AMERICAN CENTURY
Statement of Additional Information
Strategic Allocation: Conservative Fund
Strategic Allocation: Moderate Fund
Strategic Allocation: Aggressive Fund
[american century logo(reg.sm)]
American
Century
APRIL 1, 1999
THIS STATEMENT OF ADDITIONAL INFORMATION ADDS TO THE DISCUSSION IN THE FUNDS'
PROSPECTUSES, DATED APRIL 1, 1999, BUT IS NOT A PROSPECTUS. THE STATEMENT OF
ADDITIONAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUNDS' CURRENT
PROSPECTUS. IF YOU WOULD LIKE A COPY OF A PROSPECTUS, PLEASE CONTACT US AT ONE
OF THE ADDRESSES OR TELEPHONE NUMBERS LISTED ON THE BACK COVER OR VISIT AMERICAN
CENTURY'S WEB SITE AT WWW.AMERICANCENTURY.COM.
THIS STATEMENT OF ADDITIONAL INFORMATION INCORPORATES BY REFERENCE CERTAIN
INFORMATION THAT APPEARS IN THE FUNDS' ANNUAL AND SEMIANNUAL REPORTS, WHICH ARE
DELIVERED TO ALL SHAREHOLDERS. YOU MAY OBTAIN A FREE COPY OF THE FUNDS' ANNUAL
OR SEMIANNUAL REPORTS BY CALLING 1-800-345-2021.
Distributed by
Funds Distributor, Inc.
STATEMENT OF ADDITIONAL INFORMATION
APRIL 1, 1999
TABLE OF CONTENTS
The Funds' History ........................................................ 2
Fund Investment Guidelines ................................................ 2
Detailed Information About the Funds ...................................... 5
Investment Strategies and Risks ....................................... 5
Investment Policies ................................................... 16
Portfolio Turnover .................................................... 18
Management ................................................................ 19
The Board of Directors ................................................ 19
Officers .............................................................. 21
The Funds' Principal Shareholders ......................................... 23
Service Providers ......................................................... 23
Investment Advisor .................................................... 23
Transfer Agent and Administrator ...................................... 25
Distributor ........................................................... 25
Other Service Providers ................................................... 25
Custodian Banks ....................................................... 25
Independent Auditor ................................................... 25
Brokerage Allocation ...................................................... 25
The Equity Portion of the Funds ....................................... 25
The Fixed-Income Portion of the Funds ................................. 26
Information About Fund Shares ............................................. 26
Multiple Class Structure .............................................. 27
Buying and Selling Fund Shares ........................................ 29
Valuation of the Funds' Securities .................................... 29
Taxes ..................................................................... 29
Federal Income Taxes .................................................. 29
State and Local Taxes ................................................. 30
How Fund Performance
Information Is Calculated ................................................. 31
Performance Comparisons ............................................ 32
Permissible Advertising Information ................................ 32
Multiple Class Performance Advertising ............................. 32
Financial Statements ...................................................... 33
Explanation of Fixed-
Income Securities Ratings ................................................. 33
Statement of Additional Information 1
THE FUNDS' HISTORY
American Century Strategic Asset Allocations, Inc. is a registered open-end
management investment company that was organized as a Maryland corporation on
April 4, 1994. Prior to January 1, 1997, it was known as Twentieth Century
Strategic Asset Allocations, Inc. Throughout this Statement of Additional
Information, we refer to American Century Strategic Asset Allocations as the
corporation.
Each fund described in this Statement of Additional Information is a separate
series of the corporation and operates for many purposes as if it were an
independent company. Each fund has its own investment objective, strategy,
management team, assets, tax identification and stock registration number.
<TABLE>
FUND INVESTOR CLASS ADVISOR CLASS
- ------------------------------------------------------------------------------------------
Ticker Inception Date Ticker Inception Date
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Strategic Allocation: Conservative TWSCX 2/15/96 ACCAX 10/2/96
Strategic Allocation: Moderate TWSMX 2/15/96 ACOAX 10/2/96
Strategic Allocation: Aggressive TWSAX 2/15/96 ACVAX 10/2/96
</TABLE>
FUND INVESTMENT GUIDELINES
This section explains the extent to which the funds' advisor, American
Century Investment Management, Inc., can use various investment vehicles and
strategies in managing a fund's assets. Descriptions of the investment
techniques and risks associated with each appear in the section, "Investment
Strategies and Risks," which begins on page 5. In the case of the funds'
principal investment strategies, these descriptions elaborate upon discussions
contained in the Prospectus.
Each fund is a diversified open-end investment company as defined in the
Investment Company Act of 1940 (the Investment Company Act). Diversified means
that, with respect to 75% of its total assets, each fund will not invest more
than 5% of its total assets in the securities of a single issuer.
To meet federal tax requirements for qualification as a regulated investment
company, each fund must limit its investments so that at the close of each
quarter of its taxable year (1) no more than 25% of its total assets are
invested in the securities of a single issuer (other than the U.S government or
a regulated investment company), and (2) with respect to at least 50% of its
total assets, no more than 5% of its total assets are invested in the securities
of a single issuer.
In general, within the restrictions outlined here and in the funds'
Prospectus, the advisor has broad powers to decide how to invest fund assets,
including the power to hold them uninvested.
Investments are varied according to what is judged advantageous under
changing economic conditions. It is the advisor's policy to retain maximum
flexibility in management without restrictive provisions as to the proportion of
one or another class of securities that may be held, subject to the investment
restrictions described in the funds' Prospectus and below.
As described in the funds' Prospectus, each fund's assets are allocated
among major asset classes according to its respective asset mix and subject to
the applicable operating range. Each fund's assets are further diversified among
various investment categories and disciplines within the major asset classes.
The equity portion of a fund's portfolio may be invested in any type of
domestic or foreign equity or equity equivalent security, primarily common
stocks, that meets certain fundamental and technical standards of selection.
Equity equivalents include securities that permit the fund to receive an equity
interest in an issuer, the opportunity to acquire an equity interest in an
issuer, or the opportunity to receive a return on its investment that permits
the fund to benefit from the growth over time in the equity of an issuer.
Examples of equity securities and equity equivalents include preferred stock,
convertible preferred stock and convertible debt securities. Equity equivalents
may also include securities whose value or return is derived from the value or
return of a different security. Depositary receipts, which are described
2 American Century Investments
below under the heading "Foreign Securities," are an example of the type
of derivative security in which the funds might invest. Derivative securities
are discussed in greater detail below under the heading "Derivative
Securities."
The funds' managers utilize several investment disciplines in managing the
equity portion of each fund's portfolio, including growth, value and
quantitative management strategies. The growth discipline seeks long-term
capital appreciation by investing in companies whose earnings and revenue trends
meet the advisor's standards of selection, which generally means that the
companies have demonstrated, or, in the managers' opinion, have the prospects
for demonstrating, accelerating earnings and revenues as compared to prior
period and/or industry competitors. The value investment discipline seeks
capital growth by investing in equity securities of well-established companies
that the managers believe to be temporarily undervalued.
The advisor believes that both value investing and growth investing provide
the potential for appreciation over time. Value investing tends to provide less
volatile results. This lower volatility means that the price of value stocks
tends not to fall as significantly as the price of growth stocks in down
markets. However, value stocks do not usually appreciate as significantly as
growth stocks do in up markets. In keeping with the diversification theme of
these funds, and as a result of management's belief that these styles are
complementary, both disciplines will be represented to some degree in each
portfolio at all times.
As noted, the value investment discipline tends to be less volatile than the
growth style. As a result, Strategic Allocation: Conservative will generally
have a higher proportion of its equity investments in value stocks than the
other two funds. Likewise, Strategic Allocation: Aggressive will generally have
a greater proportion of growth stocks than either Strategic Allocation: Moderate
or Strategic Allocation: Conservative.
In addition, the equity portion of each fund's portfolio will be further
diversified among small, medium and large companies. This approach provides
investors with an additional level of diversification and enables investors to
achieve a broader exposure to the various capitalization ranges without having
to invest in multiple funds.
The funds' managers may also apply quantitative management techniques to a
portion of each fund's portfolio. These techniques combine elements of both
growth and value investing and are intended to reduce overall volatility
relative to the market. Quantitative management combines two investment
management approaches. The first is active management, which allows the managers
to select investments for a fund without reference to an index or investment
model. The second is indexing, in which the managers try to match a portion of a
fund's portfolio composition to that of a particular index.
The primary quantitative management technique the managers use is portfolio
optimization. The managers construct a portion of the funds' portfolios to match
the risk characteristics of the S&P 500 and then optimize each portfolio to
achieve the desired balance of risk and return potential.
Although the funds will remain exposed to each of the investment disciplines
and categories described above, a particular discipline or investment category
may be emphasized when, in the managers' opinion, such discipline or investment
category is undervalued relative to the other disciplines or categories.
The fixed income portion of a fund's portfolio will include U.S. Treasury
securities, securities issued or guaranteed by the U.S. government or a foreign
government, or an agency or instrumentality of the U.S. or a foreign government,
and nonconvertible debt obligations issued by U.S. or foreign corporations. The
funds may also invest in mortgage-related and other asset-backed securities,
which are described in greater detail under the heading "Mortgage-Related and
Other Asset-Backed Securities." As with the equity portion of a fund's
portfolio, the bond portion of a fund's portfolio will be diversified among the
various types of fixed income investment categories described above. The
managers' strategy is to actively manage the portfolio by investing the fund's
assets in sectors they believe are undervalued (relative to the other sectors)
and that represent better relative long-term investment opportunities.
The value of fixed income securities fluctuates based on changes in interest
rates and in the credit quality of the issuer. Debt securities that comprise
Statement of Additional Information 3
part of a fund's fixed income portfolio will primarily be limited to
investment-grade obligations. However, Strategic Allocation: Moderate may invest
up to 5% of its assets, and Strategic Allocation: Aggressive may invest up to
10% of its assets, in "high yield" securities. Investment-grade means that at
the time of purchase, such obligations are rated within the four highest
categories by a nationally recognized statistical rating organization [for
example, at least Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by
Standard & Poor's Corporation ("S&P"), or, if not rated, are of equivalent
investment quality as determined by the managers. According to Moody's, bonds
rated Baa are medium-grade and possess some speculative characteristics. A BBB
rating by S&P indicates S&P's belief that a security exhibits a satisfactory
degree of safety and capacity for repayment, but is more vulnerable to adverse
economic conditions and changing circumstances.
High-yield securities, sometimes referred to as "junk bonds," are
higher-risk, nonconvertible debt obligations that are rated below
investment-grade securities, or are unrated, but with similar credit quality.
There are no credit or maturity restrictions on the fixed income securities
in which the high-yield portion of a fund's portfolio may be invested. Debt
securities rated lower than Baa by Moody's or BBB by S&P or their equivalent are
considered by many to be predominantly speculative. Changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments on such securities than is the case with
higher-quality debt securities. Regardless of rating levels, all debt
securities considered for purchase by the fund are analyzed by the managers to
determine, to the extent reasonably possible, that the planned investment is
consistent with the investment objective of the fund.
Under normal market conditions, the maturities of fixed income securities in
which the funds invest will range from two to 30 years.
The cash equivalent portion of a fund's portfolio may be invested in
high-quality money market instruments (denominated in U.S. dollars or foreign
currencies), including U.S. government obligations, obligations of domestic and
foreign banks, short-term corporate debt instruments and repurchase
agreements.
Within each asset class, each fund's holdings will be invested across
industry groups and issuers that meet its investment criteria. This diversity of
investment is intended to help reduce the risk created by overconcentration in a
particular industry or issuer.
The funds are "strategic" rather than "tactical" allocation funds, which
means that the managers do not try to time the market to identify the exact time
when a major reallocation should be made. Instead, the managers utilize a
longer-term approach in pursuing the funds' investment objectives, and thus
select a blend of investments in the various asset classes.
The managers regularly review each fund's investments and allocations and
may make changes in the securities holdings within each asset class or to a
fund's asset mix (within the defined operating ranges) to favor investments that
they believe will provide the most favorable outlook for achieving a fund's
objective. Recommended reallocations may be implemented promptly or may be
implemented gradually. In order to minimize the impact of reallocations on a
fund's performance, the managers will generally attempt to reallocate assets
gradually.
In determining the allocation of assets among U.S. and foreign capital
markets, the managers consider the condition and growth potential of the various
economies; the relative valuations of the markets; and social, political, and
economic factors that may affect the markets.
In selecting securities in foreign currencies, the managers consider, among
other factors, the impact of foreign exchange rates relative to the U.S. dollar
value of such securities. The managers may seek to hedge all or a part of a
fund's foreign currency exposure through the use of forward foreign currency
contracts or options thereon.
The funds attempt to diversify across asset classes and investment
categories to a greater extent than mutual funds that invest primarily in equity
securities or primarily in fixed income securities. However, the funds are
designed to fit three general risk profiles and may not provide an appropriately
balanced investment plan for all investors.
4 American Century Investments
DETAILED INFORMATION ABOUT THE FUNDS
INVESTMENT STRATEGIES AND RISKS
In addition to investing in common stocks, bonds and cash equivalent
instruments, the funds' managers may also use the various investment vehicles
and techniques described in this section in managing the funds' assets. This
section also details the risks associated with each, because each technique
contributes to a fund's overall risk profile.
