFS is a subsidiary
of Sun Life Assurance Company of Canada (U.S.) which in turn is a subsidiary
of Sun Life Assurance Company of Canada ("Sun Life"). The Directors of MFS
are A. Keith Brodkin, Jeffrey L. Shames, John R. Gardner, John D. McNeil and
Arnold D. Scott. Mr. Brodkin is the Chairman, Mr. Shames is the President and
Mr. Scott is the Secretary and a Senior Executive Vice President of MFS.
Messrs. McNeil and Gardner are the Chairman and the President, respectively,
of Sun Life. Sun Life, a mutual life insurance company, is one of the largest
international life insurance companies and has been operating in the U.S.
since 1895, establishing a headquarters office in the U.S. in 1973. The
executive officers of MFS report to the Chairman of Sun Life.
Kevin R. Parke is the portfolio manager for the Research Portfolio. Mr. Parke
is the Director of Equity Research of MFS and oversees the selection of
portfolio securities made by the investment research analysts of the Equity
Research Group. Mr. Parke is a Senior Vice President - Investments of MFS and
has been employed by MFS since 1985.
David M. Calabro heads a team of portfolio managers of MFS for the Total
Return Portfolio. Mr. Calabro is a Vice President - Investments of MFS and
manages the equity portion of the portfolio along with Judith N. Lamb, a Vice
President - Investments of MFS, Lisa B. Nurme, a Vice President - Investments
of MFS and Maura Shaughnessy, a Vice President - Investment of MFS. Geoffrey
L. Kurinsky, a Senior Vice President - Investment manages the fixed income
portion of the portfolio and has been employed by MFS since 1987. Mr. Calabro
has been employed by MFS since 1992. Ms. Lamb has been employed by MFS since
1992. Ms. Nurme has been employed by MFS since 1987. Ms. Shaughnessy has been
employed by MFS since 1991.
John W. Ballen and Mark Regan are the portfolio managers for the OTC
Portfolio. Mr. Ballen is a Senior Vice President - Investments and the Chief
Equity Officer at MFS and has been employed by MFS since 1984. Mr. Regan is a
Vice President - Investments at MFS and has been employed by MFS since 1989.
Under the terms of the Sub-Advisory Agreement, the Adviser shall pay to MFS,
as full compensation for services rendered under the Sub-Advisory Agreement
with respect to the OTC, Research and Total Return Portfolios, the following
annual fees:
<TABLE>
<CAPTION>
<S> <C>
OTC Portfolio .40% of first $300 million
.25% of average net assets over and above $300 million
Research Portfolio .40% of first $300 million
.25% of average net assets over and above $300 million
Total Return .40% of first $300 million
Portfolio .25% of average net assets over and above $300 million
</TABLE>
CREDIT SUISSE INVESTMENT MANAGEMENT LTD. (FORMERLY, CS FIRST BOSTON
INVESTMENT MANAGEMENT LTD.), ("CSIML"), Beaufort House, London, England, is
the Sub-Adviser for the International Fixed Income Portfolio of the Trust.
CSIML is a wholly-owned subsidiary of Credit Suisse, the second largest Swiss
bank, which in turn is a subsidiary of CS Holding, a Swiss corporation.
Robert J. Parker and Mark J. Morris are the portfolio managers of CSIML for
the International Fixed Income Portfolio. Mr. Parker is a managing director,
and President of CSIML. Mr. Parker is also chief investment officer of the
international fixed income group. Mr. Parker was a founding member of CSIML.
Prior to joining the firm, he spent six years at N.M. Rothschild and Sons,
Limited as assistant director in the investment management department. He
began his career with Lloyds Bank International in France in the corporate
finance department. Mr. Parker earned an M.A. degree in economics from the
University of Cambridge.
Mr. Morris is a director and global fixed income portfolio manager of CSIML.
Mr. Morris has responsibility for both U.S. and non-U.S. clients. He joined
CSIML in 1986 as a fixed income portfolio manager with primary research
responsibility for Japan, and also to coordinate currency views. Prior to
joining the firm, he worked at Bank of America and Barclays National
Industrial Bank. Mr. Morris earned a B.Sc. degree in electrical engineering
and an M.B.A. degree in finance from Cape Town University. He is a member of
the Securities Institute.
Under the terms of the Sub-Advisory Agreement, the Adviser shall pay to CSIML
as full compensation for services rendered under the Agreement with respect to
the International Fixed Income Portfolio, the following annual fees:
<TABLE>
<CAPTION>
<S> <C>
International Fixed .45% of first $200 million
Income Portfolio .40% of next $300 million
.30% of next $500 million
.25% of next $1 billion
.10% of average net assets over and above $2 billion
</TABLE>
STRONG CAPITAL MANAGEMENT, INC. ("STRONG"), P.O. Box 2936, Milwaukee, WI
53201-2936, is the Sub-Adviser for the International Stock Portfolio of the
Trust.
Strong began conducting business in 1974. Since then, its principal business
has been providing continuous investment supervision for mutual funds,
individuals, and institutional accounts, such as pension funds and
profit-sharing plans. As of _____________, 1996, Strong had over $____
billion under management. Mr. Richard S. Strong controls Strong. Strong also
acts as investment adviser for each of the mutual funds comprising the Strong
Family of Funds.
Anthony L.T. Cragg is the portfolio manager of Strong for the International
Stock Portfolio. Mr. Cragg joined Strong in April, 1993 to develop Strong's
international investment activities. During the prior seven years, he helped
establish Dillon, Read International Asset Management, where he was in charge
of Japanese, Asian, and Australian investments. A graduate of Christ Church,
Oxford University, Mr. Cragg began his investment career in 1980 at Gartmore,
Ltd., as an international investment manager, where his tenure included
assignments in London, Hong Kong, and Tokyo.
Under the terms of the Sub-Advisory Agreement, the Adviser shall pay to
Strong, as full compensation for services rendered under the Agreement with
respect to the International Stock Portfolio the following annual fees:
<TABLE>
<CAPTION>
<S> <C>
International Stock Portfolio .40% of first $300 million
.25% of average net assets over and above $300 million
</TABLE>
Effective as of June __, 1996, the Sub-Advisory Agreement will be terminated.
The Adviser is actively seeking a successor sub-adviser for this Portfolio.
Any successor sub-adviser chosen is subject to the approval of the Board of
Trustees of the Trust and the shareholder of the International Stock
Portfolio.
ROBERTSON, STEPHENS & COMPANY INVESTMENT MANAGEMENT, L.P., 555 California
Street, San Francisco, CA 94104, is the Sub-Adviser for the Growth & Income
and Value + Growth Portfolios of the Trust. Robertson, Stephens & Company
Investment Management, L.P., a California limited partnership, was formed in
1993 and is registered as an investment adviser with the Securities and
Exchange Commission. The general partner of Robertson, Stephens & Company
Investment Management, L.P. is Robertson, Stephens & Company, Inc., and the
principal limited partner is Robertson, Stephens & Company, L.P., a major
investment banking firm specializing in emerging growth companies that has
developed substantial investment research, underwriting, and venture capital
expertise. Since 1978, Robertson, Stephens & Company, L.P. has managed
underwritten public offerings for over $15.23 billion of securities of
emerging growth companies. Robertson, Stephens & Company Investment
Management, L.P., and its affiliates have in excess of $2.7 billion under
management in public and private investment funds. Robertson, Stephens &
Company, L.P., its general partner, Robertson, Stephens & Company, Inc. and
Sanford R. Robertson may be deemed to be control persons of Robertson,
Stephens & Company Investment Management, L.P.
Ronald E. Elijah joined Robertson, Stephens & Company Investment Management,
L.P. in 1992 and is the portfolio manager for the Value + Growth Portfolio.
From August 1985 to January, 1990, Mr. Elijah was a securities analyst for
Robertson, Stephens & Company, L.P. From January 1990 to January 1992, Mr.
Elijah was an analyst and portfolio manager for Water Street Capital, which
managed short selling investment funds.
John L. Wallace is the portfolio manager for the Growth & Income Portfolio.
Prior to joining Robertson, Stephens & Company Investment Management, L.P.,
Mr. Wallace was Vice President of Oppenheimer Management Corp., where he was
portfolio manager of the Oppenheimer Main Street Income and Growth Fund.
Under the terms of the Sub-Advisory Agreement, the Adviser shall pay to
Robertson, Stephens & Company Investment Management, L.P., as full
compensation for services rendered under the Agreement with respect to the
Growth & Income and Value + Growth Portfolios the following annual fees:
<TABLE>
<CAPTION>
<S> <C>
Growth & Income Portfolio .55% of first $200 million
.45% of average net assets over and above $200 million
Value + Growth Portfolio .55% of first $500 million
.45% of average net assets over and above $500 million
</TABLE>
SALES AND REDEMPTIONS
The separate account of the Life Company places orders to purchase and redeem
shares of each Portfolio based on, among other things, the amount of premium
payments to be invested and surrender and transfer requests to be effected on
that day pursuant to the VA contracts issued by the Life Company. Orders
received by the Trust are effected on days on which the New York Stock
Exchange is open for trading, at the net asset value per share next determined
after receipt of the order, except that, in the case of the Money Market
Portfolio, purchases will not be effected until the next determination of net
asset value after federal funds have been made available to the Trust. For
orders received before 4:00 p.m. New York time, such purchases and redemptions
of shares of each Portfolio are effected at the respective net asset values
per share determined as of 4:00 p.m. New York time on that day. See "Net
Asset Value," below and "Determination of Net Asset Value" in the Trust's SAI.
Payment for redemptions will be made within seven days after receipt of a
redemption request in good order. No fee is charged the separate account of
the Life Company when it redeems Portfolio shares. The Trust may suspend the
sale of shares at any time and may refuse any order to purchase shares.