FOREIGN SECURITIES
Each fund may invest in the securities (including debt securities) of
foreign issuers, including foreign governments and their agencies, when these
securities meet its standards of selection. Securities of foreign issuers may
trade in the U.S. or foreign securities markets.
The chart below shows the portion of each fund's total assets that may be
invested in the securities of foreign issuers.
PERCENTAGE GENERALLY
FUND INVESTED IN FOREIGN SECURITIES
- ------------------------------------------------------------------------
Strategic Allocation:
Conservative 7-17%
- ------------------------------------------------------------------------
Strategic Allocation:
Moderate 10-30%
- ------------------------------------------------------------------------
Strategic Allocation:
Aggressive 15-35%
- ------------------------------------------------------------------------
The funds may make such investments either directly in foreign securities or
indirectly by purchasing depositary receipts or depositary shares of similar
instruments ("depositary receipts") for foreign securities. Depositary receipts
are securities that are listed on exchanges or quoted in the domestic
over-the-counter markets in one country but represent shares of issuers
domiciled in another country. Direct investments in foreign securities may be
made either on foreign securities exchanges or in the over-the-counter markets.
Subject to its investment objective and policies, each fund may invest in
common stocks, convertible securities, preferred stocks, bonds, notes and other
debt securities of foreign issuers and debt securities of foreign governments
and their agencies. The credit quality standards applicable to domestic debt
securities purchased by each fund are also applicable to its foreign securities
investments.
Investments in foreign securities may present certain risks, including:
Currency Risk. The value of the foreign investments held by the funds may be
significantly affected by changes in currency exchange rates. The dollar value
of a foreign security generally decreases when the value of the dollar rises
against the foreign currency in which the security is denominated and tends to
increase when the value of the dollar falls against such currency. In addition,
the value of fund assets may be affected by losses and other expenses incurred
in converting between various currencies in order to purchase and sell foreign
securities and by currency restrictions, exchange control regulation, currency
devaluations and political developments.
Political and Economic Risk. The economies of many of the countries in which
the funds may invest are not as developed as the economy of the United States
and may be subject to significantly different forces. Political or social
instability, expropriation, nationalization, or confiscatory taxation, and
limitations on the removal of funds or other assets, could also adversely affect
the value of investments. Further, the funds may encounter difficulties or be
unable to enforce ownership rights, pursue legal remedies or obtain judgments in
foreign courts.
Regulatory Risk. Foreign companies generally are not subject to the
regulatory controls imposed on U.S. issuers and, in general, there is less
publicly available information about foreign securities than is available about
domestic securities. Many foreign companies are not subject to uniform
accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic companies. Income from
foreign securities owned by the funds may be reduced by a withholding tax at the
source, which would reduce dividend income payable to shareholders.
Market and Trading Risk. Brokerage commission rates in foreign countries,
which are generally fixed rather than subject to negotiation as in the United
States, are likely to be higher. The securities markets in
Statement of Additional Information 5
many of the countries in which the funds may invest will have substantially
less trading volume than the principal U.S. markets. As a result, the securities
of some companies in these countries may be less liquid and more volatile than
comparable U.S. securities. Furthermore, one securities broker may represent
all or a significant part of the trading volume in a particular country,
resulting in higher trading costs and decreased liquidity due to a lack of
alternative trading partners. There is generally less government regulation and
supervision of foreign stock exchanges, brokers and issuers, which may make it
difficult to enforce contractual obligations.
Clearance and Settlement Risk. Foreign securities markets also have
different clearance and settlement procedures, and in certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in clearance and settlement could result in temporary periods when assets
of the funds are uninvested and no return is earned thereon. The inability of
the funds to make intended security purchases due to clearance and settlement
problems could cause the funds to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to clearance and settlement
problems could result either in losses to the funds due to subsequent declines
in the value of the portfolio security or, if the fund has entered into a
contract to sell the security, liability to the purchaser.
Ownership Risk. Evidence of securities ownership may be uncertain in many
foreign countries. In many of these countries, the most notable of which is the
Russian Federation, the ultimate evidence of securities ownership is the share
register held by the issuing company or its registrar. While some companies may
issue share certificates or provide extracts of the company's share register,
these are not negotiable instruments and are not effective evidence of
securities ownership. In an ownership dispute, the company's share register is
controlling. As a result, there is a risk that a fund's trade details could be
incorrectly or fraudulently entered on the issuer's share register at the time
of the transaction, or that a fund's ownership position could thereafter be
altered or deleted entirely, resulting in a loss to the fund. Each fund 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 Securities on page 9.)
INVESTING IN EMERGING MARKET COUNTRIES
Strategic Allocation: Moderate and Strategic Allocation: Aggressive may
invest a minority portion of their international holdings in securities of
issuers in emerging market (developing) countries. The funds consider "emerging
market countries" to include all countries that are considered by the advisor to
be developing or emerging countries. Currently, the countries not included in
this category for the funds are the United States, Canada, Japan, the United
Kingdom, Germany, Austria, France, Hong Kong, Italy, Ireland, Singapore, Spain,
Belgium, the Netherlands, Portugal, Switzerland, Sweden, Finland, Norway,
Denmark, Australia and New Zealand. In addition, as used in this Statement of
Additional Information, "securities of issuers in emerging market countries"
means (i) securities of issuers the principal securities trading market for
which is an emerging market country or (ii) securities of issuers having their
principal place of business or principal office in an emerging market country.
Investing in securities of issuers in emerging market countries involves
exposure to significantly higher risk than investing in countries with developed
markets. Emerging market countries may have economic structures that are
generally less diverse and mature, and political systems that can be expected to
be less stable than those of developed countries. Securities prices in emerging
market countries can be significantly more volatile than in developed countries,
reflecting the greater uncertainties of investing in lesser developed markets
and economies. In particular, emerging market countries may have relatively
unstable governments, and may present the risk of nationalization of businesses,
expropriation, confiscatory taxation or in certain instances, reversion to
closed-market, centrally planned economies. Such countries may also have less
protection of property rights than developed countries.
The economies of emerging market countries may
6 American Century Investments
be predominantly based on only a few industries or may be dependent on
revenues from particular commodities or on international aid or developmental
assistance, may be highly vulnerable to changes in local or global trade
conditions, and may suffer from extreme and volatile debt burdens or inflation
rates. In addition, securities markets in emerging market countries may trade a
relatively small number of securities and may be unable to respond effectively
to increases in trading volume, potentially resulting in a lack of liquidity and
in volatility in the price of securities traded on those markets. Also,
securities markets in emerging market countries typically offer less regulatory
protection for investors.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
The funds may purchase mortgage-related and other asset-backed securities.
Mortgage pass- through securities are securities representing interests in
"pools" of mortgages in which payments of both interest and principal on the
securities are generally made monthly, in effect "passing through" monthly
payments made by the individual borrowers on the residential mortgage loans that
underlie the securities (net of fees paid to the issuer or guarantor of the
securities).
Early repayment of principal on mortgage pass-through securities (arising
from prepayments of principal due to sale of the underlying property,
refinancing, or foreclosure, net of fees and costs which may be incurred) may
expose the funds to a lower rate of return upon reinvestment of principal. Also,
if a security subject to prepayment were purchased at a premium, in the event of
prepayment, the value of the premium would be lost. Like other fixed-income
securities, when interest rates rise, the value of a mortgage-related security
generally will decline; however, when interest rates decline, the value of
mortgage-related securities with prepayment features may not increase as much as
other fixed-income securities.
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, as in the case of securities
guaranteed by the Government National Mortgage Association (GNMA), or guaranteed
by agencies or instrumentalities of the U.S. government, as in the case of
securities guaranteed by the Federal National Mortgage Association (FNMA) or
the Federal Home Loan Mortgage Corporation (FHLMC), which are supported only by
the discretionary authority of the U.S. government to purchase the agency's
obligations.
Mortgage pass-through securities created by nongovernmental issuers (such
as commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers) may be supported
by various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance and letters of credit, which may be issued by
governmental entities, private insurers, or the mortgage poolers.
The funds may also invest in collateralized mortgage obligations (CMOs).
CMOs are mortgage-backed securities issued by government agencies;
single-purpose, stand-alone financial subsidiaries; trusts established by
financial institutions; or similar institutions. The funds may buy CMOs that:
* are collateralized by pools of mortgages in which payment of principal and
interest of each mortgage is guaranteed by an agency or instrumentality of
the U.S. government;
* are collateralized by pools of mortgages in which payment of principal and
interest are guaranteed by the issuer, and the guarantee is collateralized
by U.S. government securities; and
* are securities in which the proceeds of the issue are invested in mortgage
securities and payments of principal and interest are supported by the
credit of an agency or instrumentality of the U.S. government.
FORWARD CURRENCY EXCHANGE CONTRACTS
Each fund may purchase and sell foreign currency on a spot (i.e. cash) basis
and may engage in forward currency contracts, currency options and futures
transactions for hedging or any other lawful purpose. See "Derivative
Securities," page 9.
The funds expect to use forward contracts under two circumstances:
(1) When a fund's managers wish to lock in the U.S. dollar price of a security
when the fund
Statement of Additional Information 7
is purchasing or selling a security denominated in a foreign currency, the
fund would be able to enter into a forward contract to do so; or
(2) When a fund's managers believe that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, the fund
would be able to enter into a forward contract to sell foreign currency for
a fixed U.S. dollar amount approximating the value of some or all of its
portfolio securities either denominated in, or whose value is tied to, such
foreign currency.
In the first circumstance, when a fund enters into a trade for the purchase
or sale of a security denominated in a foreign currency, it may be desirable to
establish (lock in) the U.S. dollar cost or proceeds. By entering into forward
contracts in U.S. dollars for the purchase or sale of a foreign currency
involved in an underlying security transaction, the fund will be able to protect
itself against a possible loss between trade and settlement dates resulting from
the adverse change in the relationship between the U.S. dollar at the subject
foreign currency.
Under the second circumstance, when a fund's managers believe that the
currency of a particular country may suffer a substantial decline relative to
the U.S. dollar, the fund could enter into a foreign contract to sell for a
fixed dollar amount the amount in foreign currencies approximating the value of
some or all of its portfolio securities either denominated in, or whose value is
tied to, such foreign currency. The fund will place cash or high-grade liquid
securities in a separate account with its custodian in an amount equal to the
value of the forward contracts entered into under the second circumstance. If
the value of the securities placed in the separate account declines, additional
cash or securities will be placed in the account on a daily basis so that the
value of the account equals the amount of the fund's commitments with respect
to such contracts.
The precise matching of forward contracts in the amounts and values of
securities involved generally would not be possible since the future values of
such foreign currencies will change as a consequence of market movements in the
values of those securities between the date the forward contract is entered
into and the date it matures. Predicting short-term currency market movements is
extremely difficult, and the successful execution of short-term hedging strategy
is highly uncertain. The funds' managers do not intend to enter into such
contracts on a regular basis. Normally, consideration of the prospect for
currency parities will be incorporated into the long-term investment decisions
made with respect to overall diversification strategies. However, the advisor
believes that it is important to have flexibility to enter into such forward
contracts when it determines that a fund's best interests may be served.
Generally, a fund will not enter into a forward contract with a term of
greater than one year. At the maturity of the forward contract, the fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate the obligation to deliver the foreign
currency by purchasing an offsetting forward contract with the same currency
trader obligating the fund to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the forward contract. Accordingly, it
may be necessary for a fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency the fund is obligated to deliver.
CONVERTIBLE SECURITIES
A convertible security is a fixed-income security that offers the potential
for capital appreciation through a conversion feature that enables the holder to
convert the fixed-income security into a stated number of shares of common
stock. As fixed income securities, convertible securities provide a stable
stream of income, with generally higher yields than common stocks. Because
convertible securities offer the potential to benefit from increases in the
market price of the underlying common stock, however, they generally offer lower
yields than nonconvertible securities of similar quality. Of course, like all
fixed- income securities, there can be no assurance of current income because
the issuers of the convertible
8 AMERICAN CENTURY INVESTMENTS
securities may default on their obligations. In addition, there can be no
assurance of capital appreciation because the value of the underlying common
stock will fluctuate.
Convertible securities generally are subordinated to other similar but
nonconvertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar nonconvertible securities.
Unlike a convertible security that is a single security, a synthetic
convertible security is comprised of two distinct securities that together
resemble convertible securities in certain respects. Synthetic convertible
securities are created by combining nonconvertible bonds or preferred stocks
with warrants or stock call options. The options that will form elements of
synthetic convertible securities will be listed on a securities exchange or on
the National Association of Securities Dealers Automated Quotation Systems. The
two components of a synthetic convertible security, which will be issued with
respect to the same entity, generally are not offered as a unit, and may be
purchased and sold by the fund at different times. Synthetic convertible
securities differ from convertible securities in certain respects, including
that each component of a synthetic convertible security has a separate market
value and responds differently to market fluctuations. Investing in synthetic
convertible securities involves the risk normally found in holding the
securities comprising the synthetic convertible security.
Each fund will limit its holdings of convertible debt securities to those
that, at the time of purchase, are rated at least B- by S&P or B3 by Moody's,
or, if not rated by S&P or Moody's, are of equivalent investment quality as
determined by the fund's managers. A fund's investments in convertible debt
securities and other high-yield, nonconvertible debt securities rated below
investment grade will comprise less than 35% of the fund's net assets.