The Trust may suspend the right of redemption of shares of any Portfolio and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than for customary weekend and holiday closings or
during which trading on the New York Stock Exchange is restricted; (ii) when
the Securities and Exchange Commission determines that a state of emergency
exists which makes the sale of portfolio securities or the determination of
net asset value not reasonably practicable; (iii) as the Securities and
Exchange Commission may by order permit for the protection of the security
holders of the Trust; or (iv) at any time when the Trust may, under applicable
laws and regulations, suspend payment on the redemption of its shares.
NET ASSET VALUE
Each Portfolio calculates the net asset value of a share by dividing the total
value of its assets, less liabilities, by the number of shares outstanding.
Shares are valued as of 4:00 p.m. New York time on each day the New York Stock
Exchange is open.
The Money Market Portfolio's securities are valued at their amortized cost,
which does not take into account unrealized gains or losses on securities.
This method involves initially valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any premium paid or
discount received. For a more complete description of amortized cost
valuation, see "Determination of Net Asset Value" in the SAI.
Because foreign securities are quoted in foreign currencies which will be
translated into U.S. dollars at the New York cable transfer rates or at such
other rates as the Trustees may determine in computing net asset value,
fluctuations in the value of such currencies in relation to the U.S. dollar
will affect the net asset value of shares of a Portfolio investing in foreign
securities even though there has not been any change in the local currency
values of such securities.
PERFORMANCE INFORMATION
Money Market Portfolio: From time to time, the Money Market Portfolio's
annualized "yield" and "effective yield" may be presented in advertisements
and sales literature. These yield figures are based on historical earnings
and are not intended to indicate future performance. The "yield" of the Money
Market Portfolio refers to the income generated by an investment in the shares
of that Portfolio over a seven-day period (which period will be stated in the
advertisement). This income is then "annualized." That is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when
annualized, the income earned by an investment in the shares of the Money
Market Portfolio is assumed to be reinvested. The "effective yield" will be
slightly higher than the "yield" because of the compounding effect of this
assumed reinvestment. For more information regarding the computation of
"yield" and "effective yield", see "Performance Information" in the SAI.
Other Portfolios: Performance information for each of the other Portfolios may
also be presented from time to time in advertisements and sales literature.
The Portfolios may advertise several types of performance information. These
are the "yield," "average annual total return" and "aggregate total return".
Each of these figures is based upon historical results and is not necessarily
representative of the future performance of any Portfolio. The
yield of a Portfolio's shares is determined by annualizing net investment
income earned per share for a stated period (normally one month or thirty
days) and dividing the result by the net asset value per share at the end of
the valuation period. The average annual total return and aggregate total
return figures measure both the net investment income generated by, and the
effect of any realized or unrealized appreciation or depreciation of the
underlying investments in, the Portfolio's portfolio for the period in
question, assuming the reinvestment of all dividends. Thus, these figures
reflect the change in the value of an investment in a Portfolio's shares
during a specified period. Average annual total return will be quoted for at
least the one, five and ten year periods ending on a recent calendar quarter
(or if such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Portfolio). Average annual total return
figures are annualized and, therefore, represent the average annual percentage
change over the period in question. Total return figures are not annualized
and represent the aggregate percentage or dollar value change over the period
in question. For more information regarding the computation of yield, average
annual total return and aggregate total return, see "Performance Information"
in the SAI.
Any Portfolio performance information presented will also include performance
information for the insurance company separate accounts investing in the Trust
which will take into account insurance-related charges and expenses under such
insurance policies and contracts.
Advertisements concerning the Trust may from time to time compare the
performance of one or more Portfolios to various indices. Advertisements may
also contain the performance rankings assigned certain Portfolios or their
advisers by various publications and statistical services, including, for
example, SEI, Lipper Analytical Services Mutual Funds Survey, Lipper Variable
Insurance Products Performance Analysis Service, Morningstar, Intersec
Research Survey of Non-U.S. Equity Fund Returns, Frank Russell International
Universe, and Financial Services Week. Any such comparisons or rankings are
based on past performance and the statistical computation performed by
publications and services, and are not necessarily indications of future
performance. Because the Portfolios are managed investment vehicles investing
in a wide variety of securities, the securities owned by a Portfolio will not
match those making up an index.
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
Each Portfolio of the Trust intends to qualify and elect to be treated as a
regulated investment company that is taxed under the rules of Subchapter M of
the Internal Revenue Code. As such an electing regulated investment company,
a Portfolio will not be subject to federal income tax on its net ordinary
income and net realized capital gains to the extent such income and gains are
distributed to the separate account of the Life Company which hold its shares.
For further information concerning federal income tax consequences for the
holders of the VA contracts of the Life Company, investors should consult the
prospectus used in connection with the issuance of their VA contracts.
The Money Market Portfolio will declare a dividend of its net ordinary income
daily and distribute such dividend monthly. The Money Market Portfolio does
not anticipate that it will normally realize any long-term capital gains with
respect to its portfolio securities. Distributions will be made shortly after
the first business day of each month following declaration of the dividend.
Each of the other Portfolios will declare and distribute dividends from net
ordinary income at least annually and will distribute its net realized capital
gains, if any, at least annually. Distributions of ordinary income and
capital gains will be made in shares of such Portfolios unless an election is
made on behalf of a separate account to receive distributions in cash. The
Life Company will be informed at least annually about the amount and character
of distributions from the Trust for federal income tax purposes.
ADDITIONAL INFORMATION
The Trust was established as a Massachusetts business trust under the laws of
Massachusetts by a Declaration of Trust dated May 11, 1994 (the "Declaration
of Trust"). Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for the
obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with Trust property or the
acts, obligations, or affairs of the Trust. The Declaration of Trust also
provides for indemnification out of a Portfolio's property of any shareholder
of that Portfolio held personally liable for the claims and liabilities to
which a shareholder may become subject by reason of being or having been a
shareholder. Thus, the risk of a shareholder's incurring financial loss on
account of shareholder liability is limited to circumstances in which the
Portfolio itself would be unable to meet its obligations. A copy of the
Declaration of Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts.
The Trust has an unlimited authorized number of shares of beneficial interest.
Shares of the Trust are entitled to one vote per share (with proportional
voting for fractional shares) and are freely transferable, and, in liquidation
of a Portfolio, shareholders of the Portfolio are entitled to receive pro rata
the net assets of the Portfolio. Although no Portfolio is 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. Shareholders have no preemptive rights. The
Trust's custodian, transfer and dividend-paying agent is State Street Bank and
Trust Company.
To mitigate the possibility that a Portfolio will be adversely affected by
personal trading of employees, the Trust, the Adviser and the Sub-Advisers
have adopted policies that restrict securities trading in personal accounts of
the portfolio managers and others who normally come into possession of
information on portfolio transactions. These policies comply, in all material
respects, with the recommendations of the Investment Company Institute.
APPENDIX
SECURITIES AND INVESTMENT PRACTICES
In attempting to achieve its investment objective or policies each Portfolio
employs a variety of instruments, strategies and techniques, which are
described in greater detail below. Risks and restrictions associated with
these practices are also described. Policies and limitations are considered
at the time a security or instrument is purchased or a practice initiated.
Generally, securities need not be sold if subsequent changes in market value
result in applicable limitations not being met.
A Portfolio might not buy all of these securities or use all of these
techniques to the full extent permitted unless the Adviser or the Sub-Adviser,
subject to oversight by Adviser, believes that doing so will help the
Portfolio achieve its goal. As a shareholder, you will receive Portfolio
reports every six months detailing the Trust's holdings and describing recent
investment practices.
The investment guidelines set forth below may be changed at any time without
shareholder consent by vote of the Board of Trustees of the Trust. A complete
list of investment restrictions that identifies additional restrictions that
cannot be changed without the approval of a majority of an affected
Portfolio's outstanding shares is contained in the SAI.
AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS
Certain of the Portfolios may invest in securities of foreign issuers directly
or in the form of American Depositary Receipts ("ADRs"), European Depositary
Receipts ("EDRs") or other similar securities representing securities of
foreign issuers. These securities may not necessarily be denominated in the
same currency as the securities they represent. ADRs are receipts typically
issued by a United States bank or trust company evidencing beneficial
ownership of the underlying foreign securities. EDRs are receipts issued by a
European financial institution evidencing a similar arrangement. Generally,
ADRs, in registered form, are designed for use in the United States securities
markets, and EDRs, in bearer form, are designed for use in European securities
markets.
ASSET-BACKED SECURITIES
Certain of the Portfolios may purchase asset-backed securities, which
represent a participation in, or are secured by and payable from, a stream of
payments generated by particular assets, most often a pool of assets similar
to one another. Assets generating such payments may include motor vehicle
installment purchase obligations, credit card receivables and home equity
loans.
BANK OBLIGATIONS
All of the Portfolios may invest in Bank Obligations, which include
certificates of deposit, time deposits and bankers' acceptances of U.S.
commercial banks or savings and loan institutions which are determined by the
Adviser or the Sub-Advisers to present minimal credit risks. Certain of the
Portfolios may invest in foreign-currency denominated Bank Obligations,
including Euro-currency instruments and securities of U.S. and foreign banks
and thrifts.
BORROWING
Each of the Portfolios may borrow money (up to 33 1/3% of its assets) for
temporary or emergency purposes. In addition, the Money Market Portfolio may
borrow to facilitate redemptions. The Mortgage-Backed Securities Portfolio
and the International Fixed Income Portfolio may also borrow to enhance income.
If a Portfolio borrows money, its share price may be subject to greater
fluctuation until the borrowing is paid off. If the Portfolio makes additional
investments while borrowings are outstanding, this may be construed as a form
of leverage.