SHORT SALES
A fund may engage in short sales if, at the time of the short sale, the fund
owns or has the right to acquire securities equivalent in kind and amount to the
securities being sold short.
In a short sale, the seller does not immediately deliver the securities sold
and is said to have a short position in those securities until delivery occurs.
To make delivery to the purchaser, the executing broker borrows the securities
being sold short on behalf of the seller. While the short position is
maintained, the seller collateralizes its obligation to deliver the securities
sold short in an amount equal to the proceeds of the short sale plus an
additional margin amount established by the Board of Governors of the Federal
Reserve. If a fund engages in a short sale, the collateral account will be
maintained by the fund's custodian. While the short sale is open, the fund
will maintain in a segregated custodial account an amount of securities
convertible into, or exchangeable for, such equivalent securities at no
additional cost. These securities would constitute the fund's long position.
A fund may make a short sale, as described above, when it wants to sell the
security it owns at a current attractive price, but also wishes to defer
recognition of gain or loss for federal income tax purposes. There will be
certain additional transaction costs associated with short sales, but the fund
will endeavor to offset these costs with income from the investment of the cash
proceeds of short sales.
PORTFOLIO LENDING
In order to realize additional income, a fund may lend its portfolio
securities. Such loans may not exceed one-third of the fund's net assets valued
at market except (i) through the purchase of debt securities in accordance with
its investment objective, policies and limitations, or (ii) by engaging in
repurchase agreements with respect to portfolio securities.
DERIVATIVE SECURITIES
To the extent permitted by its investment objectives and policies, each of
the funds may invest in securities that are commonly referred to as derivative
securities. Generally, a derivative is a financial arrangement the value of
which is based on, or derived from, a traditional security, asset, or market
index. Certain derivative securities are more accurately described as
index/structured securities. Index/structured securities are derivative
securities
Statement of Additional Information 9
whose value or performance is linked to other equity securities (such as
depositary receipts), currencies, interest rates, indices or other financial
indicators (reference indices).
Some derivatives such as mortgage-related and other asset-backed securities
are in many respects like any other investment, although they may be more
volatile or less liquid than more traditional debt securities.
There are many different types of derivatives and many different ways to use
them. Futures and options are commonly used for traditional hedging purposes to
attempt to protect a fund from exposure to changing interest rates, securities
prices, or currency exchange rates and for cash management purposes as a
low-cost method of gaining exposure to a particular securities market without
investing directly in those securities.
No fund may invest in a derivative security unless the reference index or
the instrument to which it relates is an eligible investment for the fund. For
example, a security whose underlying value is linked to the price of oil would
not be a permissible investment because the funds may not invest in oil and gas
leases or futures.
The return on a derivative security may increase or decrease, depending upon
changes in the reference index or instrument to which it relates.
There is a range of risks associated with derivative investments, including
* the risk that the underlying security, interest rate, market index or other
financial asset will not move in the direction the fund managers anticipate;
* the possibility that there may be no liquid secondary market, or the
possibility that price fluctuation limits may be imposed by the exchange,
either of which may make it difficult or impossible to close out a position
when desired;
* the risk that adverse price movements in an instrument can result in a loss
substantially greater than a fund's initial investment; and
* the risk that the counterparty will fail to perform its obligations.
The Board of Directors has approved the managers' policy regarding
investments in derivative securities. That policy specifies factors that must be
considered in connection with a purchase of derivative securities. The policy
also establishes a committee that must review certain proposed purchases before
the purchases can be made. The managers will report on fund activity in
derivative securities to the Board of Directors as necessary. In addition, the
Board will review the managers' policy for investments in the derivative
securities annually.
INVESTMENTS IN COMPANIES WITH
LIMITED OPERATING HISTORIES
The funds may invest in the securities of issuers with limited operating
histories. The managers consider an issuer to have a limited operating history
if that issuer has a record of less than three years of continuous operation.
The managers will consider periods of capital formation, incubation,
consolidations, and research and development in determining whether a particular
issuer has a record of three years of continuous operation.
Investments in securities of issuers with limited operating histories may
involve greater risks than investments in securities of more mature issuers. By
their nature, such issuers present limited operating history and financial
information upon which the manager may base its investment decision on behalf of
the funds. In addition, financial and other information regarding such issuers,
when available, may be incomplete or inaccurate.
REPURCHASE AGREEMENTS
Each fund may invest in repurchase agreements when such transactions present
an attractive short-term return on cash that is not otherwise committed to the
purchase of securities pursuant to the investment policies of that fund.
A repurchase agreement occurs when, at the time the fund purchases an
interest-bearing obligation, the seller (a bank or a broker-dealer registered
under the Securities Exchange Act of 1934) agrees to purchase it on a specified
date in the future at an agreed-upon price. The repurchase price reflects an
agreed-upon interest rate during the time the fund's money is invested in the
security.
Because the security purchased constitutes security for the repurchase
obligation, a repurchase agreement can be considered a loan collateralized by
the security purchased. The fund's risk is the ability of the seller to pay the
agreed-upon repurchase price on
10 American Century Investments
the repurchase date. If the seller defaults, the fund may incur costs in
disposing of the collateral, which would reduce the amount realized thereon. If
the seller seeks relief under the bankruptcy laws, the disposition of the
collateral may be delayed or limited. To the extent the value of the security
decreases, the fund could experience a loss.
The funds will limit repurchase agreement transactions to securities issued
by the U.S. government, its agencies and instrumentalities, and will enter into
such transactions with those banks and securities dealers who are deemed
creditworthy pursuant to criteria adopted by the funds' Board of Directors.
VARIABLE- AND FLOATING-RATE OBLIGATIONS
The funds may buy variable- and floating-rate demand obligations (VRDOs and
FRDOs). These obligations carry rights that permit holders to demand payment of
the unpaid principal plus accrued interest, from the issuers or from financial
intermediaries. Floating-rate securities, or floaters, have interest rates that
change whenever there is a change in a designated base rate; variable-rate
instruments provide for a specified, periodic adjustment in the interest rate,
which typically is based on an index. These rate formulas are designed to result
in a market value for the VRDO or FRDO that approximates par value.
OBLIGATIONS WITH TERM PUTS ATTACHED
Each fund may invest in fixed-rate bonds subject to third-party puts and in
participation interests in such bonds held by a bank in trust or otherwise.
These bonds and participation interests have tender options or demand features
that permit the funds to tender (or put) their bonds to an institution at
periodic intervals and to receive the principal amount thereof.
The managers expect that the funds will pay more for securities with puts
attached than for securities without these liquidity features.
Because it is difficult to evaluate the likelihood of exercise or the
potential benefit of a put, puts normally will be determined to have a value of
zero, regardless of whether any direct or indirect consideration is paid.
Accordingly, puts as separate securities are not expected to affect the funds'
weighted average maturities. When a fund has paid for a put, the cost will be
reflected as unrealized depreciation on the underlying security for the period
the put is held. Any gain on the sale of the underlying security will be reduced
by the cost of the put.
There is a risk that the seller of a put will not be able to repurchase the
underlying obligation when (or if) a fund attempts to exercise the put. To
minimize such risks, the funds will purchase obligations with puts attached only
from sellers deemed creditworthy by the advisor under the direction of the Board
of Directors.
WHEN-ISSUED AND FORWARD COMMITMENT AGREEMENTS
The funds may sometimes purchase new issues of securities on a when-issued
or forward commitment basis in which the transaction price and yield are each
fixed at the time the commitment is made, but payment and delivery occur at a
future date (typically 15 to 45 days later).
When purchasing securities on a when-issued or forward commitment basis, a
fund assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. Market rates of interest on debt securities at the time of
delivery may be higher or lower than those contracted for on the when-issued
security. Accordingly, the value of such security may decline prior to delivery,
which could result in a loss to the fund. While the fund will make commitments
to purchase or sell securities with the intention of actually receiving or
delivering them, it may sell the securities before the settlement date if doing
so is deemed advisable as a matter of investment strategy.
In purchasing securities on a when-issued or forward commitment basis, a
fund will establish and maintain until the settlement date a segregated account
consisting of cash, cash equivalents or other appropriate liquid securities in
an amount sufficient to meet the purchase price. When the time comes to pay for
the when-issued securities, the fund will meet its obligations with available
cash, through the sale of securities, or, although it would not normally expect
to do so, by selling the when-issued securities themselves (which may have a
market value greater or less than the fund's payment obligation). Selling
securities to meet when-issued or forward commitment obligations may generate
taxable capital gains or losses.
Statement of Additional Information 11
INVERSE FLOATERS
An inverse floater is a type of derivative security that bears an interest
rate that moves inversely to market interest rates. As market interest rates
rise, the interest rate on inverse floaters goes down, and vice versa.
Generally, this is accomplished by expressing the interest rate on the inverse
floater as an above-market fixed rate of interest, reduced by an amount
determined by reference to a market-based or bond-specific floating interest
rate (as well as by any fees associated with administering the inverse floater
program).
Inverse floaters may be issued in conjunction with an equal amount of Dutch
Auction floating-rate bonds (floaters), or a market-based index may be used to
set the interest rate on these securities. A Dutch Auction is an auction system
in which the price of the security is gradually lowered until it meets a
responsive bid and is sold. Floaters and inverse floaters may be brought to
market by a broker-dealer who purchases fixed-rate bonds and places them in a
trust or by an issuer seeking to reduce interest expenses by using a
floater/inverse floater structure in lieu of fixed-rate bonds.
In the case of a broker-dealer structured offering (where underlying
fixed-rate bonds have been placed in a trust), distributions from the underlying
bonds are allocated to floater and inverse floater holders in the following
manner:
(i) Floater holders receive interest based on rates set at a six-month
interval or at a Dutch Auction, which is typically held every 28 to 35
days. Current and prospective floater holders bid the minimum interest
rate that they are willing to accept on the floaters, and the interest
rate is set just high enough to ensure that all of the floaters are
sold.
(ii) Inverse floater holders receive all of the interest that remains on the
underlying bonds after floater interest and auction fees are paid.
Procedures for determining the interest payment on floaters and inverse
floaters brought to market directly by the issuer are comparable, although the
interest paid on the inverse floaters is based on a presumed coupon rate that
would have been required to bring fixed-rate bonds to market at the time the
floaters and inverse floaters were issued.
Where inverse floaters are issued in conjunction with floaters, inverse
floater holders may be given the right to acquire the underlying security (or to
create a fixed-rate bond) by calling an equal amount of corresponding floaters.
The underlying security may then be held or sold. However, typically, there are
time constraints and other limitations associated with any right to combine
interests and claim the underlying security.
Floater holders subject to a Dutch Auction procedure generally do not have
the right to put back their interests to the issuer or to a third party. If a
Dutch Auction fails, the floater holder may be required to hold its position
until the underlying bond matures, during which time interest on the floater is
capped at a predetermined rate.
The secondary market for floaters and inverse floaters may be limited. The
market value of inverse floaters tends to be significantly more volatile than
fixed-rate bonds. The interest rates on inverse floaters may be significantly
reduced, even to zero, if interest rates rise.
SHORT-TERM SECURITIES
In order to meet anticipated redemptions, to hold pending the purchase of
additional securities for a funds portfolio, or in some cases, for temporary
defensive purposes, the funds may invest a portion of their assets in money
market and other short-term securities.
Examples of those securities include
* Securities issued or guaranteed by the U.S. government and its agencies and
instrumentalities;
* Commercial Paper;
* Certificates of Deposit and Euro Dollar Certificates of Deposit;
* Bankers' Acceptances;
* Short-term notes, bonds, debentures or other debt instruments; and
* Repurchase agreements.
OTHER INVESTMENT COMPANIES
Each of the funds may invest up to 10% of its total assets in any other
mutual fund, including those of the advisor, provided that the investment is
consistent with the fund's investment policies and restrictions.
12 American Century Investments
Under the Investment Company Act, each fund's investment in such securities,
subject to certain exceptions, currently is limited to (a) 3% of the total
voting stock of any one investment company, (b) 5% of the fund's total assets
with respect to any one investment company and (c) 10% of the fund's total
assets in the aggregate. Such purchases will be made in the open market where no
commission or profit to a sponsor or dealer results from the purchase other than
the customary brokers' commissions. As a shareholder of another investment
company, a fund would bear, along with other shareholders, its pro rata portion
of the other investment company's expenses, including advisory fees. These
expenses would be in addition to the management fee that each fund bears
directly in connection with its own operations.
FUTURES AND OPTIONS
Each fund may enter into futures contracts, options or options on futures
contracts. Funds may not, however, enter into a futures transaction for
speculative purposes. Generally, futures transactions will be used to
* protect against a decline in market value of the funds' securities (taking a
short futures position), or
* protect against the risk of an increase in market value for securities in
which the fund generally invests at a time when the fund is not fully invested
(taking a long futures position), or
* provide a temporary substitute for the purchase of an individual security that
may be purchased in an orderly fashion.
Some futures and options strategies, such as selling futures, buying puts
and writing calls, hedge a fund's investments against price fluctuations. Other
strategies, such as buying futures, writing puts and buying calls, tend to
increase market exposure. Although other techniques may be used to control a
fund's exposure to market fluctuations, the use of futures contracts may be a
more effective means of hedging this exposure. While a fund pays brokerage
commissions in connection with opening and closing out futures positions, these
costs are lower than the transaction costs incurred in the purchase and sale of
the underlying securities.
For example, the sale of a future by a fund means the fund becomes obligated
to deliver the security (or securities, in the case of an index future) at a
specified price on a specified date. The purchase of a future means the fund
becomes obligated to buy the security (or securities) at a specified price on a
specified date. Futures contracts provide for the sale by one party and purchase
by another party of a specific security at a specified future time and price.
The funds may engage in futures and options transactions based on securities
indices that are consistent with the fund's investment objectives. Examples of
indices that may be used include the Bond Buyer Index of Municipal Bonds, for
fixed-income funds, or the S&P 500 Index, for equity funds. The funds also may
engage in futures and options transactions based on specific securities, such as
U.S. Treasury bonds or notes. Futures contracts are traded on national futures
exchanges. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission (CFTC), a U.S.
government agency.
Index futures contracts differ from traditional futures contracts in that
when delivery takes place, no stocks or bonds change hands. Instead, these
contracts settle in cash at the spot market value of the index. Although other
types of futures contracts by their terms call for actual delivery or acceptance
of the underlying securities, in most cases the contracts are closed out before
the settlement date. A futures position may be closed by taking an opposite
position in an identical contract (i.e., buying a contract that has previously
been sold or selling a contract that has previously been bought).
Unlike when the fund purchases or sells a bond, no price is paid or received
by the fund upon the purchase or sale of the future. Initially, the fund will
be required to deposit an amount of cash or securities equal to a varying
specified percentage of the contract amount. This amount is known as initial
margin. The margin deposit is intended to assure completion of the contract
(delivery or acceptance of the underlying security) if it is not terminated
prior to the specified delivery date. They do not constitute margin
transactions for purposes of the funds' investment restrictions. Minimum initial
margin requirements are established by the futures exchanges and may be
Statement of Additional Information 13
revised. In addition, brokers may establish margin deposit requirements that
are higher than the exchange minimums. Cash held in the margin account is not
income-producing. Subsequent payments, called variation margin, to and from the
broker, will be made on a daily basis as the price of the underlying debt
securities or index fluctuates, making the future more or less valuable , a
process known as marking the contract to market. Changes in variation margin
are recorded by the fund as unrealized gains or losses. At any time prior to
expiration of the future, the fund may elect to close the position by taking an
opposite position that will operate to terminate its position in the future. A
final determination of variation margin is then made; additional cash is
required to be paid by or released to the fund and the fund realizes a loss or
gain.
RISKS RELATED TO FUTURES AND OPTIONS TRANSACTIONS
Futures and options prices can be volatile, and trading in these markets
involves certain risks. If the fund managers apply a hedge at an inappropriate
time or judge interest rate or equity market trends incorrectly, futures and
options strategies may lower the fund's return.
A fund could suffer losses if it were unable to close out its position
because of an illiquid secondary market. Futures contracts may be closed out
only on an exchange that provides a secondary market for these contracts, and
there is no assurance that a liquid secondary market will exist for any
particular futures contract at any particular time. Consequently, it may not be
possible to close a futures position when the fund managers consider it
appropriate or desirable to do so. In the event of adverse price movements, a
fund would be required to continue making daily cash payments to maintain its
required margin. If the fund had insufficient cash, it might have to sell
portfolio securities to meet daily margin requirements at a time when the fund
managers would not otherwise elect to do so. In addition, a fund may be required
to deliver or take delivery of instruments underlying futures contracts it
holds. The fund managers will seek to minimize these risks by limiting the
contracts entered into on behalf of the funds to those traded on national
futures exchanges and for which there appears to be a liquid secondary market.
A fund could suffer losses if the prices of its futures and options
positions were poorly correlated with its other investments, or if securities
underlying futures contracts purchased by a fund had different maturities than
those of the portfolio securities being hedged. Such imperfect correlation may
give rise to circumstances in which a fund loses money on a futures contract at
the same time that it experiences a decline in the value of its hedged portfolio
securities. A fund also could lose margin payments it has deposited with a
margin broker, if, for example, the broker became bankrupt.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of the trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond the limit. However, the daily limit
governs only price movement during a particular trading day and, therefore, does
not limit potential losses. In addition, the daily limit may prevent liquidation
of unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
OPTIONS ON FUTURES
By purchasing an option on a futures contract, a fund obtains the right, but
not the obligation, to sell the futures contract (a put option) or to buy the
contract (a call option) at a fixed strike price. A fund can terminate its
position in a put option by allowing it to expire or by exercising the option.
If the option is exercised, the fund completes the sale of the underlying
security at the strike price. Purchasing an option on a futures contract does
not require a fund to make margin payments unless the option is exercised.
Although they do not currently intend to do so, the funds may write (or
sell) call options that obligate it to sell (or deliver) the option's underlying
instrument
14 American Century Investments
upon exercise of the option. While the receipt of option premiums would
mitigate the effects of price declines, the funds would give up some ability to
participate in a price increase on the underlying security. If a fund were to
engage in options transactions, it would own the futures contract at the time a
call were written and would keep the contract open until the obligation to
deliver it pursuant to the call expired.
RESTRICTIONS ON THE USE OF CONTRACTS AND OPTIONS
Each fund may enter into futures contracts, options or options on futures
contracts.
Under the Commodity Exchange Act, a fund may enter into futures and options
transactions (a) for hedging purposes without regard to the percentage of assets
committed to initial margin and option premiums or (b) for other than hedging
purposes, provided that assets committed to initial margin and option premiums
do not exceed 5% of the fund's total assets. To the extent required by law, each
fund will segregate cash or securities on its records in an amount sufficient
to cover its obligations under the futures contracts and options.
RESTRICTED AND ILLIQUID SECURITIES
The funds may, from time to time, purchase restricted or illiquid
securities, including Rule 144A securities, when they present attractive
investment opportunities that otherwise meet the funds' criteria for selection.
Rule 144A securities are securities that are privately placed with and traded
among qualified institutional investors rather than the general public.
Although Rule 144A securities are considered restricted securities, they are not
necessarily illiquid.
With respect to securities eligible for resale under Rule 144A, the staff of
the SEC has taken the position that the liquidity of such securities in the
portfolio of a fund offering redeemable securities is a question of fact for the
Board of Directors to determine, such determination to be based upon a
consideration of the readily available trading markets and the review of any
contractual restrictions. Accordingly, the Board of Directors is responsible for
developing and establishing the guidelines and procedures for determining the
liquidity of Rule 144A securities. As allowed by Rule 144A, the Board of
Directors of the funds has delegated the day-to-day function of determining the
liquidity of Rule 144A securities to the fund managers. The board retains the
responsibility to monitor the implementation of the guidelines and procedures it
has adopted.
Since the secondary market for such securities is limited to certain
qualified institutional investors, the liquidity of such securities may be
limited accordingly and a fund may, from time to time, hold a Rule 144A or other
security that is illiquid. In such an event, the fund managers will consider
appropriate remedies to minimize the effect on such fund's liquidity.
ZERO-COUPON, STEP-COUPON AND PAY-IN-KIND SECURITIES
Zero-coupon, step-coupon and pay-in-kind 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
STATEMENT OF ADDITIONAL INFORMATION 15
of the original issue discount and other noncash income on such securities
accrued during that year. In order to continue to qualify for treatment as a
regulated investment company under the Internal Revenue Code and avoid certain
excise tax, the funds 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.
LOAN INTERESTS
Loan interests are interests in amounts owed by a corporate, governmental or
other borrower to lenders or lending syndicates. Loan interests purchased by the
funds may have a maturity of any number of days or years, and 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 nationally
recognized securities rating organization and are, at present, not readily
marketable and may be subject to contractual restrictions on resale.
INVESTMENT POLICIES
Unless otherwise indicated, with the exception of the percentage limitations
on borrowing, the restrictions apply at the time transactions are entered into.
Accordingly, any later increase or decrease beyond the specified limitation
resulting from a change in a fund's net assets will not be considered in
determining whether it has complied with its investment restrictions.
FUNDAMENTAL INVESTMENT POLICIES
The funds' investment restrictions are set forth below. These investment
restrictions are fundamental and may not be changed without approval of a
majority of the outstanding votes of shareholders of a fund, as determined in
accordance with the Investment Company Act.
For purposes of the investment restriction relating to concentration, a fund
shall not purchase any securities that would cause 25% or more of the value of
the fund's total assets at the time of purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. government, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions and
repurchase agreements secured by such instruments, (b) wholly owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents, (c)
utilities will be divided according to their services, for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry, and (d) personal credit and business credit businesses will
be considered separate industries.
Subject Policy
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Senior Securities A fund may not issue senior securities, except as permitted
under the Investment Company Act.
- ----------------------------------------------------------------------------
Borrowing A fund may not borrow money, except for temporary or
emergency purposes (not for leveraging or investment) in an
amount not exceeding 331/3% of the fund's total assets
(including the amount borrowed) less liabilities (other
than borrowings).
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Lending A fund may not lend any security or make any other loan if,
as a result, more than 331/3% of the fund's total assets
would be lent to other parties, except, (i) through the
purchase of debt securities in accordance with its
investment objective, policies and limitations or (ii) by
engaging in repurchase agreements with respect to portfolio
securities.
16 American Century Investments
Subject Policy
- --------------------------------------------------------------------------------
Real Estate A fund may not purchase or sell real estate unless acquired as
a result of ownership of securities or other instruments. This
policy shall not prevent a fund from investing in securities or
other instruments backed by real estate or securities of
companies that deal in real estate or are engaged in the real
estate business.
- --------------------------------------------------------------------------------
Concentration A fund may not concentrate its investments in securities of
issuers in a particular industry (other than securities issued
or guaranteed by the U.S. government or any of its agencies or
instrumentalities).
- --------------------------------------------------------------------------------
Underwriting A fund may not act as an underwriter of securities issued by
others, except to the extent that the fund may be considered an
underwriter within the meaning of the Securities Act of 1933 in
the disposition of restricted securities.
- --------------------------------------------------------------------------------
Commodities A fund may not purchase or sell physical commodities unless
acquired as a result of ownership of securities or other
instruments; provided that this limitation shall not prohibit
the fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments
backed by physical commodities.
- --------------------------------------------------------------------------------
Control A fund may not invest for purposes of exercising control over
management.
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NONFUNDAMENTAL INVESTMENT POLICIES
In addition, the funds are subject to the following additional investment
restrictions that are not fundamental and may be changed by the Board of
Directors.
The Investment Company Act imposes certain additional restrictions upon
acquisition by the funds of securities issued by insurance companies,
broker-dealers, underwriters or investment advisors, and upon transactions with
affiliated persons as therein defined. It also defines and forbids the creation
of cross and circular ownership. Neither the Securities and Exchange Commission
nor any other agency of the federal or state agency participates in or
supervises the management of the funds or their investment practices or
policies.
The Investment Company Act also provides that the funds may not invest more
than 25% of their assets in the securities of issuers engaged in a single
industry. In determining industry groups for purposes of this restriction, the
SEC ordinarily uses the Standard Industry Classification codes developed by the
United States Office of Management and Budget. In the interest of ensuring
adequate diversification, the funds monitor industry concentration using a more
restrictive list of industry groups than that recommended by the SEC. The funds
believe that these classifications are reasonable and are not so broad that the
primary economic characteristics of the companies in a single class are
materially different. The use of these restrictive industry classifications may,
however, cause the funds to forego investment possibilities that may otherwise
be available to them under the Investment Company Act.
<TABLE>
Subject Policy
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<S> <C>
Diversification A fund may not purchase additional investment securities at any
time during which outstanding borrowings exceed 5% of the total
assets of the fund.
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Liquidity A fund may not purchase any security or enter into a repurchase
agreement if, as a result, more than
15% of its net assets would be invested in repurchase agreements not entitling
the holder to payment of principal and interest within seven days and in
securities that are illiquid by virtue of legal or contractual restrictions on
resale or the absence of a readily available market.
Statement of Additional Information 17
Subject Policy
- ---------------------------------------------------------------------------------------------
Short Sales A fund may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities sold
short, and provided that transactions in futures contracts and options are not
deemed to constitute selling securities short.
- ---------------------------------------------------------------------------------------------
Margin A fund may not purchase securities on margin, except to obtain
such short-term credits as are necessary for the clearance of transactions, and
provided that margin payments in connection with futures contracts and options
on futures contracts shall not constitute purchasing securities on margin.
- ---------------------------------------------------------------------------------------------
Futures & Options A fund may enter into futures contracts, options or options
on futures contracts. Futures transactions may be used to (1) protect against a
decline in market value of the fund's securities, (2) protect against the risk
of an increase in market value for securities in which the fund generally
invests at a time when the fund is not fully-invested, or (3) provide a
temporary substitute for the purchase of an individual security that may be
purchased in an orderly fashion. A fund may not, however, enter into leveraged
futures transactions.