Borrowing, including reverse repurchase agreements and, in certain
circumstances, dollar rolls, creates leverage which increases a Portfolio's
investment risk. If the income and gains on the securities purchased with the
proceeds of borrowings exceed the cost of the arrangements, the Portfolio's
earnings or net asset value will increase faster than would be the case
otherwise. Conversely, if the income and gains fail to exceed the costs,
earnings or net asset value will decline faster than would otherwise be the
case.
BRADY BONDS
Certain Portfolios of the Trust may invest in Brady Bonds, which are
securities created through the exchange of existing commercial bank loans to
public and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady
Plan"). Brady Plan debt restructurings have been implemented to date in
Argentina, Brazil, Bulgaria, Costa Rica, Ecuador, Mexico, Nigeria, the
Philippines, Poland, Uruguay and Venezuela. Brady Bonds have been issued only
recently, and for that reason do not have a long payment history. Brady Bonds
may be collateralized or uncollateralized, are issued in various currencies
(but primarily the U.S. dollar) and are actively traded in over-the-counter
secondary markets. U.S. dollar denominated, collateralized Brady Bonds, which
may be fixed rate bonds or floating-rate bonds, are generally collateralized
in full as to principal by U.S. Treasury zero coupon bonds having the same
maturity as the bonds. Brady Bonds are often viewed as having three or four
valuation components: the collateralized repayment of principal at final
maturity; the collateralized interest payments; the uncollateralized interest
payments; and any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constituting the "residual risk"). In light of the
residual risk of Brady Bonds and the history of defaults of countries issuing
Brady Bonds with respect to commercial bank loans by public and private
entities, investments in Brady Bonds may be viewed as speculative.
COMMON STOCK AND OTHER EQUITY SECURITIES
Common Stocks represent an equity (ownership) interest in a corporation. This
ownership interest generally gives a Portfolio the right to vote on measures
affecting the company's organization and operations.
Certain of the Portfolios may also buy securities such as convertible debt,
preferred stock, warrants or other securities exchangeable for shares of
Common Stock. In selecting equity investments for a Portfolio, the Adviser or
Sub-Adviser will generally invest the Portfolio's assets in industries and
companies that it believes are experiencing favorable demand for their
products and services and which operate in a favorable competitive and
regulatory climate.
CONVERTIBLE SECURITIES
A convertible security is a security that may be converted either at a stated
price or rate within a specified period of time into a specified number of
shares of Common Stock. By investing in Convertible Securities, a Portfolio
seeks the opportunity, through the conversion feature, to participate in the
capital appreciation of the Common Stock into which the securities are
convertible, while earning a higher fixed rate of return than is available in
Common Stocks.
CURRENCY MANAGEMENT
A Portfolio's flexibility to participate in higher yielding debt markets
outside of the United States may allow the Portfolio to achieve higher yields
than those generally obtained by domestic money market funds and short-term
bond investments. When a Portfolio invests significantly in securities
denominated in foreign currencies, however, movements in foreign currency
exchange rates versus the U.S. dollar are likely to impact the Portfolio's
share price stability relative to domestic short-term income funds.
Fluctuations in foreign currencies can have a positive or negative impact on
returns. Normally, to the extent that the Portfolio is invested in foreign
securities, a weakening in the U.S. dollar relative to the foreign currencies
underlying a Portfolio's investments should help increase the net asset value
of the Portfolio. Conversely, a strengthening in the U.S. dollar versus the
foreign currencies in which a Portfolio's securities are denominated will
generally lower the net asset value of the Portfolio. The Adviser or
Sub-Adviser attempts to minimize exchange rate risk through active portfolio
management, including hedging currency exposure through the use of futures,
options and forward currency transactions and attempting to identify bond
markets with strong or stable currencies. There can be no assurance that such
hedging will be successful and such transactions, if unsuccessful, could
result in additional losses or expenses to a Portfolio.
DOLLAR ROLL TRANSACTIONS
Certain Portfolios seeking a high level of current income may enter into
dollar rolls or "covered rolls" in which the Portfolio sells securities
(usually Mortgage-Backed Securities) and simultaneously contracts to purchase,
typically in 30 to 60 days, substantially similar, but not identical
securities, on a specified future date. The proceeds of the initial sale of
securities in the Dollar Roll Transactions may be used to purchase long-term
securities which will be held during the roll period. During the roll period,
the Portfolio forgoes principal and interest paid on the securities sold at
the beginning of the roll period. The Portfolio is compensated by the
difference between the current sales price and the forward price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position or
cash equivalent securities position that matures on or before the forward
settlement date of the dollar roll transaction. As used herein the term
"dollar roll" refers to dollar rolls that are not "covered rolls." At the end
of the roll commitment period, the Portfolio may or may not take delivery of
the securities the Portfolio has contracted to purchase.
The Portfolio will establish a segregated account with its custodian in which
it will maintain cash, U.S. Government Securities or other liquid high-grade
debt obligations equal in value at all times to its obligations in respect of
dollar rolls, and, accordingly, the Portfolio will not treat such obligations
as senior securities for purposes of the 1940 Act. "Covered rolls" are not
subject to these segregation requirements. Dollar Roll Transactions may be
considered borrowings and are, therefore, subject to the borrowing limitations
applicable to the Portfolios.
EQUITY AND DEBT SECURITIES ISSUED OR GUARANTEED BY SUPRANATIONAL ORGANIZATIONS
Portfolios authorized to invest in securities of foreign issuers may invest
assets in equity and debt securities issued or guaranteed by Supranational
Organizations, such as obligations issued or guaranteed by the Asian
Development Bank, Inter-American Development Bank, International Bank for
Reconstruction and Development (World Bank), African Development Bank,
European Coal and Steel Community, European Economic Community, European
Investment Bank and the Nordic Investment Bank.
EXCHANGE RATE-RELATED SECURITIES
Certain of the Portfolios may invest in securities which are indexed to
certain specific foreign currency exchange rates. The terms of such security
would provide that the principal amount or interest payments are adjusted
upwards or downwards (but not below zero) at payment to reflect fluctuations
in the exchange rate between two currencies while the obligation is
outstanding, depending on the terms of the specific security. A Portfolio
will purchase such security with the currency in which it is denominated and
will receive interest and principal payments thereon in the currency, but the
amount of principal or interest payable by the issuer will vary in proportion
to the change (if any) in the exchange rate between the two specific
currencies between the date the instrument is issued and the date the
principal or interest payment is due. The staff of the SEC is currently
considering whether a mutual fund's purchase of this type of security would
result in the issuance of a "senior security" within the meaning of the 1940
Act. The Trust believes that such investments do not involve the creation of
such a senior security, but nevertheless undertakes, pending the resolution of
this issue by the staff, to establish a segregated account with respect to
such investments and to maintain in such account cash not available for
investment or U.S. Government Securities or other liquid high quality debt
securities having a value equal to the aggregate principal amount of
outstanding securities of this type.
Investment in Exchange Rate-Related Securities entails certain risks. There
is the possibility of significant changes in rates of exchange between the
U.S. dollar and any foreign currency to which an Exchange Rate-Related
Security is linked. In addition, there is no assurance that sufficient
trading interest to create a liquid secondary market will exist for a
particular Exchange Rate-Related Security due to conditions in the debt and
foreign currency markets. Illiquidity in the forward foreign exchange market
and the high volatility of the foreign exchange market may from time to time
combine to make it difficult to sell an Exchange Rate-Related Security prior
to maturity without incurring a significant price loss.
FIXED-INCOME SECURITIES
The market value of fixed-income obligations held by the Portfolios and,
consequently, the net asset value per share of the Portfolios can be expected
to vary inversely to changes in prevailing interest rates. Investors should
also recognize that, in periods of declining interest rates, the yields of the
Bond Portfolios will tend to be somewhat higher than prevailing market rates
and, in periods of rising interest rates, the Bond Portfolios' yields will
tend to be somewhat lower. Also, when interest rates are falling, the inflow
of net new money to the Bond Portfolios from the continuous sales of their
shares will likely be invested in instruments producing lower yields than the
balance of their assets, thereby reducing current yields. In periods of
rising interest rates, the opposite can be expected to occur. Prices of
longer term securities generally increase or decrease more sharply than those
of shorter term securities in response to interest rate changes. In addition,
obligations purchased by certain of the Bond Portfolios that are rated in the
lower categories are considered to have speculative characteristics and changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case
with higher grade securities. (See "Lower Rated Securities" in this
Appendix.)
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Certain of the Portfolios may engage in foreign currency exchange
transactions. Portfolios that buy and sell securities denominated in
currencies other than the U.S. dollar, and receive interest, dividends and
sale proceeds in currencies other than the U.S. dollar, may enter into foreign
currency exchange transactions to convert to and from different foreign
currencies and to convert foreign currencies to and from the U.S. dollar. A
Portfolio can either enter into these transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market, or
use forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by a Portfolio
to purchase or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract. Forward foreign currency
exchange contracts establish an exchange rate at a future date. These
contracts are transferable in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward foreign currency exchange contract generally has no deposit
requirement, and is traded at a net price without a commission. When a
Portfolio engages in forward contracts for the sale or purchase of currencies,
the Portfolio will either cover its position or establish a segregated
account. The Portfolio will consider its position covered if it has
securities in the currency subject to the forward contract, or otherwise has
the right to obtain that currency at no additional cost. In the alternative,
the Trust, on behalf of the Portfolio, will place cash which is not available
for investment, liquid, high-grade debt securities or other securities
(denominated in the foreign currency subject to the forward contract) in a
separate account. The amounts in such separate account will equal the value
of the Portfolio's total assets which are committed to the consummation of
foreign currency exchange contracts. If the value of the securities placed in
the separate account declines, the Trust, on behalf of the Portfolio, will
place additional cash or securities in the account on a daily basis so that
the value of the account will equal the amount of the Portfolio's commitments
with respect to such contracts. Neither spot transactions nor forward foreign
currency exchange contracts eliminate fluctuations in the prices of the
Portfolio's portfolio securities or in foreign exchange rates, or prevent loss
if the prices of these securities should decline.
A Portfolio may enter into foreign currency exchange transactions for hedging
purposes as well as for non-hedging purposes. Transactions are entered into
for hedging purposes in an attempt to protect against changes in foreign
currency exchange rates between the trade and settlement dates of specific
securities transactions or changes in foreign currency exchange rates that
would adversely affect a portfolio position or an anticipated portfolio
position. Although these transactions tend to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same time they tend
to limit any potential gain that might be realized should the value of the
hedged currency increase. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be
possible because the future value of these securities in foreign currencies
will change as a consequence of market movements in the value of those
securities between the date the forward contract is entered into and the date
it matures. The projection of currency market movements is extremely
difficult, and the successful execution of a hedging strategy is highly
uncertain. In addition, when the Adviser or Sub-Adviser believes that the
currency of a specific country may deteriorate against another currency, it
may enter into a forward contract to sell the less attractive currency and buy
the more attractive one. The amount in question could be less than or equal
to the value of the Portfolio's securities denominated in the less attractive
currency. The Portfolio may also enter into a forward contract to sell a
currency which is linked to a currency or currencies in which some or all of
the Portfolio's portfolio securities are or could be denominated, and to buy
U.S. dollars. These practices are referred to as "cross hedging" and "proxy
hedging."
A Portfolio may enter into foreign currency exchange transactions for other
than hedging purposes which presents greater profit potential but also
involves increased risk. For example, if the Adviser or Sub-Adviser believes
that the value of a particular foreign currency will increase or decrease
relative to the value of the U.S. dollar, the Portfolio may purchase or sell
such currency, respectively, through a forward foreign currency exchange
contract. If the expected changes in the value of the currency occur, the
Portfolio will realize profits which will increase its gross income. Where
exchange rates do not move in the direction or to the extent anticipated,
however, the Portfolio may sustain losses which will reduce its gross income.
Such transactions, therefore, could be considered speculative.
Forward currency exchange contracts are agreements to exchange one currency
for another--for example, to exchange a certain amount of U.S. dollars for a
certain amount of Japanese Yen--at a future date and specified price.
Typically, the other party to a currency exchange contract will be a
commercial bank or other financial institution. Because there is a risk of
loss to the Portfolio if the other party does not complete the transaction,
the Portfolio's Adviser or Sub-Adviser will enter into foreign currency
exchange contracts only with parties approved by the Trust's Board of
Trustees.
A Portfolio may maintain "short" positions in forward currency exchange
transactions in which the Portfolio agrees to exchange currency that it
currently does not own for another currency--for example, to exchange an
amount of Japanese Yen that it does not own for a certain amount of U.S.
dollars--at a future date and specified price in anticipation of a decline in
the value of the currency sold short relative to the currency that the
Portfolio has contracted to receive in the exchange.
While such actions are intended to protect the Portfolio from adverse currency
movements, there is a risk that currency movements involved will not be
properly anticipated. Use of this technique may also be limited by
management's need to protect the status of the Portfolio as a regulated
investment company under the Internal Revenue Code of 1986, as amended. The
projection of currency market movements is extremely difficult, and the
successful execution of currency strategies is highly uncertain.
FOREIGN INVESTMENTS
Certain Portfolios may invest in securities of foreign issuers. There are
certain risks involved in investing in foreign securities, including those
resulting from fluctuations in currency exchange rates, devaluation of
currencies, future political or economic developments and the possible
imposition of currency exchange blockages or other foreign governmental laws
or restrictions, reduced availability of public information concerning
issuers, and the fact that foreign companies are not generally subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to
domestic companies. Moreover, securities of many foreign companies may be
less liquid and the prices more volatile than those of securities of
comparable domestic companies. With respect to certain foreign countries,
there is the possibility of expropriation, nationalization, confiscatory
taxation and limitations on the use or removal of funds or other assets of the
Portfolios, including the withholding of dividends.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and the Portfolios hold various foreign
currencies from time to time, the value of the net assets of the Portfolios as
measured in U.S. dollars will be affected favorably or unfavorably by changes
in exchange rates. The cost of the Portfolio's currency exchange transactions
will generally be the difference between the bid and offer spot rate of the
currency being purchased or sold. In order to protect against uncertainty in
the level of future foreign currency exchange rates, the Portfolios are
authorized to enter into certain foreign currency exchange transactions.
Investors should be aware that exchange rate movements can be significant and
can endure for long periods of time. Extensive research of the economic,
political and social factors that influence global markets is conducted by the
Sub-Advisers. Particular attention is given to country-specific analysis,
reviewing the strength or weakness of a country's overall economy, the
government policies influencing business conditions and the outlook for the
country's currency. Certain Portfolios are authorized to engage in foreign
currency options, futures, options on futures and forward currency contract
transactions for hedging and/or other permissible purposes.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of the NYSE. Accordingly, the Portfolios' foreign investments may
be less liquid and their prices may be more volatile than comparable
investments in securities of United States companies. Moreover, the
settlement periods for foreign securities, which are often longer than those
for securities of United States issuers, may affect portfolio liquidity. In
buying and selling securities on foreign exchanges, the Portfolio normally
pays fixed commissions that are generally higher than the negotiated
commissions charged in the United States. In addition, there is generally
less governmental supervision and regulation of securities exchanges, brokers
and issuers in foreign countries than in the United States.
Certain of the Portfolios may invest, as described below, in countries or
regions with relatively low gross national product per capita compared to the
world's major economies, and in countries or regions with the potential for
rapid economic growth (emerging markets). Emerging markets will include any
country: (i) having an "emerging stock market" as defined by the International
Finance Corporation; (ii) with low- to middle-income economies according to
the International Bank for Reconstruction and Development (the World Bank);
(iii) listed in World Bank publications as developing; or (iv) determined by
the Adviser or a Sub-Adviser to be an emerging market as defined above. The
Portfolio may invest in securities of: (i) companies the principal securities
trading market for which is an emerging market country; (ii) companies
organized under the laws of, and with a principal office in, an emerging
market country; (iii) companies whose principal activities are located in
emerging market countries; (iv) companies traded in any market that derive 50%
or more of their total revenue from either goods or services produced in an
emerging market or sold in an emerging market; (v) companies that have 50% or
more of their assets in an emerging market country; or (vi) the security is
issued or guaranteed by the government of an emerging market country or any of
its agencies, authorities or instrumentalities.
The risks of investing in foreign securities may be intensified in the case of
investments in emerging markets. Securities prices in emerging markets can be
significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be
predominantly based on only a few industries, may be highly vulnerable to
changes in local or global trade conditions, and may suffer from extreme and
volatile debt burdens or inflation rates. Local securities markets may trade
a small number of securities and may be unable to respond effectively to
increases in trading volume, potentially making prompt liquidation of
substantial holdings difficult or impossible at times. Securities of issuers
located in countries with emerging markets may have limited marketability and
may be subject to more abrupt or erratic price movements.
FUTURES AND OPTIONS ON FUTURES
When deemed appropriate by its Adviser or Sub-Adviser, certain Portfolios may
enter into financial or currency futures and related options that are traded
on a U.S. exchange or board of trade or, to the extent permitted by applicable
law, on exchanges located outside the U.S., for hedging purposes or for
non-hedging purposes to the extent permitted by applicable law. A Portfolio
may not enter into futures and options contracts for which aggregate initial
margin deposits and premiums paid for unexpired futures options entered into
for purposes other than "bona fide hedging" positioning as defined in
regulations adopted by the Commodity Future Trading Commission exceed 5% of
the fair market value of the Portfolio's net assets, after taking into account
unrealized profits and unrealized losses on futures contracts into which it
has entered. With respect to each long position in a futures contract or
option thereon, the underlying commodity value of such contract will always be
covered by cash and cash equivalents set aside plus accrued profits held at
the futures commission merchant.
A financial or currency futures contract provides for the future sale by one
party and the purchase by the other party of a specified amount of a
particular financial instrument or currency (e.g., debt security or currency)
at a specified price, date, time and place. An index futures contract is an
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. An option on a futures contract generally
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at any time prior
to the expiration date of the option.
The purpose of entering into a futures contract by a Portfolio is to either
enhance return or to protect the Portfolio from fluctuations in the value of
its securities caused by anticipated changes in interest rates, currency or
market conditions without necessarily buying or selling the securities. The
use of futures contracts and options on futures contracts involves several
risks. There can be no assurance that there will be a correlation between
price movements in the underlying securities, currencies or index, on the one
hand, and price movements in the securities which are the subject of the
futures contract or option on futures contract, on the other hand. Positions
in futures contracts and options on futures contracts may be closed out only
on the exchange or board of trade on which they were entered into, and there
can be no assurance that an active market will exist for a particular contract
or option at any particular time. If a Portfolio has hedged against the
possibility of an increase in interest rates or bond prices adversely
affecting the value of securities held in its portfolio and rates or prices
decrease instead, a Portfolio will lose part or all of the benefit of the
increased value of securities that it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations,
if a Portfolio had insufficient cash, it may have to sell securities to meet
daily variation margin requirements at a time when it may be disadvantageous
to do so. These sales of securities may, but will not necessarily, be at
increased prices that reflect the decline in interest rates or bond prices, as
the case may be. In addition, the Portfolio would pay commissions and other
costs in connection with such investments, which may increase the Portfolio's
expenses and reduce its return. While utilization of options, futures
contracts and similar instruments may be advantageous to the Portfolio, if the
Portfolio's Adviser or Sub-Adviser is not successful in employing such
instruments in managing the Portfolio's investments, the Portfolio's
performance will be worse than if the Portfolio did not make such investments.