- ---------------------------------------------------------------------------------------------
Issuers with Limited A fund may invest up to 5% of its assets in the securities of issuers with
limited operating histories. An Operating Histories issuer is considered to
have a limited operating history if that issuer has a record of less than
three years of continuous operation. Periods of capital formation,
incubation, consolidations, and research and development may be
considered in determining whether a particular issuer has a record of three
years of continuous operation.
- ---------------------------------------------------------------------------------------------
</TABLE>
PORTFOLIO TURNOVER
The portfolio turnover rates of the funds are shown in the Financial
Highlights tables in the Prospectus.
With respect to each fund, the managers may purchase and sell securities
without regard to the length of time the security has been held. Accordingly,
the fund's rate of portfolio turnover may be substantial.
The fund managers intend to purchase a given security whenever they believe
it will contribute to the stated objective of the fund. In order to achieve each
fund's investment objective, the managers may sell a given security, no matter
for how long or for how short a period it has been held in the portfolio, and no
matter whether the sale is at a gain or at a loss, if the managers believe that
the security is not fulfilling its purpose, either because, among other things,
it did not live up to the managers' expectations, or because it may be replaced
with another security holding greater promise, or because it has reached its
optimum potential, or because of a change in the circumstances of a particular
company or industry or in general economic conditions, or because of some
combination of such reasons.
When a general decline in security prices is anticipated, a fund may
decrease its position in such category and increase its position in one or both
of the other asset categories, and when a rise in price levels is anticipated, a
fund may increase its position in such category and decrease its position in the
other categories. However, the funds will, under most circumstances, be
essentially fully invested within the operating ranges set forth in the
Prospectus.
Because investment decisions are based on the anticipated contribution of
the security in question to a funds' objectives, the managers believe that the
rate of portfolio turnover is irrelevant when they believe a change is in order
to achieve those objectives. As a result, a fund's annual portfolio turnover
rate cannot be anticipated and may be higher than other mutual funds with
similar investment objectives. Higher turnover would generate correspondingly
greater brokerage commissions, which is a cost the funds pay directly.
Portfolio turnover also may affect the character of capital gains realized and
distributed by the fund, if any, since short-term capital gains are taxable as
ordinary income. This disclosure regarding portfolio turnover is a statement of
fundamental policy and may be changed only by a vote of the shareholders.
Because the managers do not take portfolio turnover rate into account in
making investment decisions, (1) the managers have no intention of
18 American Century Investments
accomplishing any particular rate of portfolio turnover, whether high or low,
and (2) the portfolio turnover rates in the past should not be considered as
representative of the rates that will be attained in the future.
MANAGEMENT
THE BOARD OF DIRECTORS
The Board of Directors oversees the management of the funds and meets at
least quarterly to review reports about fund operations. Although the Board of
Directors does not manage the funds, it has hired the advisor to do so.
Two-thirds of the directors are independent of the funds' advisor, that is, they
are not employed by and have no financial interest in the advisor.
The individuals listed in the table below whose names are marked by an
asterisk (*) are interested persons of the funds (as defined in the Investment
Company Act) by virtue of, among other considerations, their affiliation with
either the advisor, American Century Investment Management, Inc. (ACIM); the
funds' agent for transfer and administrative services, American Century Services
Corporation (ACSC); the parent corporation of ACIM and ACSC, American Century
Companies, Inc. (ACC); ACC's subsidiaries; the funds' distribution agent and
co-administrator, Funds Distributor, Inc. (FDI); the funds or other funds
advised by the advisor. Each director listed below serves as a director of six
registered investment companies in the six investment companies served by this
board which are also advised by the advisor.
<TABLE>
Name (Age) Position(s) Held Principal Occupation(s)
Address With Fund During Past Five Years
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
James E. Stowers, Jr.* (75) Director, Chairman Chairman, Director and controlling shareholder,
4500 Main Street of the Board ACC, Chairman and Director, ACIM and ACIS
Kansas City, MO 64111 Father of James E. Stowers III
- --------------------------------------------------------------------------------------------------------
James E. Stowers III* (40) Director Director and Chief Executive Officer, ACC,
ACIM,
4500 Main Street ASCS and ACIS
Kansas City, MO 64111 Son of James E. Stowers, Jr.
- --------------------------------------------------------------------------------------------------------
Thomas A. Brown (59) Director Director of Plains States Development, Applied
4500 Main Street Industrial Technologies, Inc., a corporation engaged in
Kansas City, MO 64111 the sale of bearings and power transmission products
- --------------------------------------------------------------------------------------------------------
Robert W. Doering, M.D. (66) Director Retired, formerly a general surgeon
4500 Main Street
Kansas City, MO 64111
- --------------------------------------------------------------------------------------------------------
Andrea C. Hall, Ph.D. (54) Director Senior Vice President and Associate Director, Midwest
4500 Main Street Research Institute
Kansas City, MO 64111
- --------------------------------------------------------------------------------------------------------
D.D. (Del) Hock (64) Director Retired, formerly Chairman, Public Service Company of
4500 Main Street Colorado; Director, Service Tech, Inc., Hathaway
Kansas City, MO 64111 Corporation, and J.D. Edwards & Company
- --------------------------------------------------------------------------------------------------------
Donald H. Pratt (61) Director, Vice President and Director, Butler Manufacturing Company
4500 Main Street Chairman
Kansas City, MO 64111 of the Board
Statement of Additional Information 19
Name (Age) Position(s) Held Principal Occupation(s)
Address With Fund During Past Five Years
- ------------------------------------------------------------------------------------------------
Lloyd T. Silver, Jr. (71) Director President, LSC, Inc., manufacturer's representative
4500 Main Street
Kansas City, MO 64111
- ------------------------------------------------------------------------------------------------
M. Jeannine Strandjord (53) Director Senior Vice President, Finance, Sprint Corporation;
4500 Main Street Director, DST Systems, Inc.
Kansas City, MO 64111
COMMITTEES
The Board has four standing committees to oversee specific functions of the
funds' operations. Information about these committees appears in the table
below. The Director first named acts as chairman of the committee.
Committee Members Function of Committee
- ----------------------------------------------------------------------------------------------------------------
Executive James E. Stowers, Jr. The Executive Committee performs the functions of the Board of
James E. Stowers III Directors between Board meetings, subject to the limitations on its
Donald H. Pratt power set out in the Maryland General Corporation Law, and except for matters
required by the Investment Company Act to be acted upon by the whole Board.
- ----------------------------------------------------------------------------------------------------------------
Compliance Thomas A. Brown The Compliance Committee reviews the results of
Andrea C. Hall, Ph.D. the funds' compliance testing program, reviews quarterly
Donald H. Pratt reports from the advisor to the Board regarding various compliance
Lloyd T. Silver, Jr. matters and monitors the implementation of the funds' Code of Ethics,
Andrea C. Hall Ph.D. including any violations thereof.
- ----------------------------------------------------------------------------------------------------------------
Audit M. Jeannine Strandjord The Audit Committee recommends the engagement of
Robert W. Doering, M.D. the funds' independent auditors and oversees its activities.
D.D. (Del) Hock The Committee receives reports from the advisor's Internal Audit Department,
which is accountable to the Committee. The Committee also receives reporting
about compliance matters affecting the funds.
- ----------------------------------------------------------------------------------------------------------------
Nominating Donald H. Pratt The Nominating Committee primarily considers and recommends
D.D. (Del) Hock individuals for nomination as directors. The names of potential
James E. Stowers III director candidates are drawn from a numb of sources, including recommendations
from members of the Board, management and shareholders. This committee also
reviews and makes recommendations to the Board with respect to the composition
of Board committees and other Board-related matters, including its organization,
size, composition, responsibilities, functions and compensation.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
20 American Century Investments
COMPENSATION OF DIRECTORS
The directors also serve as directors for five American Century investment
companies other than American Century Strategic Asset Allocations, Inc. Each
director who is not an interested person as defined in the Investment Company
Act receives compensation for service as a member of the Board of all six such
companies based on a schedule that takes into account the number of meetings
attended and the assets of the funds for which the meetings are held. These fees
and expenses are divided among the six investment companies based, in part,
upon their relative net assets. Under the terms of the management agreement
with the advisor, the funds are responsible for paying such fees and expenses.
The table presented shows the aggregate compensation paid by the corporation
for the periods indicated and by the six investment companies served by this
Board to each director who is not an interested person as defined in the
Investment Company Act.
Aggregate Director Compensation for Fiscal Year Ended November 30, 1998
- -------------------------------------------------------------------------------
Total
Total Compensation
Compensation From The
From the American Century
Name of Director Funds (1) Family of Funds( (2))
- -------------------------------------------------------------------------------
Thomas A. Brown $654.00 $54,167.00
Robert W. Doering, M.D. $627.00 $52,167.00
Andrea C. Hall, Ph.D. $602.00 $52,167.00
D.D. (Del) Hock $592.00 $52,167.00
Donald H. Pratt $644.00 $54,167.00
Lloyd T. Silver, Jr. $593.00 $52,167.00
M. Jeannine Strandjord $619.00 $54,167.00
(1) Includes compensation paid to the directors during the fiscal year ended
November 30, 1998, and also includes amounts deferred at the election of the
directors under the American Century Mutual Funds Deferred Compensation Plan for
Non-Interested Directors and Trustees. The total amount of deferred compensation
included in the preceding table is as follows: Mr. Brown, $81.00; Ms. Hall, $
259.00; Mr. Hock, $75.00; Mr. Pratt, $179.00; Mr. Silver, $394.00 and Ms.
Strandjord, $510.00.
(2) Includes compensation paid by the six investment company members of the
American Century family of funds served by this Board.
The funds have adopted the American Century Deferred Compensation Plan for
Non-Interested Directors and Trustees. Under the plan, the independent directors
may defer receipt of all or any part of the fees to be paid to them for serving
as directors of the funds.
All deferred fees are credited to an account established in the name of the
directors. The amounts credited to the account then increase or decrease, as the
case may be, in accordance with the performance of one or more of the American
Century funds that are selected by the director. The account balance continues
to fluctuate in accordance with the performance of the selected fund or funds
until final payment of all amounts credited to the account. Directors are
allowed to change their designation of mutual funds from time to time.
No deferred fees are payable until such time as a director resigns, retires
or otherwise ceases to be a member of the Board of Directors. Directors may
receive deferred fee account balances either in a lump sum payment or in
substantially equal installment payments to be made over a period not to exceed
10 years. Upon the death of a director, all remaining deferred fee account
balances are paid to the director's beneficiary or, if none, to the director's
estate.
The plan is an unfunded plan and, accordingly, the funds have no obligation
to segregate assets to secure or fund the deferred fees. The rights of directors
to receive their deferred fee account balances are the same as the rights of a
general unsecured creditor of the funds. The plan may be terminated at any time
by the administrative committee of the plan. If terminated, all deferred fee
account balances will be paid in a lump sum.
No deferred fees were paid to any director under the plan during the fiscal
year ended November 30, 1998.
OFFICERS
Background information for the officers of the funds is provided in the
following table. All persons named as officers of the funds also serve in
similar capacities for the 12 other investment companies advised by American
Century. Not all officers of the funds are listed; only those officers with
policy-making functions for the funds are listed. No officer is compensated for
his or her service as an officer of the funds. The individuals listed in the
table below are
Statement of Additional Information 21
<TABLE>
Name (Age) Position(s) Held Principal Occupation(s)
Address With Fund During Past Five Years
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
George A. Rio (44) President Executive Vice President and Director
60 State Street of Client Services, FDI (March 1998 to
Suite 1300 present) Senior Vice President and Senior Key
Boston, MA 02109 Account Manager, Putnam Mutual Funds
(June 1995 to March 1998) Director Business Development,
First Data Corporation (May 1994 to June 1995) Senior
Vice President and Manager of Client Services and Director
of Internal Audit, The Boston Company, Inc. (September 1983
to May 1994)
- --------------------------------------------------------------------------------------------------
Christopher J. Kelley (34) Vice President Vice President and Associate General Counsel of FDI
60 State Street (since July 1996) Assistant Counsel. Forum Financial
Suite 1300 Group (April 1994 to July 1996) Compliance Officer, Putnam
Boston, MA 02109 Investments (1992 to April 1994).
- --------------------------------------------------------------------------------------------------
Mary A. Nelson (34) Vice President Vice President and Manager of Treasury
60 State Street Services and Administration, FDI (1994 to present)
Suite 1300 Assistant Vice President and Client Manager for
Boston, MA 02109 The Boston Company, Inc. (1989 to 1994).