Losses incurred in futures contracts and options on futures contracts and the
costs of these transactions will adversely affect a Portfolio's performance.
GEOGRAPHICAL AND INDUSTRY CONCENTRATION
Where a Portfolio invests at least 25% of its assets in Bank Obligations, the
Portfolio's investments may be subject to greater risk than a Portfolio that
does not concentrate in the banking industry. In particular, Bank Obligations
may be subject to the risks associated with interest rate volatility, changes
in federal and state laws and regulations governing banking and the inability
of borrowers to pay principal and interest when due. In addition, foreign
banks present the risks of investing in foreign securities generally and are
not subject to reserve requirements and other regulations comparable to those
of U.S. Banks.
GOVERNMENT STRIPPED MORTGAGE-BACKED SECURITIES
Certain Portfolios may invest in Government Stripped Mortgage-Backed
Securities issued or guaranteed by the Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC"). These securities represent
beneficial ownership interests in either periodic principal distributions
("principal-only") or interest distributions ("interest-only") on
mortgage-backed certificates issued by GNMA, FNMA or FHLMC, as the case may
be. The certificates underlying the Government Stripped Mortgage-Backed
Securities represent all or part of the beneficial interest in pools of
mortgage loans. The Portfolios will invest in interest-only Government
Stripped Mortgage-Backed Securities in order to enhance yield or to benefit
from anticipated appreciation in value of the securities at times when the
Adviser or the appropriate Sub-Adviser believes that interest rates will
remain stable or increase. In periods of rising interest rates, the value of
interest-only Government Stripped Mortgage-Backed Securities may be expected
to increase because of the diminished expectation that the underlying
mortgages will be prepaid. In this situation the expected increase in the
value of interest-only Government Stripped Mortgage-Backed Securities may
offset all or a portion of any decline in value of the portfolio securities of
the Portfolios. Investing in Government Stripped Mortgage-Backed Securities
involves the risks normally associated with investing in mortgage-backed
securities issued by government or government-related entities. See
"Mortgage-Backed Securities" below. In addition, the yields on interest-only
and principal-only Government Stripped Mortgage-Backed Securities are
extremely sensitive to the prepayment experience on the mortgage loans
underlying the certificates collateralizing the securities. If a decline in
the level of prevailing interest rates results in a rate of principal
prepayments higher than anticipated, distributions of principal will be
accelerated, thereby reducing the yield to maturity on interest-only
Government Stripped MortgageBacked Securities and increasing the yield to
maturity on principal-only Government Stripped Mortgage-Backed Securities.
Conversely, if an increase in the level of prevailing interest rates results
in a rate of principal prepayments lower than anticipated, distributions of
principal will be deferred, thereby increasing the yield to maturity on
interest-only Government Stripped Mortgage-Backed Securities and decreasing
the yield to maturity on principal-only Government Stripped Mortgage-Backed
Securities. Sufficiently high prepayment rates could result in the Portfolio
not fully recovering its initial investment in an interest-only Government
Stripped Mortgage-Backed Security. Government Stripped Mortgage-Backed
Securities are currently traded in an over-the-counter market maintained by
several large investment banking firms. There can be no assurance that the
Portfolio will be able to effect a trade of a Government Stripped
Mortgage-Backed Security at a time when it wishes to do so. The Portfolios
will acquire Government Stripped Mortgage-Backed Securities only if a liquid
secondary market for the securities exists at the time of acquisition.
INTEREST RATE TRANSACTIONS
Certain Portfolios may engage in certain Interest Rate Transactions, such as
swaps, caps, floors and collars. Interest rate swaps involve the exchange
with another party of commitments to pay or receive interest (e.g., an
exchange of floating rate payments for fixed rate payments). The purchase of
an interest rate cap entitles the purchaser, to the extent that a specified
index exceeds a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling such interest rate cap.
The purchase of an interest rate floor entitles the purchaser, to the extent
that a specified index falls below a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party selling
such interest rate floor. An interest rate collar combines the elements of
purchasing a cap and selling a floor. The collar protects against an interest
rate rise above the maximum amount but gives up the benefits of an interest
rate decline below the minimum amount. The net amount of the excess, if any,
of a Portfolio's obligations over its entitlements with respect to each
interest rate swap will be accrued on a daily basis and an amount of cash or
liquid securities having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account with the Trust's
custodian. If there is a default by the other party to the transaction, the
Portfolio will have contractual remedies pursuant to the agreements related to
the transactions.
ILLIQUID SECURITIES
Up to 10% (15% for the International Fixed Income Portfolio, Mortgage-Backed
Securities Portfolio, OTC Portfolio and Total Return Portfolio) of the net
assets of a Portfolio may be invested in securities that are not readily
marketable, including, where applicable: (1) Repurchase Agreements with
maturities greater than seven calendar days; (2) time deposits maturing in
more than seven calendar days; (3) to the extent a liquid secondary market
does not exist for the instruments, futures contracts and options thereon
(except for the Money Market Portfolio); (4) certain over-the-counter options,
as described in the SAI; (5) certain variable rate demand notes having a
demand period of more than seven days; and (6) securities the disposition of
which is restricted under Federal securities laws (excluding Rule 144A
Securities, described below). The Portfolios will not include for purposes of
the restrictions on illiquid investments, securities sold pursuant to Rule
144A under the Securities Act of 1933, as amended, so long as such securities
meet liquidity guidelines established by the Trust's Board of Trustees. Under
Rule 144A, securities which would otherwise be restricted may be sold by
persons other than issuers or dealers to qualified institutional buyers.
INVESTMENT COMPANIES
When a Portfolio's Adviser or Sub-Adviser believes that it would be beneficial
for the Portfolio and appropriate under the circumstances, up to 10% of the
Portfolio's assets may be invested in securities of mutual funds. As a
shareholder in any such mutual fund, the Portfolio will bear its ratable share
of the mutual fund's expenses, including management fees, and will remain
subject to the Portfolio's advisory and administration fees with respect to
the assets so invested.
LEASE OBLIGATION BONDS
Lease Obligation Bonds are mortgages on a facility that is secured by the
facility and are paid by a lessee over a long term. The rental stream to
service the debt as well as the mortgage are held by a collateral trustee on
behalf of the public bondholders. The primary risk of such instrument is the
risk of default. Under the lease indenture, the failure to pay rent is an
event of default. The remedy to cure default is to rescind the lease and sell
the assets. If the lease obligation is not readily marketable or market
quotations are not readily available, such lease obligations will be subject
to a Portfolio's limit on Illiquid Securities.
LENDING OF SECURITIES
All of the Portfolios have the ability to lend portfolio securities to brokers
and other financial organizations. By lending its securities, a Portfolio can
increase its income by continuing to receive interest on the loaned securities
as well as by either investing the cash collateral in short-term instruments
or obtaining yield in the form of interest paid by the borrower when U.S.
Government Securities are used as collateral. These loans, if and when made,
may not exceed 20% (25% with respect to the Money Market Portfolio) of a
Portfolio's total assets taken at value. Loans of portfolio securities by a
Portfolio will be collateralized by cash, irrevocable letters of credit or
U.S. Government Securities that are maintained at all times in an amount at
least equal to the current market value of the loaned securities. Any gain or
loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the Portfolio involved. Each
Portfolio's Adviser or Sub-Adviser will monitor on an ongoing basis the credit
worthiness of the institutions to which the Portfolio lends securities.
LOWER-RATED SECURITIES
Certain Portfolios may invest in debt securities rated in the lower NRSRO
categories (e.g., BBB- by S&P or Baa3 by Moody's), or of equivalent quality as
determined by the Adviser or Sub-Adviser. Securities rated BB+, Ba1 or lower
are commonly referred to as high yield securities or "junk bonds."
Securities rated below investment grade as well as unrated securities are
often considered to be speculative and usually entail greater risk (including
the possibility of default or bankruptcy of the issuers). Such securities
generally involve greater price volatility and risk of principal and income,
and may be less liquid, than securities in higher rated categories. Both
price volatility and illiquidity may make it difficult for the Portfolio to
value certain of these securities at certain times and these securities may be
difficult to sell under certain market conditions. Prices for securities
rated below investment grade may be affected by legislative and regulatory
developments. (See SAI for additional information pertaining to lower-rated
securities including risks.)
MORTGAGE-BACKED SECURITIES
Certain of the Portfolios may invest in Mortgage-Backed Securities, which
represent an interest in a pool of mortgage loans. The primary government
issuers or guarantors of Mortgage-Backed Securities are GNMA, FHMA and FHLMC.
Mortgage-Backed Securities provide a monthly payment consisting of interest
and principal payments. Additional payments may be made out of unscheduled
repayments of principal resulting from the sale of the underlying residential
property, refinancing or foreclosure, net of fees or costs that may be
incurred. Prepayments of principal on Mortgage-Backed Securities may tend to
increase due to refinancing of mortgages as interest rates decline. Prompt
payment of principal and interest on GNMA mortgage pass-through certificates
is backed by the full faith and credit of the U.S. government. FNMA
guaranteed mortgage pass-through certificates and FHLMC participation
certificates are solely the obligations of those entities but are supported by
the discretionary authority of the U.S. Government to purchase the agencies'
obligations. Collateralized Mortgage Obligations are a type of bond secured
by an underlying pool of mortgages or mortgage pass-through certificates that
are structured to direct payments on underlying collateral to different series
or classes of the obligations.
To the extent that a Portfolio purchases mortgage-related or mortgage-backed
securities at a premium, prepayments may result in some loss of the
Portfolio's principal investment to the extent of the premium paid. The yield
of the Portfolio may be affected by reinvestment of prepayments at higher or
lower rates than the original investment. In addition, like other debt
securities, the value of mortgage-related securities, including government and
government-related mortgage pools, will generally fluctuate in response to
market interest rates.
NEW ISSUERS
A Portfolio may invest up to 5% (except for the OTC Portfolio which may invest
without limitation) of its assets in the securities of issuers which have been
in continuous operation for less than three years.
OPTIONS ON SECURITIES
OPTION PURCHASE. Certain Portfolios 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. A Portfolio
may utilize up to 10% of its assets to purchase put options on portfolio
securities and may do so at or about the same time that it purchases the
underlying security or at a later time and may also utilize up to 10% of its
assets to purchase call options on securities in which it is authorized to
invest. By buying a put, the Portfolios limit their risk of loss from a
decline in the market value of the security until the put expires. Any
appreciation in the value of the underlying security, however, will be
partially offset by the amount of the premium paid for the put option and any
related transaction costs. Call options may be purchased by the Portfolio in
order to acquire the underlying securities for the Portfolio at a price that
avoids any additional cost that would result from a substantial increase in
the market value of a security. The Portfolios may also purchase call options
to increase their return to investors at a time when the call is expected to
increase in value due to anticipated appreciation of the underlying security.
Prior to their expirations, put and call options may be sold in closing sale
transactions (sales by the Portfolio, prior to the exercise of options that it
has purchased, of options of the same series), and profit or loss from the
sale will depend on whether the amount received is more or less than the
premium paid for the option plus the related transaction costs.
COVERED OPTION WRITING. Certain Portfolios may write put and call
options on securities for hedging purposes. The Portfolios realize fees
(referred to as "premiums") for granting the rights evidenced by the options.
A put option embodies the right of its purchaser to compel the writer of the
option to purchase from the option holder an underlying security at a
specified price at any time during the option period. In contrast, a call
option embodies the right of its purchaser to compel the writer of the option
to sell to the option holder an underlying security at a specified price at
anytime during the option period.
Upon the exercise of a put option written by a Portfolio, the Portfolio may
suffer a loss equal to the difference between the price at which the Portfolio
is required to purchase the underlying security and its market value at the
time of the option exercise, less the premium received for writing the option.
Upon the exercise of a call option written by the Portfolio, the Portfolio
may suffer a loss equal to the excess of the security's market value at the
time of the option exercise over the Portfolio's acquisition cost of the
security, less the premium received for writing the option.
Each Portfolio will comply with regulatory requirements of the SEC and the
Commodity Futures Trading Commission with respect to coverage of options and
futures positions by registered investment companies and, if the guidelines so
require, will set aside cash and/or appropriate liquid assets in a segregated
custodial account in the amount prescribed. Securities held in a segregated
account cannot be sold while the futures or options position is outstanding,
unless replaced with other permissible assets. As a result, there is a
possibility that the segregation of a large percentage of a Portfolio's assets
may force the Portfolio to close out futures and options positions and/or
liquidate other portfolio securities, any of which may occur at
disadvantageous prices, in order for the Portfolio to meet redemption requests
or other current obligations.
The principal reason for writing covered call and put options on a securities
portfolio is to attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. In return for a
premium, the writer of a covered call option forfeits the rights to any
appreciation in the value of the underlying security above the strike price
for the life of the option (or until a closing purchase transaction can be
effected). Nevertheless, the call writer retains the risk of a decline in the
price of the underlying security. Similarly, the principal reason for writing
covered put options is to realize income in the form of premiums. The writer
of the covered put option accepts the risk of a decline in the price of the
underlying security. The size of the premiums that the Portfolios may receive
may be adversely affected as new or existing institutions, including other
investment companies, engage in or increase their option-writing activities.
The Portfolios may engage in closing purchase transactions to realize a
profit, to prevent an underlying security from being called or put or, in the
case of a call option, to unfreeze an underlying security (thereby permitting
its sale or the writing of a new option on the security prior to the
outstanding option's expiration). To effect a closing purchase transaction,
the Portfolios would purchase, prior to the holder's exercise of an option
that the Portfolio has written, an option of the same series as that on which
the Portfolio desires to terminate its obligation. The obligation of the
Portfolio under an option that it has written would be terminated by a closing
purchase transaction, but the Portfolio would not be deemed to own an option
as the result of the transaction. There can be no assurance that the
Portfolio will be able to effect closing purchase transactions at a time when
it wishes to do so. The ability of the Portfolio to engage in closing
transactions with respect to options depends on the existence of a liquid
secondary market. While the Portfolio will generally purchase or write
options only if there appears to be a liquid secondary market for the options
purchased or sold, for some options no such secondary market may exist or the
market may cease to exist. To facilitate closing purchase transactions,
however, the Portfolio will ordinarily write options only if a secondary
market for the options exists on a U.S. securities exchange or in the
over-the-counter market.
Option writing for the Portfolios may be limited by position and exercise
limits established by U.S. securities exchanges and the National Association of
Securities Dealers, Inc. and by requirements of the Code for qualification as
a regulated investment company. In addition to writing covered put and call
options to generate current income, the Portfolios may enter into options
transactions as hedges to reduce investment risk, generally by making an
investment expected to move in the opposite direction of a portfolio position.
A hedge is designed to offset a loss on a portfolio position with a gain on
the hedge position; at the same time, however, a properly correlated hedge
will result in a gain on the portfolio position's being offset by a loss on
the hedge position. The Portfolios bear the risk that the prices of the
securities being hedged will not move in the same amount as the hedge. A
Portfolio will engage in hedging transactions only when deemed advisable by
its Adviser or Sub-Adviser. Successful use by the Portfolio of options will
depend on its Adviser's or Sub-Adviser's ability to correctly predict
movements in the direction of the stock underlying the option used as a hedge.
Losses incurred in hedging transactions and the costs of these transactions
will adversely affect the Portfolio's performance.
OPTIONS ON FOREIGN CURRENCIES
A Portfolio may purchase and write put and call options on foreign currencies
for the purpose of hedging against declines in the U.S. dollar value of
foreign currency-denominated portfolio securities and against increases in the
U.S. dollar cost of such securities to be acquired. Generally, transactions
relating to Options on Foreign Currencies occur in the over-the-counter
market. As in the case of other kinds of options, however, the writing of an
option on a foreign currency constitutes only a partial hedge, up to the
amount of the premium received, and the Portfolio could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on a foreign currency may
constitute an effective hedge against fluctuations in exchange rates,
although, in the event of rate movements adverse to the Portfolio's position,
it may forfeit the entire amount of the premium plus related transaction
costs. There is no specific percentage limitation on the Portfolio's
investments in Options on Foreign Currencies. See the SAI for further
discussion of the use, risks and costs of Options on Foreign Currencies and
Over the Counter Options.
OPTIONS ON INDEXES
A Portfolio may, subject to applicable securities regulations, purchase and
write put and call options on stock and fixed-income indexes listed on foreign
and domestic stock exchanges. A stock index fluctuates with changes in the
market values of the stocks included in the index. An example of a domestic
stock index is the Standard and Poor's 500 Stock Index. Examples of foreign
stock indexes are the Canadian Market Portfolio Index (Montreal Stock
Exchange), The Financial Times--Stock Exchange 100 (London Stock Exchange) and
the Toronto Stock Exchange Composite 300 (Toronto Stock Exchange). Examples
of fixed-income indexes include the Lehman Government/Corporate Bond Index and
the Lehman Treasury Bond Index.
Options on Indexes are generally similar to options on securities except that
the delivery requirements are different. Instead of giving the right to take
or make delivery of a security at a specified price, an option on an index
gives the holder the right to receive a cash "exercise settlement amount"
equal to (a) the amount, if any, by which the fixed exercise price of the
option exceeds (in the case of a put) or is less than (in the case of a call)
the closing value of the underlying index on the date of exercise, multiplied
by (b) a fixed "index multiplier." Receipt of this cash amount will depend
upon the closing level of the index upon which the option is based being
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. The amount of cash received will be equal to
such difference between the closing price of the index and the exercise price
of the option expressed in dollars or a foreign currency, as the case may be,
times a specified multiple. The writer of the option is obligated, in return
for the premium received, to make a delivery of this amount. The writer may
offset its position in index options prior to expiration by entering into a
closing transaction on an exchange or the option may expire unexercised.
The effectiveness of purchasing or writing options as a hedging technique will
depend upon the extent to which price movements in the portion of the
securities portfolio of a Portfolio correlate with price movements of the
stock index selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular
stock, whether a Portfolio will realize a gain or loss from the purchase or
Option writing of options on an index depends upon movements in the level
of stock prices in the stock market generally or, in the case of certain
indexes, in an industry or market segment, rather than movements in the price
of a particular stock. Accordingly, successful use of Options on Indexes by
a Portfolio will be subject to its Adviser's or Sub-Adviser's ability to
predict correctly movements in the direction of the market generally or of
a particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks.
Options on securities indexes entail risks in addition to the risks of options
on securities. Because exchange trading of options on securities indexes is
relatively new, the absence of a liquid secondary market to close out an
option position is more likely to occur, although a Portfolio generally will
only purchase or write such an option if the Sub-Adviser believes the option
can be closed out. Because options on securities indexes require settlement
in cash, a Portfolio may be forced to liquidate portfolio securities to meet
settlement obligations. A Portfolio will engage in stock index options
transactions only when determined by its Adviser or Sub-Adviser to be
consistent with its efforts to control risk. There can be no assurance that
such judgement will be accurate or that the use of these portfolio strategies
will be successful.
OVER-THE-COUNTER OPTIONS
Certain Portfolios may write or purchase options in privately negotiated
domestic or foreign transactions ("OTC Options"), as well as exchange-traded
or "listed" options. OTC Options can be closed out only by agreement with the
other party to the transaction, and thus any OTC Options purchased by a
Portfolio will be considered an Illiquid Security. In addition, certain OTC
Options on foreign currencies are traded through financial institutions acting
as market-makers in such options and the underlying currencies.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a
certain percentage of a Portfolio's assets (the "SEC illiquidity ceiling").