- --------------------------------------------------------------------------------------------------
Maryanne Roepke, CPA (43) Vice President Senior Vice President, Treasurer an Principal
4500 Main Street and Treasurer Accounting Officer, ACSC
Kansas City, Mo 64111
- --------------------------------------------------------------------------------------------------
David C. Tucker (40) Vice President Senior Vice President and General Counsel,
4500 Main Street and Treasurer (ACSC and ACIM June 1998 to present) General
Kansas City, Mo 64111 Counsel, ACC (June 1998 to present) Consultant
(May 1997 to April 1998) Vice President and
General Counsel, Janus Companies (1990 to May 1997)
- ---------------------------------------------------------------------------------------------------
Paul J. Carrigan, Jr. (49) Secretary Secretary, ACC (December 1998 to present)
4500 Main Street Director of Legal Operations, ACSC
Kansas City, Mo 64111 (February 1996 to present) Board
Communications Manager, The Benham Company
(April 1994 to January 1996) Legal Coordinator, State
of California Health & Welfare Agency (February 1992 to
March 1994)
- --------------------------------------------------------------------------------------------------
Merele A. May (36) Controller Vice President, ACSC Controller-Fund
Accounting
4500 Main Street
Kansas City, Mo 64111
- --------------------------------------------------------------------------------------------------
Robert J. Leach (32) Controller Controller-Fund Accounting, ACSC
4500 Main Street
Kansas City, Mo 64111
- --------------------------------------------------------------------------------------------------
C. Jean Wade (35) Controller Controller-Fund Accounting, ACSC
4500 Main Street
Kansas City, Mo 64111
- --------------------------------------------------------------------------------------------------
Jon Zindel (32) Tax Officer Director of Taxation, ACSC (since 1996)
4500 Main Street Tax Manager, Price Waterhouse LLP (1989)
Kansas City, Mo 64111
- --------------------------------------------------------------------------------------------------
22 American Century Investments
THE FUNDS' PRINCIPAL SHAREHOLDERS
As of February 26, 1999, the following companies were the record owners of
more than 5% of a fund's outstanding shares:
Percentage
of Shares
Fund Shareholder Outstanding
- ---------------------------------------------------------------------------------------------
Strategic Allocation: Conservative American Century Investment Management, Inc. 10.5%
Kansas City, Missouri
- ---------------------------------------------------------------------------------------------
Strategic Allocation: Moderate The Chase Manhattan Bank NA Trustee
GEC-USA Employees Savings and
Investment Trust 8.3%
New York, New York
- ---------------------------------------------------------------------------------------------
Strategic Allocation: Aggressive The Chase Manhattan Bank NA Trustee
GEC-USA Employees Savings and
Investment Trust 10.6%
New York, New York
- ---------------------------------------------------------------------------------------------
The funds are unaware of any other shareholders, beneficial or of record, who
own more than 5% of a fund's outstanding shares. As of February 26, 1999, the
officers and directors of the funds, as a group, own less than 1% of any fund's
outstanding shares.
- ---------------------------------------------------------------------------------------------
</TABLE>
interested persons of the funds (as defined in the Investment
Company Act) by virtue of, among other considerations, their affiliation with
either the funds, ACC, ACC's subsidiaries (including ACIM and ACSC), or the
funds' distributor (FDI), as specified in the following table.
SERVICE PROVIDERS
The funds have no employees. To conduct the funds' day-to-day activities,
the funds have hired a number of service providers. Each service provider has a
specific function to fill on behalf of the funds and is described below.
ACIM and ACSC are both wholly owned by ACC. James E. Stowers Jr., Chairman
of ACC, controls ACC by virtue of his ownership of a majority of its voting
stock.
INVESTMENT ADVISOR
Each fund has an investment management agreement with the advisor, American
Century Investment Management, Inc. dated August 1, 1997. This agreement was
approved by the shareholders of each of the funds July 30, 1997. A description
of the responsibilities of the advisor appears in the Prospectus under the
heading "Management."
For the services provided to the funds, the advisor receives a monthly fee
based on a percentage of the average net assets of the fund.
For the services provided to the funds, the advisor receives a monthly fee
based on a percentage of the average net assets of the fund as follows:
Percentage of
Fund Class Net Assets
- --------------------------------------------------------------------------------
Strategic Allocation: Investor 1.00% of first $1 billion
Conservative .90% $1 billion and over
Advisor .75% of first $1 billion
.65% $1 billion and over
- --------------------------------------------------------------------------------
Strategic Allocation: Investor 1.10% of first $1 billion
Moderate 1.00% $1 billion and over
Advisor .85% of first $1 billion
.75% $1 billion and over
- --------------------------------------------------------------------------------
Strategic Allocation: Investor 1.20% of first $1 billion
Aggressive 1.10% $1 billion and over
Advisor .95% of first $1 billion
.85% $1 billion and over
On the first business day of each month, the funds pay a management fee to
the advisor for the previous month at the specified rate. The fee for the
previous month is calculated by multiplying the applicable fee
Statement of Additional Information 23
for the fund by the aggregate average daily closing value of a fund's net assets
during the previous month, by a fraction, the numerator of which is the number
of days in the previous month and the denominator of which is 365 (366 in leap
years).
The management agreement shall continue in effect until the earlier of the
expiration of two years from the date of its execution or until the first
meeting of shareholders following such execution and for as long thereafter as
its continuance is specifically approved at least annually by (1) the funds'
Board of Directors, or by the vote of a majority of outstanding votes (as
defined in the Investment Company Act) and (2) the vote of a majority of the
directors of the funds who are not parties to the agreement or interested
persons of the advisor, cast in person at a meeting called for the purpose of
voting on such approval.
The management agreement provides that it may be terminated at any time
without payment of any penalty by the funds' Board of Directors, or by a vote of
a majority of outstanding votes, on 60 days' written notice to the advisor, and
that it shall be automatically terminated if it is assigned.
The management agreement provides that the advisor shall not be liable to
the funds or their shareholders for anything other than willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations and duties.
The management agreement also provides that the advisor and its officers,
directors and employees may engage in other business, devote time and attention
to any other business whether of a similar or dissimilar nature, and render
services to others.
Certain investments may be appropriate for the funds and also for other
clients advised by the advisor. Investment decisions for the funds and other
clients are made with a view to achieving their respective investment objectives
after consideration of such factors as their current holdings, availability of
cash for investment and the size of their investment generally. A particular
security may be bought or sold for only one client or fund, or in different
amounts and at different times for more than one but less than all clients or
funds. In addition, purchases or sales of the same security may be made for two
or more clients or funds on the same date. Such transactions will be allocated
among clients in a manner believed by the advisor 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 a fund.
The advisor may aggregate purchase and sale orders of the funds with
purchase and sale orders of its other clients when the advisor believes that
such aggregation provides the best execution for the funds. The corporation's
Board of Directors has approved the policy of the advisor with respect to the
aggregation of portfolio transactions. Where portfolio transactions have been
aggregated, the funds participate at the average share price for all
transactions in that security on a given day and share transaction costs on a
pro rata basis. The advisor will not aggregate portfolio transactions of the
funds unless it believes such aggregation is consistent with its duty to seek
best execution on behalf of the funds and the terms of the management agreement.
The advisor receives no additional compensation or remuneration as a result of
such aggregation.
Unified management fees incurred by each fund by class for the fiscal
periods ended November 30, 1998, 1997 and 1996, are indicated in the following
table.
UNIFIED MANAGEMENT FEES
FUND 1998 1997 1996
- ---------------------------------------------------------------
Strategic Allocation:
Conservative
Investor $1,702,193 $762,315 $114,199
Advisor 42,903 30,490 4,575
- ---------------------------------------------------------------
Strategic Allocation:
Moderate
Investor $2,640,608 $1,498,878 $283,056
Advisor 1,112,851 66,449 9,815
- ---------------------------------------------------------------
Strategic Allocation:
Aggressive
Investor $1,579,928 $1,011,207 $209,001
Advisor 92,096 61,573 8,332
- ---------------------------------------------------------------
24 American Century Investments
OTHER ADVISOR RELATIONSHIPS
In addition to managing the funds, the advisor also acts as an investment
advisor to 9 institutional accounts and to the following registered investment
companies:
American Century Mutual Funds, Inc.
American Century World Mutual Funds, Inc.
American Century Premium Reserves, Inc.
American Century Variable Portfolios, Inc.
American Century Capital Portfolios, Inc.
American Century Municipal Trust
American Century Government Income Trust
American Century Investment Trust
American Century Target Maturities Trust
American Century Quantitative Equity Funds
American Century International Bond Funds
American Century California Tax-Free and Municipal Funds
TRANSFER AGENT AND ADMINISTRATOR
American Century Services Corporation, 4500 Main Street, Kansas City,
Missouri 64111, acts as transfer agent and dividend-paying agent for the funds.
It provides physical facilities, computer hardware and software and personnel,
for the day-to-day administration of the funds and of the advisor. The advisor
pays ACSC for such services.
From time to time, special services may be offered to shareholders who
maintain higher share balances in our family of funds. These services may
include the waiver of minimum investment requirements, expedited confirmation of
shareholder transactions, newsletters and a team of personal representatives.
Any expenses associated with these special services will be paid by the
advisor.
Pursuant to a Sub-Administration Agreement with the advisor, Funds
Distributor, Inc. (FDI) serves as the Co-Administrator for the funds. FDI is
responsible for (i) providing certain officers of the funds and (ii) reviewing
and filing marketing and sales literature on behalf of the funds. The fees and
expenses of FDI are paid by the advisor out of its unified fee.
DISTRIBUTOR
The funds' shares are distributed by FDI, a registered broker-dealer. The
distributor is a wholly owned indirect subsidiary of Boston Institutional Group,
Inc. The distributor's principal business address is 60 State Street, Suite
1300, Boston, Massachusetts 02109.
The distributor is the principal underwriter of the funds' shares. The
distributor makes a continuous, best efforts underwriting of the funds' shares.
This means that the distributor has no liability for unsold shares.
OTHER SERVICE PROVIDERS
CUSTODIAN BANKS
Chase Manhattan Bank, 770 Broadway, 10th Floor, New York, New York
10003-9598, and Commerce Bank, N.A., 1000 Walnut, Kansas City, Missouri 64105,
each serves as custodian of the assets of the funds. The custodians take no part
in determining the investment policies of the funds or in deciding which
securities are purchased or sold by the funds. The funds, however, may invest in
certain obligations of the custodians and may purchase or sell certain
securities from or to the custodians.
INDEPENDENT AUDITOR
Deloitte & Touche LLP is the independent auditor of the funds. The address
of Deloitte & Touche LLP is 1010 Grand Boulevard, Kansas City, Missouri 64106.
As the independent auditor of the funds, Deloitte & Touche provides services
including (1) audit of the annual financial statements for each fund, (2)
assistance and consultation in connection with SEC filings and (3) review of the
annual federal income tax return filed for each fund.
BROKERAGE ALLOCATION
THE EQUITY PORTION OF THE FUNDS
Under the management agreement between the funds and the advisor, the
advisor has the responsibility of selecting brokers and dealers to execute
portfolio transactions. The funds' policy is to secure the most favorable prices
and execution of orders on its portfolio transactions. So long as that policy is
met, the advisor may take into consideration the factors discussed below when
selecting brokers.
The advisor receives statistical and other information and services,
including research, without cost from brokers and dealers. The advisor evaluates
such information and services, together with all other information that it may
have, in supervising and managing the investments of the funds. Because such
STATEMENT OF ADDITIONAL INFORMATION 25
information and services may vary in amount, quality and reliability, their
influence in selecting brokers varies from none to very substantial. The
advisor proposes to continue to place some of the funds' brokerage business
with one or more brokers who provide information and services. Such information
and services will be in addition to and not in lieu of services required to be
performed by the advisor. The advisor does not utilize brokers that provide
such information and services for the purpose of reducing the expense of
providing required services to the funds.
In the years ended November 30, 1998, 1997 and 1996, the brokerage
commissions of each fund were as follows:
FUND 1998 1997 1996
- -------------------------------------------------------
Strategic Allocation: $198,409 $127,134 $22,060
Conservative
- -------------------------------------------------------
Strategic Allocation: 521,010 337,258 81,203
Moderate
- -------------------------------------------------------
Strategic Allocation: 359,809 254,195 74,216
Aggressive
- -------------------------------------------------------
The brokerage commissions paid by the funds may exceed those which another
broker might have charged for effecting the same transactions, because of the
value of the brokerage and research services provided by the broker. Research
services furnished by brokers through whom the funds effect securities
transactions may be used by the advisor in servicing all of its accounts, and
not all such services may be used by the advisor in managing the portfolios of
the funds.
The staff of the SEC has expressed the view that the best price and
execution of over-the-counter transactions in portfolio securities may be
secured by dealing directly with principal market makers, thereby avoiding the
payment of compensation to another broker. In certain situations, the officers
of the funds and the advisor believe that the facilities, expert personnel and
technological systems of a broker often enable the funds to secure as good a net
price by dealing with a broker instead of a principal market maker, even after
payment of the compensation to the broker. The funds regularly place its
over-the-counter transactions with principal market makers, but also may deal on
a brokerage basis when utilizing electronic trading networks or as circumstances
warrant.
THE FIXED-INCOME PORTION OF THE FUNDS
Under the management agreement between the funds and the advisor, the
advisor has the responsibility of selecting brokers and dealers to execute
portfolio transactions. In many transactions, the selection of the broker or
dealer is determined by the availability of the desired security and its
offering price. In other transactions, the selection of broker or dealer is a
function of the selection of market and the negotiation of price, as well as the
broker's general execution and operational and financial capabilities in the
type of transaction involved. The advisor will seek to obtain prompt execution
of orders at the most favorable prices or yields. The advisor may choose to
purchase and sell portfolio securities to and from dealers who provide services
or research, statistical and other information to the funds and to the advisor.
Such information or services will be in addition to and not in lieu of the
services required to be performed by the advisor, and the expenses of the
advisor will not necessarily be reduced as a result of the receipt of such
supplemental information.