Except as provided below, the Portfolios intend to write over-the-counter
options only with primary U.S. Government securities dealers recognized by the
Federal Reserve Bank of New York. Also, the contracts which such Portfolios
have in place with such primary dealers will provide that each Portfolio has
the absolute right to repurchase any option it writes at any time at a price
which represents the fair market value, as determined in good faith through
negotiation between the parties, but which in no event will exceed a price
determined pursuant to a formula in the contract. Although the specific
formula may vary between contracts with different primary dealers, the formula
will generally be based on a multiple of the premium received by the Portfolio
for writing the option, plus the amount, if any, of the option's intrinsic
value (i.e., the amount that the option is in-the-money). The formula may
also include a factor to account for the difference between the price of the
security and the strike price of the option if the option is written
out-of-money. A Portfolio will treat all or a part of the formula price as
illiquid for purposes of the SEC illiquidity ceiling. Certain Portfolios may
also write over-the-counter options with non-primary dealers, including
foreign dealers, and will treat the assets used to cover these options as
illiquid for purposes of such SEC illiquidity ceiling.
OTC Options entail risks in addition to the risks of exchange-traded options.
Exchange-traded options are in effect guaranteed by the Options Clearing
Corporation, while a Portfolio relies on the party from whom it purchases an
OTC Option to perform if the Portfolio exercises the option. With OTC
Options, if the transacting dealer fails to make or take delivery of the
securities or amount of foreign currency underlying an option it has written,
in accordance with the terms of that option, the Portfolio will lose the
premium paid for the option as well as any anticipated benefit of the
transaction. Furthermore, OTC Options are less liquid than exchange-traded
options.
REPURCHASE AGREEMENTS
Repurchase Agreements are agreements to purchase underlying debt obligations
from financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase the obligations at an established time and
price. The collateral for such Repurchase Agreements will be held by the
Portfolio's custodian or a duly appointed sub-custodian. The Portfolio will
enter into Repurchase Agreements only with banks and broker-dealers that have
been determined to be creditworthy by the Trust's Board of Trustees under
criteria established in consultation with the Adviser and the Sub-Adviser.
The seller under a Repurchase Agreement would be required to maintain the
value of the obligations subject to the Repurchase Agreement at not less than
the repurchase price. Default by the seller would, however, expose the
Portfolio to possible loss because of adverse market action or delay in
connection with the disposition of the underlying obligations. In addition,
if bankruptcy proceedings are commenced with respect to the seller of the
obligations, the Portfolio may be delayed or limited in its ability to sell
the collateral.
REVERSE REPURCHASE AGREEMENTS
Reverse Repurchase Agreements are the same as repurchase agreements except
that, in this instance, the Portfolios would assume the role of
seller/borrower in the transaction. The Portfolios will maintain segregated
accounts with the Custodian consisting of U.S. Government Securities, cash or
money market instruments that at all times are in an amount equal to their
obligations under Reverse Repurchase Agreements. Reverse Repurchase
Agreements involve the risk that the market value of the securities sold by a
Portfolio may decline below the repurchase price of the securities and, if the
proceeds from the reverse repurchase agreement are invested in securities,
that the market value of the securities sold may decline below the repurchase
price of the securities sold. Each Portfolio's Adviser or Sub-Adviser, acting
under the supervision of the Board of Trustees, reviews on an on-going basis
the creditworthiness of the parties with which it enters into Reverse
Repurchase Agreements. Under the 1940 Act, Reverse Repurchase Agreements may
be considered borrowings by the seller. Whenever borrowings by a fund,
including Reverse Repurchase Agreements, exceed 5% of the value of a
Portfolio's total assets, the Portfolio will not purchase any securities.
SMALL COMPANIES
Certain of the Portfolios may invest in small companies, some of which
may be unseasoned. Such companies may have limited product lines, markets, or
financial resources and may be dependent on a limited management group. While
the markets in securities of such companies have grown rapidly in recent
years, such securities may trade less frequently and in smaller volume than
more widely held securities. The values of these securities may fluctuate more
sharply than those of other securities, and a Portfolio may experience some
difficulty in establishing or closing out positions in these securities at
prevailing market prices. There may be less publicly available information
about the issuers of these securities or less market interest in such
securities than in the case of larger companies, and it may take a longer
period of time for the prices of such securities to reflect the full value of
their issuers' underlying earnings potential or assets.
Some securities of smaller issuers may be restricted as to resale or may
otherwise be highly illiquid. The ability of a Portfolio to dispose of such
securities may be greatly limited, and a Portfolio may have to continue to
hold such securities during periods when a Sub-Adviser would otherwise have
sold the security. It is possible that a Sub-Adviser or its affiliates or
clients may hold securities issued by the same issuers, and may in some cases
have acquired the securities at different times, on more favorable terms, or
at more favorable prices, than a Portfolio which it manages.
STRATEGIC TRANSACTIONS
Subject to the investment limitations and restrictions for each of the
Portfolios as stated elsewhere in the Prospectus and SAI of the Trust, each of
the Portfolios, except the Strong Fixed Income Portfolios, may, but is not
required to, utilize various investment strategies as described in this
Appendix to hedge various market risks, to manage the effective maturity or
duration of Fixed-Income Securities, or to seek potentially higher returns.
Utilizing these investment strategies, the Portfolio may purchase and sell, to
the extent not otherwise limited or restricted for such Portfolio,
exchange-listed and over-the-counter put and call options on securities,
equity and fixed-income indexes and other financial instruments, purchase and
sell financial futures contracts and options thereon, enter into various
Interest Rate Transactions such as swaps, caps, floors or collars, and enter
into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or
currency futures (collectively, all the above are called "Strategic
Transactions").
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Portfolio's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Portfolio's unrealized gains in the value of
its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of the
Portfolio's portfolio, or to establish a position in the derivatives markets
as a temporary substitute for purchasing or selling particular securities.
Some Strategic Transactions may also be used to seek potentially higher
returns, although no more than 5% of the Portfolio's assets will be used as
the initial margin or purchase price of options for Strategic Transactions
entered into for purposes other than "bona fide hedging" positions as defined
in the regulations adopted by the Commodity Futures Trading Commission. Any
or all of these investment techniques may be used at any time, as use of any
Strategic Transaction is a function of numerous variables including market
conditions. The ability of the Portfolio to utilize these Strategic
Transactions successfully will depend on the Adviser's or Sub-Adviser's
ability to predict, which cannot be assured, pertinent market movements. The
Portfolio will comply with applicable regulatory requirements when utilizing
Strategic Transactions. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes.
U.S. GOVERNMENT SECURITIES
U.S. Government Securities include direct obligations of the U.S. Treasury
(such as U.S. Treasury bills, notes and bonds) and obligations directly issued
or guaranteed by U.S. Government agencies or instrumentalities. Some
obligations issued or guaranteed by agencies or instrumentalities of the U.S.
Government are backed by the full faith and credit of the U.S. Government
(such as GNMA certificates), others are backed only by the right of the issuer
to borrow from the U.S. Treasury (such as securities of Federal Home Loan
Banks) and still others are backed only by the credit of the instrumentality
(such as FNMA and FHLMC certificates).
WHEN ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS
In order to secure yields or prices deemed advantageous at the time, certain
Portfolios may purchase or sell securities on a when-issued or a
delayed-delivery basis. The Portfolios will enter into a when-issued
transaction for the purpose of acquiring portfolio securities and not for the
purpose of leverage. In such transactions, delivery of the securities occurs
beyond the normal settlement periods, but no payment or delivery is made by,
and no interest accrues to, the Portfolios prior to the actual delivery or
payment by the other party to the transaction. Due to fluctuations in the
value of securities purchased on a when-issued or a delayed-delivery basis,
the yields obtained on such securities may be higher or lower than the yields
available in the market on the dates when the investments are actually
delivered to the buyers. Similarly, the sale of securities for
delayed-delivery can involve the risk that the prices available in the market
when delivery is made may actually be higher than those obtained in the
transaction itself. The Portfolios will establish a segregated account with
the Custodian consisting of cash, U.S. Government-securities or other high
grade debt obligations in an amount equal to the amount of its when-issued and
delayed-delivery commitments.
PART B
EQUI-SELECT SERIES TRUST
FORM N-1A
PART B
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.
TABLE OF CONTENTS
PAGE
DEFINITIONS
INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST
Swaps, Caps, Floors and Collars
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 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 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 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 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 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 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 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 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 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 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 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
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 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 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 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
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 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 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 Sub-Adviser to value the
Portfolio's securities becomes more difficult and the 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 Sub-Adviser's judgment, analysis and
experience in evaluating the creditworthiness of an issue. In this
evaluation, the 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 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 Sub-Adviser continuously
monitors the issuers of such securities held in the Portfolio's portfolio. A
Portfolio may, if deemed appropriate by the 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: __
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: __ 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: __ 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: __ 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: __ cassettes
Paul E. Larson Treasurer and Executive Vice President,
Age: __ 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: __ 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: __ 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: __ Insurance Company of Iowa
Kimberly K. Krumviede Assistant Vice Managing Director of
Age: __ 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: __ 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 $_________.
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,
President and
Trustee
Thomas W. Bedell,
Trustee
J. Michael Earley,
Trustee
R. Barbara Gitenstein,
Trustee
Stanley B. Seidler,
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 ________, 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
Government Securities
International Fixed Income
International Stock
Money Market
Mortgage-Backed Securities
OTC
Research
Short-Term Bond
Total Return
</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.
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 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 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 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 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 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 Sub-Advisers
and/or their affiliates may receive such services.