INFORMATION ABOUT FUND SHARES
Each of the three funds named on the front of this Statement of Additional
Information is a series of shares issued by American Century Strategic Asset
Allocations, Inc. In addition, each series (or fund) may be divided into
separate classes. See "Multiple Class Structure" that follows. Additional funds
and classes may be added without a shareholder vote.
Each fund votes separately on matters affecting that fund exclusively.
Voting rights are not cumulative, so that investors holding more than 50% of the
corporation's (i.e., all funds') outstanding shares may be able to elect a Board
of Directors. The corporation understates dollar-based voting, meaning that the
number of votes you are entitled to is based upon the dollar amount of your
investment. The election of directors is determined by the votes received from
all of the corporation's shareholders without regard to whether a majority of
shares of any one fund voted in favor of a particular nominee or all nominees as
a group.
26 American Century Investments
The assets belonging to each series or class of shares are held separately
by the custodian and the shares of each series or class represent a beneficial
interest in the principal, earnings and profit (or losses) of investment and
other assets held for each series or class. Your rights as a shareholder are the
same for all series or class of securities unless otherwise stated. Within their
respective series or class, all shares have equal redemption rights. Each share,
when issued, is fully paid and non-assessable.
In the event of complete liquidation or dissolution of the funds,
shareholders of each series or class of shares shall be entitled to receive, pro
rata, all of the assets less the liabilities of that series or class.
Each shareholder has rights to dividends and distributions declared by the
fund he or she owns and to the net assets of such fund upon its liquidation or
dissolution proportionate to his or her share ownership interest in the fund.
Shares of each fund have equal voting rights, although each fund votes
separately on matters affecting that fund exclusively.
MULTIPLE CLASS STRUCTURE
The funds' Board of Directors has adopted a multiple class plan (the
Multiclass Plan) pursuant to Rule 18f-3 adopted by the SEC. Pursuant to such
plan, the funds may issue up to four classes of shares: an Investor Class, an
Institutional Class, a Service Class and an Advisor Class. Not all funds offer
all four classes.
The Investor Class is made available to investors directly without any load
or commission, for a single unified management fee. The Institutional, Service
and Advisor Classes are made available to institutional shareholders or through
financial intermediaries that do not require the same level of shareholder and
administrative services from the advisor as Investor Class shareholders. As a
result, the advisor is able to charge these classes a lower management fee. In
addition to the management fee, however, the Advisor Class shares are subject to
a Master Distribution and Shareholder Services Plan (described on this page).
The plan has been adopted by the funds' Board of Directors and initial
shareholder in accordance with Rule 12b-1 adopted by the SEC under the
Investment Company Act.
RULE 12B-1
Rule 12b-1 permits an investment company to pay expenses associated with the
distribution of its shares in accordance with a plan adopted by the investment
company's Board of Directors and approved by its shareholders. Pursuant to such
rule, the Board of Directors and initial shareholder of the funds' Advisor Class
have approved and entered into a Master Distribution and Shareholder Services
Plan. The Plan is described below.
In adopting the Plan, the Board of Directors (including a majority of
directors who are not "interested persons" of the funds [as defined in the
Investment Company Act], hereafter referred to as the independent directors)
determined that there was a reasonable likelihood that the Plan would benefit
the funds and the shareholders of the affected class. Pursuant to Rule 12b-1,
information with respect to revenues and expenses under the Plan is presented to
the Board of Directors quarterly for its consideration in connection with its
deliberations as to the continuance of the Plan. Continuance of the Plan must be
approved by the Board of Directors (including a majority of the independent
directors) annually. The Plan may be amended by a vote of the Board of Directors
(including a majority of the independent directors), except that the Plan may
not be amended to materially increase the amount to be spent for distribution
without majority approval of the shareholders of the affected class. The Plan
terminates automatically in the event of an assignment and may be terminated
upon a vote of a majority of the independent directors or by vote of a majority
of the outstanding voting securities of the affected class.
All fees paid under the Plan will be made in accordance with Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers.
MASTER DISTRIBUTION AND SHAREHOLDER SERVICES PLAN
As described in the Prospectus, the funds' Advisor Class of shares are also
made available to participants in employer-sponsored retirement or savings plans
and to persons purchasing through financial intermediaries such as banks,
broker-dealers and insurance companies. The funds' distributor enters into
con-
Statement of Additional Information 27
tracts with various banks, broker-dealers, insurance companies and other
financial intermediaries, with respect to the sale of the funds' shares and/or
the use of the funds' shares in various investment products or in connection
with various financial services.
Certain recordkeeping and administrative services that are provided by the
funds' transfer agent for the Investor Class shareholders may be performed by
a plan sponsor (or its agents) or by a financial intermediary for shareholders
in the Advisor Class. In addition to such services, the financial
intermediaries provide various distribution services.
To enable the funds' shares to be made available through such plans and
financial intermediaries, and to compensate them for such services, the funds'
advisor has reduced its management fee by 0.25% per annum with respect to the
Advisor Class shares and the funds' Board of Directors has adopted a Master
Distribution and Shareholder Services Plan (the Distribution Plan). Pursuant to
such Plan, the Advisor Class shares pay a fee of 0.50% annually of the
aggregate average daily assets of the funds' Advisor Class shares, 0.25% of
which is paid for Shareholder Services (as described below) and 0.25% of which
is paid for distribution services.
Payments may be made for a variety of shareholder services, including, but
are not limited to, (a) receiving, aggregating and processing purchase, exchange
and redemption requests from beneficial owners (including contract owners of
insurance products that utilize the funds as underlying investment media) of
shares and placing purchase, exchange and redemption orders with the funds'
distributor; (b) providing shareholders with a service that invests the assets
of their accounts in shares pursuant to specific or pre-authorized instructions;
(c) processing dividend payments from a fund on behalf of shareholders and
assisting shareholders in changing dividend options, account designations and
addresses; (d) providing and maintaining elective services such as check writing
and wire transfer services; (e) acting as shareholder of record and nominee for
beneficial owners; (f) maintaining account records for shareholders and/or other
beneficial owners; (g) issuing confirmations of transactions; (h) providing
subaccounting with respect to shares beneficially owned by customers of third
parties or providing the information to a fund as necessary for such
subaccounting; (i) preparing and forwarding shareholder communications from the
funds (such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to shareholders and/or
other beneficial owners; and (j) providing other similar administrative and
sub-transfer agency services. Shareholder services do not include those
activities and expenses that are primarily intended to result in the sale of
additional shares of the funds.
Distribution services include any activity undertaken or expense incurred
that is primarily intended to result in the sale of Advisor Class shares, which
services may include but are not limited to, (a) the payment of sales
commissions, on-going commissions and other payments to brokers, dealers,
financial institutions or others who sell Advisor Class shares pursuant to
Selling Agreements; (b) compensation to registered representatives or other
employees of distributor who engage in or support distribution of the funds'
Advisor Class shares; (c) compensation to, and expenses (including overhead and
telephone expenses) of, distributor; (d) the printing of prospectuses,
statements of additional information and reports for other than existing
shareholders; (e) the preparation, printing and distribution of sales literature
and advertising materials provided to the funds' shareholders and prospective
shareholders; (f) receiving and answering correspondence from prospective
shareholders, including distributing prospectuses, statements of additional
information, and shareholder reports; (g) the providing of facilities to answer
questions from prospective investors about fund shares; (h) complying with
federal and state securities laws pertaining to the sale of fund shares; (i)
assisting investors in completing application forms and selecting dividend and
other account options; (j) the providing of other reasonable assistance in
connection with the distribution of fund shares; (k) the organizing and
conducting of sales seminars and payments in the form of transactional and
compensation or promotional incentives; (l) profit on the foregoing; (m) the
payment of "service fees" for the provision of personal, continuing services to
investors, as contemplated by the Rules of Fair
28 AMERICAN CENTURY INVESTMENTS
Practice of the NASD and (n) such other distribution and services activities as
the advisor determines may be paid for by the funds pursuant to the terms of
this Agreement and in accordance with Rule 12b-1 of the Investment Company Act.
BUYING AND SELLING FUND SHARES
Information about buying, selling and exchanging fund shares is contained in
the American Century Investor Services Guide. The guide is available to
investors without charge and may be obtained by calling us.
VALUATION OF THE FUNDS' SECURITIES
Each fund's net asset value per share (NAV), is calculated as of the close
of business of the New York Stock Exchange (the Exchange), usually at 4 p.m.
Eastern time each day the Exchange is open for business. The Exchange has
designated the following holiday closings for 1999: New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. Although the funds expect
the same holiday schedule to be observed in the future, the Exchange may modify
its holiday schedule at any time.
Each fund's NAV is calculated by adding the value of all portfolio
securities and other assets, deducting liabilities and dividing the result by
the number of shares outstanding. Expenses and interest earned on portfolio
securities are accrued daily.
The portfolio securities of the fund, except as otherwise noted, listed or
traded on a domestic securities exchange are valued at the last sale price on
that exchange. Portfolio securities primarily traded on foreign securities
exchanges are generally valued at the preceding closing values of such
securities on the exchange where primarily traded. If no sale is reported, or if
local convention or regulation so provides, the mean of the latest bid and asked
prices is used. Depending on local convention or regulation, securities traded
over-the-counter are priced at the mean of the latest bid and asked prices, or
at the last sale price. When market quotations are not readily available,
securities and other assets are valued at fair value as determined in accordance
with procedures adopted by the Board of Directors.
Debt securities not traded on a principal securities exchange are valued
through valuations obtained from a commercial pricing service or at the most
recent mean of the bid and asked prices provided by investment dealers in
accordance with procedures established by the Board of Directors.
The value of an exchange-traded 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 the close of business on the New York Stock Exchange, if that
is earlier. That value is then translated to dollars at the prevailing foreign
exchange rate.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed at various times before the close
of business on each day that the New York Stock Exchange is open. If an event
were to occur after the value of a security was established but before the net
asset value per share was determined that was likely to materially change the
net asset value, then that security would be valued at fair value as determined
in accordance with procedures adopted by the Board of Directors.
Trading of these securities in foreign markets may not take place on every
New York Stock Exchange business day. In addition, trading may take place in
various foreign markets on Saturdays or on other days when the New York Stock
Exchange is not open and on which the fund's net asset value is not calculated.
Therefore, such calculation does not take place contemporaneously with the
determination of the prices of many of the portfolio securities used in such
calculation and the value of the fund's portfolio may be affected on days when
shares of the fund may not be purchased or redeemed.
TAXES
FEDERAL INCOME TAXES
Each fund intends to qualify annually as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code).
By so qualifying, a fund will be exempt from federal income taxes to the extent
that it distributes substantially all of its net investment income and net
realized capital gains (if any) to shareholders. If a fund fails to qualify as a
regulated investment company, it will be liable for taxes, significantly
reducing its distri-
Statement of Additional Information 29
butions to shareholders and eliminating shareholders' ability to treat
distributions of the funds in the manner they were realized by the funds.
If fund shares are purchased through taxable accounts, distributions of net
investment income and net short-term capital gains are taxable to you as
ordinary income. The dividends from net income may qualify for the 70% dividends
received deduction for corporations to the extent that the fund held shares
receiving the dividend for more than 45 days.
Distributions from gains on assets held greater than 12 months are taxable
as long-term gains regardless of the length of time you have held the shares.
However, you should note that any loss realized upon the sale or redemption of
shares held for six months or less will be treated as a long-term capital loss
to the extent of any distributions of long-term capital gain to you with respect
to such shares.
Dividends and interest received by a fund on foreign securities may give
rise to withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. Foreign countries generally do not impose taxes on capital
gains in respect to investments by non-resident investors. The foreign taxes
paid by a fund will reduce its dividends.
If more than 50% of the value of a fund's total assets at the end of each
quarter of its fiscal year consists of securities of foreign corporations, the
fund may qualify for and make an election with the Internal Revenue Service with
respect to such fiscal year so that fund shareholders may be able to claim a
foreign tax credit in lieu of a deduction for foreign income taxes paid by the
fund. If such an election is made, the foreign taxes paid by the fund will be
treated as income received by you. In order for the shareholder to utilize the
foreign tax credit, the mutual fund shares must have been held for 16 days or
more during the 30-day period, beginning 15 days prior to the ex-dividend date
for the mutual fund shares. The mutual fund must meet a similar holding period
requirement with respect to foreign securities to which a dividend is
attributable. Any portion of the foreign tax credit that is ineligible as a
result of the fund not meeting the holding period requirement will be separately
disclosed and may be eligible as an itemized deduction.
If a fund purchases the securities of certain foreign investment funds or
trusts called passive foreign investment companies (PFIC), capital gains on the
sale of such holdings will be deemed to be ordinary income regardless of how
long the fund holds its investment. The fund also may be subject to corporate
income tax and an interest charge on certain dividends and capital gains earned
from these investments, regardless of whether such income and gains are
distributed to shareholders. In the alternative, the fund may elect to recognize
cumulative gains on such investments as of the last day of its fiscal year and
distribute it to shareholders. Any distribution attributable to a PFIC is
characterized as ordinary income.
If you have not complied with certain provisions of the Internal Revenue
Code and Regulations, either American Century or your financial intermediary is
required by federal law to withhold and remit to the IRS 31% of reportable
payments (which may include dividends, capital gains distributions and
redemptions). Those regulations require you to certify that the Social Security
number or tax identification number you provide is correct and that you are not
subject to 31% withholding for previous under-reporting to the IRS. You will be
asked to make the appropriate certification on your application. Payments
reported by us that omit your Social Security number or tax identification
number will subject us to a penalty of $50, which will be charged against your
account if you fail to provide the certification by the time the report is
filed, and is not refundable.
Redemption of shares of a fund (including redemption made in an exchange
transaction) will be a taxable transaction for federal income tax purposes and
shareholders will generally recognize gain or loss in an amount equal to the
difference between the basis of the shares and the amount received. If a loss
is realized on the redemption of fund shares, the reinvestment in additional
fund shares within 30 days before or after the redemption may be subject to the
"wash sale" rules of the Code, resulting in a postponement of the recognition of
such loss for federal income tax purposes.
STATE AND LOCAL TAXES
Distributions also may be subject to state and local taxes, even if all or a
substantial part of such distributions are derived from interest on U.S.
government
30 American Century Investments
obligations which, if you received them directly, would be exempt
from state income tax. However, most but not all states allow this tax exemption
to pass through to fund shareholders when a fund pays distributions to its
shareholders. You should consult your tax advisor about the tax status of such
distributions in your own state.
HOW FUND PERFORMANCE INFORMATION IS CALCULATED
The funds may quote performance in various ways. Fund performance may be
shown by presenting one or more performance measurements, including cumulative
total return, average annual total return or yield.
All performance information advertised by the funds is historical in nature
and is not intended to represent or guarantee future results. The value of fund
shares when redeemed may be more or less than their original cost.
Total returns quoted in advertising and sales literature reflect all aspects
of a fund's return, including the effect of reinvesting dividends and capital
gain distributions (if any) and any change in the fund's NAV during the period.
Average annual total returns are calculated by determining the growth or
decline in value of a hypothetical historical investment in a fund during a
stated period and then calculating the annually compounded percentage rate that
would have produced the same result if the rate of growth or decline in value
had been constant throughout the period. For example, a cumulative total return
of 100% over 10 years would produce an average annual return of 7.18%, which is
the steady annual rate that would equal 100% growth on a compounded basis in 10
years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that the funds' performance is
not constant over time, but changes from year-to-year, and that average annual
total returns represent averaged figures as opposed to actual year-to-year
performance.
The following tables set forth the average annual total return for the
various classes of the funds for the one-year period and the period since
inception ended November 30, 1998, the last day of the funds' fiscal year.
AVERAGE ANNUAL TOTAL RETURNS-INVESTOR CLASS
FUND 1 YEAR FROM INCEPTION
- --------------------------------------------------------------------------------
Strategic Allocation: 9.43% 9.81%
Conservative( (1))
Strategic Allocation: 10.32% 11.96%
Moderate( (1))
Strategic Allocation: 9.93% 12.36%
Aggressive( (1)
(1) Commenced operations on February 15, 1996.
AVERAGE ANNUAL TOTAL RETURNS-ADVISOR CLASS
FUND 1 YEAR FROM INCEPTION
- --------------------------------------------------------------------------------
Strategic Allocation: 9.06% 10.81%
Conservative( (1))
Strategic Allocation: 10.07% 12.23%
Moderate( (1))
Strategic Allocation: 9.66% 12.14%
Aggressive( (1)
(1) Commenced operations on October 2, 1996.
In addition to average annual total returns, each fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period, including periods other than one, five and 10
years. Average annual and cumulative total returns may be quoted as percentages
or as dollar amounts and may be calculated for a single investment, a series of
investments, or a series of redemptions over any time period. Total returns may
be broken down into their components of income and capital (including capital
gains and changes in share price) to illustrate the relationship of these
factors and their contributions to total return.
Statement of Additional Information 31
PERFORMANCE COMPARISONS
The funds' performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indices of market
performance. This may include comparisons with funds that, unlike the American
Century funds, are sold with a sales charge or deferred sales charge. Sources of
economic data that may be used for such comparisons may include, but are not
limited to, U.S. Treasury bill, note and bond yields, money market fund yields,
U.S. government debt and percentage held by foreigners, the U.S. money supply,
net free reserves, and yields on current-coupon GNMAs (source: Board of
Governors of the Federal Reserve System); the federal funds and discount rates
(source: Federal Reserve Bank of New York); yield curves for U.S. Treasury
securities and AA/AAA-rated corporate securities (source: Bloomberg Financial
Markets); yield curves for AAA-rated tax-free municipal securities (source:
Telerate); yield curves for foreign government securities (sources: Bloomberg
Financial Markets and Data Resources, Inc.); total returns on foreign bonds
(source: J.P. Morgan Securities Inc.); various U.S. and foreign government
reports; the junk bond market (source: Data Resources, Inc.); the CRB Futures
Index (source: Commodity Index Report); the price of gold (sources: London
a.m./p.m. fixing and New York Comex Spot Price); rankings of any mutual fund or
mutual fund category tracked by Lipper Inc. or Morningstar, Inc.; mutual fund
rankings published in major, nationally distributed periodicals; data provided
by the Investment Company Institute; Ibbotson Associates, Stocks, Bonds, Bills,
and Inflation; major indices of stock market performance; and indices and
historical data supplied by major securities brokerage or investment advisory
firms. The funds also may utilize reprints from newspapers and magazines
furnished by third parties to illustrate historical performance or to provide
general information about the funds.
PERMISSIBLE ADVERTISING INFORMATION
From time to time, the funds may, in addition to any other permissible
information, include the following types of information in advertisements,
supplemental sales literature and reports to shareholders: (1) discussions of
general economic or financial principles (such as the effects of compounding
and the benefits of dollar-cost averaging); (2) discussions of general economic
trends; (3) presentations of statistical data to supplement such discussions;
(4) descriptions of past or anticipated portfolio holdings for one or more of
the funds; (5) descriptions of investment strategies for one or more of the
funds; (6) descriptions or comparisons of various savings and investment
products (including, but not limited to, qualified retirement plans and
individual stocks and bonds), which may or may not include the funds; (7)
comparisons of investment products (including the funds) with relevant market or
industry indices or other appropriate benchmarks; (8) discussions of fund
rankings or ratings by recognized rating organizations; and (9) testimonials
describing the experience of persons that have invested in one or more of the
funds. The funds also may include calculations, such as hypothetical compounding
examples, which describe hypothetical investment results in such
communications. Such performance examples will be based on an express set of
assumptions and are not indicative of the performance of any of the funds.
MULTIPLE CLASS PERFORMANCE ADVERTISING
Pursuant to the Multiple Class Plan, the funds may issue additional classes
of existing funds or introduce new funds with multiple classes available for
purchase. To the extent a new class is added to an existing fund, the advisor
may, in compliance with SEC and NASD rules, regulations and guidelines, market
the new class of shares using the historical performance information of the
original class of shares. When quoting performance information for the new class
of shares for periods prior to the first full quarter after inception, the
original class' performance will be restated to reflect the expenses of the new
class and for periods after the first full quarter after inception, actual
performance of the new class will be used.
32 American Century Investments
FINANCIAL STATEMENTS
The financial statements of the funds are included in the Annual Reports to
shareholders for the fiscal year ended November 30, 1998. The Annual Report is
incorporated herein by reference. You may receive copies of the reports without
charge upon request to American Century at the address and telephone number
shown on the back cover of this Statement of Additional Information.
EXPLANATION OF FIXED INCOME SECURITIES RATINGS
As described in the Prospectus, the funds may invest in fixed income
securities. Those investments, however, are subject to certain credit quality
restrictions, as noted in the Prospectus. The following is a summary of the
rating categories referenced in the Prospectus disclosure.
<TABLE>
BOND RATINGS
S&P Moody's Description
- -------------------------------------------------------------------------------------------
<S> <C> <C>
AAA Aaa These are the highest ratings assigned by S&P and Moody's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
- -------------------------------------------------------------------------------------------
AA Aa Debt rated in this category is considered to have a very strong
capacity to pay interest and repay principal and
differs from AAA/Aaa issues only in a small degree.
- -------------------------------------------------------------------------------------------
A A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
- -------------------------------------------------------------------------------------------
BBB Baa Debt rated BBB/Baa is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits 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
debt in this category than in higher-rated categories.
- -------------------------------------------------------------------------------------------
BB Ba Debt rated BB/Ba has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions that could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category also is used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
- -------------------------------------------------------------------------------------------
B B Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB/Ba or BB-/Ba3 rating.
- -------------------------------------------------------------------------------------------
CCC Caa Debt rated CCC/Caa has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC/Caa rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied B or B-/B3 rating.
- -------------------------------------------------------------------------------------------
CC Ca The rating CC/Ca typically is applied to debt subordinated to senior
debt that is assigned an actual or implied CCC/Caa rating.
Statement of Additional Information 33
BOND RATINGS
S&P Moody's Description
- -------------------------------------------------------------------------------------------
C C The rating C typically is applied to debt subordinated to senior
debt, which is assigned an actual or implied
CCC/Caa3 debt rating. The C rating may be used to cover a situation where a
bankruptcy petition has been filed, but debt service payments are continued.
- -------------------------------------------------------------------------------------------
CI - The rating CI is reserved for income bonds on which no interest is
being paid.
- -------------------------------------------------------------------------------------------
D D Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
To provide more detailed indications of credit quality, the Standard & Poor's
ratings from AA to CCC may be modified by the addition of a plus or minus sign
to show relative standing within these major rating categories. Similarly,
Moody's adds numerical modifiers (1,2,3) to designate relative standing within
its major bond rating categories. Fitch Investors Service, Inc. also rates bonds
and uses a ratings system that is substantially similar to that used by Standard
& Poor's.
COMMERCIAL PAPER RATINGS
S&P Moody's Description
- --------------------------------------------------------------------------------
A-1 Prime-1 This indicates that the degree of safety
regarding timely payment is strong.
(P-1) Standard & Poor's rates those issues determined
to possess extremely strong safety characteristics
as A-1+.
- --------------------------------------------------------------------------------
A-2 Prime-2 Capacity for timely payment on commercial paper
is satisfactory, but the relative
(P-2) degree of safety is not as high as for issues
designated A-1. Earnings trends and coverage ratios,
while sound, will be more subject to variation.
Capitalization characteristics, while still
appropriated, may be more affected by external
conditions. Ample alternate liquidity is maintained.
- --------------------------------------------------------------------------------
A-3 Prime-3 Satisfactory capacity for timely repayment.
Issues that carry this rating
(P-3) are somewhat more vulnerable to the adverse
changes in circumstances
than obligations carrying the higher designations.
- --------------------------------------------------------------------------------
NOTE RATINGS
S&P Moody's Description
- --------------------------------------------------------------------------------
SP-1 MIG-1; VMIG-1 Notes are of the highest quality enjoying strong
protection from established cash flows of funds
for their servicing or from established and
broad-based access to the market for refinancing,
or both.
- --------------------------------------------------------------------------------
SP-2 MIG-2; VMIG-2 Notes are of high quality, with margins of
protection ample, although not so large as in
the preceding group.
- --------------------------------------------------------------------------------
SP-3 MIG-3; VMIG-3 Notes are of favorable quality, with all
security elements accounted for, but lacking the
undeniable strength of the preceding grades.
Market access for refinancing, in particular,
is likely to be less well
established.
- --------------------------------------------------------------------------------
SP-4 MIG-4; VMIG-4 Notes are of adequate quality, carrying specific
risk but having protection and not distinctly
or predominantly speculative.
</TABLE>
34 American Century Investments
MORE INFORMATION ABOUT THE FUNDS IS CONTAINED IN THESE DOCUMENTS
ANNUAL AND SEMIANNUAL REPORTS
These contain more information about the funds' investments and the market
conditions and investment strategies that significantly affected the funds'
performance during the most recent fiscal period. The annual and semiannual
reports are incorporated by reference into this SAI. This means that these are
legally part of this SAI.
You can receive a free copy of the annual and semiannual reports, and ask any
questions about the funds, by contacting us at one of the addresses or telephone
numbers listed below.
If you own or are considering purchasing fund shares through
* an employer-sponsored retirement plan
* a bank
* a broker-dealer
* an insurance company
* another financial intermediary
you can receive the annual and semiannual reports directly from them.
You also can get information about the funds from the Security and Exchange
Commission (SEC).
* In person SEC Public Reference Room
Washington, D.C.
Call 1-800-SEC-0330 for location and hours.
* On the Internet www.sec.gov
* By mail SEC Public Reference Section
Washington, D.C. 20549-6009
(The SEC will charge a fee for copying the
documents.)
Investment Company Act File No. 811-8532
[american century logo(reg.sm)]
American
Century
AMERICAN CENTURY INVESTMENTS
P.O. Box 419200
Kansas City, Missouri 64141-6200
INVESTOR RELATIONS
1-800-345-2021 or 816-531-5575
AUTOMATED INFORMATION LINE
1-800-345-8765
WWW.AMERICANCENTURY.COM
FAX 816-340-7962
TELECOMMUNICATIONS DEVICE FOR THE DEAF
1-800-634-4113 or 816-444-3485
BUSINESS; NOT-FOR-PROFIT AND
EMPLOYER-SPONSORED RETIREMENT PLANS
1-800-345-353
SH-SAI-18727 9910