As permitted by Section 28(e) of the 1934 Act, a 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 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 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 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 a Sub-Adviser on the
same day. In such event, such transactions will be allocated among the
clients in a manner believed by the 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 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: Advantage Portfolio, $_____;
Government Securities Portfolio, $_____; International Fixed Income Portfolio,
$_____; International Stock Portfolio, $_____; Money Market Portfolio, $_____;
Mortgage-Backed Securities Portfolio, $_____; OTC Portfolio, $_____; Research
Portfolio, $_____; Short-Term Bond Portfolio, $_____; and Total Return
Portfolio, $_____.
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 qualify each year and elect 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 ___________________________, 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 THOMPSON 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 THOMPSON 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 period ended
December 31, 1995, and the report of _______________________, Independent
Auditors, with respect thereto, are set forth below.
PART C
OTHER INFORMATION
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS:
The Financial Statements filed as part of this Registration Statement are
as follows:
[TO BE FILED BY AMENDMENT]
(B) EXHIBITS
(1) Declaration of Trust*
(2) By-laws of Trust*
(3) Not Applicable
(4) Not Applicable
(5) (a)(i) Form of Investment Advisory Agreement**
(ii) Form of Addendum to Investment Advisory Agreement
(to be filed by Amendment)
(b)(i) Form of Sub-Advisory Agreements**
(ii) Form of New Sub-Advisory Agreement
(to be filed by Amendment)
(6) Not Applicable
(7) Not Applicable
(8) Form of Custodian Agreement between the Registrant and State Street
Bank and Trust Company**
(9) (a) Form of Transfer Agency and Service Agreement between the
Registrant and State Street Bank and Trust Company**
(b) Form of Subadministration Agreement for Reporting and
Accounting Services between the Registrant and State Street
Bank and Trust Company**
(10) Consent and Opinion of Counsel*
(11) Consent of Independent Auditors (to be filed by Amendment)
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Not Applicable
* incorporated by reference to Registrant's Registration Statement on
Form N-1A (File No. 33-79166), as filed on May 19, 1994.
** incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A (File No.
33-79166), as filed on September 26, 1994.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The shares of the Trust are currently sold to Equitable Life Insurance Company
of Iowa Separate Account A.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
The general account of Equitable Life Insurance Company of Iowa and Equitable
Life Insurance Company of Iowa Separate Account A are the shareholders of the
Trust.
ITEM 27. INDEMNIFICATION
Each officer, Trustee or agent of the Trust shall be indemnified by the Trust
to the full extent permitted under the General Laws of The Commonwealth of
Massachusetts and the Investment Company Act of 1940 ("1940 Act"), as amended,
except that such indemnity shall not protect any such person against any
liability to the Trust or any shareholder thereof to which such person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office ("disabling conduct"). Indemnification shall be made when (i) a final
decision on the merits, by a court or other body before whom the proceeding
was brought, that the person to be indemnified was not liable by reason of
disabling conduct or, (ii) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the person to be
indemnified was not liable by reason of disabling conduct, by (a) the vote of
a majority of a quorum of Trustees who are neither "interested persons" of the
company as defined in section 2(a)(19) of the 1940 Act, nor parties to the
proceedings or (b) an independent legal counsel in a written opinion. The
Trust may, by vote of a majority of a quorum of Trustees who are not
interested persons, advance attorneys' fees or other expenses incurred by
officers, Trustees, investment advisers or principal underwriters, in
defending a proceeding upon the undertaking by or on behalf of the person to
be indemnified to repay the advance unless it is ultimately determined that he
is entitled to indemnification. Such advance shall be subject to at least one
of the following: (1) the person to be indemnified shall provide a security
for his undertaking, (2) the Trust shall be insured against losses arising by
reason of any lawful advances, or (3) a majority of a quorum of the
disinterested, non-party Trustees of the Trust, or an independent legal
counsel in a written opinion, shall determine, based on a review of readily
available facts, that there is reason to believe that the person to be
indemnified ultimately will be found entitled to indemnification. The law of
Massachusetts is superseded by the 1940 Act insofar as it conflicts with the
1940 Act or rules published thereunder.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a trustee, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such trustee, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER AND
SUB-ADVISERS
There is set forth below information as to any other business, profession,
vocation or employment of a substantial nature in which each director or
officer of the Registrant's Investment Adviser is, or at any time during the
past two years has been, engaged for his own account or in the capacity of
director, officer, employee, partner or trustee.
<TABLE>
<CAPTION>
<S> <C>
Name Business and Other Connections
- ---------------------------------- -------------------------------------------------
Frederick S. Hubbell, Chairman (since April, 1993), President and Chief
Director, Chairman Executive Officer (since April, 1989) of
Equitable of Iowa Companies, Equitable American
Insurance Company ("Equitable American") (since
January, 1993), and Equitable Life Insurance
Company of Iowa ("Equitable Life") (since May,
1992) and Chairman of the Adviser and USG Annuity
& Life Company ("USG"); Director, Pioneer Hi-Bred
International, Inc.; Director, The Macerich
Company
Lawrence V. Durland, Jr., Senior Vice President of Equitable of Iowa
Director Companies, Equitable American and Equitable Life.
Susan M. Jordan Vice President and Chief Information Officer
Director of Equitable of Iowa Companies; Assistant Vice
President of Chicago Board of Options Exchange
from August, 1987 to July, 1994
Beth B. Neppl Vice President of Human Resources of
Director Equitable of Iowa Companies
Paul E. Larson, Executive Vice President, Treasurer and Chief
Director, Assistant Treasurer Financial Officer of Equitable of Iowa Companies,
and Assistant Secretary Equitable American (since January, 1993) and USG,
and Executive Vice President and Chief Financial
Officer of Equitable Life.
Thomas L. May Senior Vice President of Marketing of Equitable
Director Life and USG
John A. Merriman, Secretary and General Counsel of Equitable of
Director, Assistant Secretary Iowa Companies, USG and Equitable American (since
and General Counsel January, 1993) and Assistant Secretary and
General Counsel of Equitable Life.
Paul R. Schlaack, President and Chief Executive Officer of the
President, Chief Executive Adviser since 1984.
Officer and Director
Kimberly K. Krumviede, Director - Administration, Treasurer/Secretary of
Secretary and Treasurer the Adviser since June, 1994. 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;
Assistant Vice President - Equitable Life
Insurance Company of Iowa.
David A. Terwilliger, Vice President and Controller of Equitable of
Vice President, Controller, Iowa Companies, Equitable American (since
Assistant Treasurer and January, 1993), the Adviser, Equitable Life, and
Assistant Secretary USG.
Robert F. Bowman, Managing Director of Equitable
Managing Director Investment Services, Inc. since 1986.
Robert H. Kunnen, Managing Director of Equitable
Managing Director Investment Services, Inc. since 1986.
Annette F. Shaw, Managing Director of Equitable
Managing Director Investment Services, Inc. since 1989.
Diane M. Kurt, Managing Director of Equitable
Managing Director Investment Services, Inc. since 1994.
Director from October 1990 to April, 1994.
Bryan L. Borchert, Managing Director of Equitable
Managing Director Investment Services, Inc. since February, 1995;
Director from February, 1992 to February, 1995;
Principal from February, 1989 to February, 1992.
</TABLE>
The principal address of Registrant's Investment Adviser is 699 Walnut Street,
Des Moines, Iowa 50309.
With respect to information regarding the Sub-Advisers, reference is hereby
made to "Management of the Trust" in the Prospectus. For information as to
the business, profession, vocation or employment of a substantial nature of
each of the officers and directors of the Sub-Advisers, reference is made to
the current Form ADVs of the Sub-Advisers filed under the Investment Advisers
Act of 1940, incorporated herein by reference and file numbers of which are as
follows:
Credit Suisse Investment Management Limited
File No. 801-40177
Strong Capital Management, Inc.
File No. 801-10724
Massachusetts Financial Services Company
File No. 801-17352
Robertson, Stephens & Company Investment Management, L.P.
File No. 801-144125
ITEM 29. PRINCIPAL UNDERWRITER
Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Persons maintaining physical possession of accounts, books, and other
documents required to be maintained by Section 31(a) of the Investment Company
Act of 1940 and the Rules promulgated thereunder include the Registrant's
Secretary; the Registrant's investment adviser, Equitable Investment Services,
Inc.; and the Registrant's custodian, State Street Bank and Trust Company.
The address of the Secretary and Equitable Investment Services, Inc. is 604
Locust Street, Des Moines, Iowa 50309; and the address of State Street Bank
and Trust Company is 225 Franklin Street, Boston, Massachusetts 02110.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth in Parts A and B of this Registration Statement, the
Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS
The Registrant will furnish each person to whom a prospectus is delivered with
a copy of the Registrant's latest Annual Report upon request and without
charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Des Moines, and State of Iowa on the 22nd day of
January, 1996.
EQUI-SELECT SERIES TRUST
By: /s/ PAUL R. SCHLAACK
_________________________
Paul R. Schlaack
President and Trustee
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE
/s/ PAUL R. SCHLAACK January 22, 1996
- -------------------------- President and Trustee -----------------
Paul R. Schlaack (Principal Executive Officer)
/s/ PAUL E. LARSON January 22, 1996
- -------------------------- Treasurer -----------------
Paul E. Larson (Principal Financial Officer)
/s/ DAVID A. TERWILLIGER January 22, 1996
- -------------------------- Principal Accounting Officer -----------------
David A. Terwilliger
/s/ R. BARBARA GITENSTEIN January 22, 1996
- -------------------------- Trustee -----------------
R. Barbara Gitenstein
/s/ STANLEY B. SEIDLER January 22, 1996
- -------------------------- Trustee -----------------
Stanley B. Seidler
/s/ J. MICHAEL EARLEY January 22, 1996
- -------------------------- Trustee -----------------
J. Michael Earley
- -------------------------- Trustee -----------------
Thomas W. Bedell
</TABLE>
