<PAGE>
PROSPECTUS DATED FEBRUARY 28, 1995
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
(212) 392-2550 OR (800) 526-3143
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES (the "Fund") is an open-end
diversified investment company which is intended to provide a broad range of
investment alternatives with its twelve separate Portfolios, each of which has
distinct investment objectives and policies.
- THE MONEY MARKET PORTFOLIO
- THE NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO
- THE DIVERSIFIED INCOME PORTFOLIO
- THE BALANCED PORTFOLIO
- THE UTILITIES PORTFOLIO
- THE DIVIDEND GROWTH PORTFOLIO
- THE VALUE-ADDED MARKET PORTFOLIO
- THE CORE EQUITY PORTFOLIO
- THE AMERICAN VALUE PORTFOLIO
- THE GLOBAL EQUITY PORTFOLIO
- THE DEVELOPING GROWTH PORTFOLIO
- THE EMERGING MARKETS PORTFOLIO
There can be no assurance that the investment objectives of the Portfolios will
be achieved. SEE "Prospectus Summary" and "Investment Objectives and Policies."
AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THE EMERGING MARKETS PORTFOLIO MAY INVEST UP TO 35% OF ITS TOTAL ASSETS IN HIGH
RISK DEBT SECURITIES WHICH ARE UNRATED OR RATED BELOW INVESTMENT GRADE (SUCH
SECURITIES ARE COMMONLY KNOWN AS "JUNK BONDS"). IN ADDITION, INVESTORS IN THE
EMERGING MARKETS PORTFOLIO SHOULD BE COGNIZANT OF THE FACT THAT INVESTMENTS IN
EMERGING MARKET COUNTRIES INVOLVE CERTAIN SPECIAL RISK FACTORS AND THEREFORE MAY
NOT BE SUITABLE FOR ALL INVESTORS.
SHARES OF THE PORTFOLIOS OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY.
Currently, shares of the Fund will be sold only to (1) Hartford Life Insurance
Company to fund the benefits under certain flexible premium deferred variable
annuity contracts it issues, and to (2) ITT Hartford Life and Annuity Insurance
Company to fund the benefits under certain flexible premium deferred variable
annuity contracts it issues. The variable annuity contracts issued by Hartford
Life Insurance Company and ITT Hartford Life and Annuity Insurance Company (the
"Companies") are sometimes referred to as the "Variable Annuity Contracts" or
the "Contracts." In the future, shares may be sold to affiliated or
non-affiliated entities of the Companies. The Companies will invest in shares of
the Fund in accordance with allocation instructions received from Contract
Owners, which allocation rights are further described in the Prospectus for the
Variable Annuity Contracts. The Companies will redeem shares to the extent
necessary to provide benefits under the Contracts.
This Prospectus sets forth concisely the information you should know before
allocating your investment under your Contract to the Fund. It should be read
and retained for future reference. Additional information about the Fund is
contained in the Statement of Additional Information, dated February 28, 1995,
which has been filed with the Securities and Exchange Commission, and which is
available at no charge upon request of the Fund at the address or telephone
numbers listed on this page. The Statement of Additional Information is
incorporated herein by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
DEAN WITTER INTERCAPITAL INC. -- Investment Manager
This Prospectus must be accompanied by a current Prospectus for the Variable
Annuity Contracts issued by Hartford Life Insurance Company or ITT Hartford Life
and Annuity Insurance Company. Both Prospectuses should be read and retained for
future reference.
<PAGE>
TABLE OF CONTENTS
------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
- ------------------------------------------------
Prospectus Summary 3
- ------------------------------------------------
Financial Highlights 8
- ------------------------------------------------
The Fund and its Management 10
- ------------------------------------------------
Investment Objectives and Policies 11
- ------------------------------------------------
The Money Market Portfolio 11
- ------------------------------------------------
The North American Government
Securities Portfolio 12
- ------------------------------------------------
The Diversified Income Portfolio 15
- ------------------------------------------------
The Balanced Portfolio 17
- ------------------------------------------------
The Utilities Portfolio 18
- ------------------------------------------------
The Dividend Growth Portfolio 20
- ------------------------------------------------
The Value-Added Market Portfolio 20
- ------------------------------------------------
The Core Equity Portfolio 21
- ------------------------------------------------
The American Value Portfolio 22
- ------------------------------------------------
The Global Equity Portfolio 23
- ------------------------------------------------
The Developing Growth Portfolio 24
- ------------------------------------------------
The Emerging Markets Portfolio 25
- ------------------------------------------------
General Portfolio Techniques 28
- ------------------------------------------------
Investment Restrictions 42
- ------------------------------------------------
Determination of Net Asset Value 43
- ------------------------------------------------
Purchase of Fund Shares 44
- ------------------------------------------------
Redemption of Fund Shares 44
- ------------------------------------------------
Dividends, Distributions and Taxes 45
- ------------------------------------------------
Performance Information 46
- ------------------------------------------------
Additional Information 46
- ------------------------------------------------
Report of Independent Accountants 47
- ------------------------------------------------
Financial Statements--December 31,
1994 48
- ------------------------------------------------
Appendix--Ratings of Investments 73
- ------------------------------------------------
</TABLE>
2 - PROSPECTUS
<PAGE>
PROSPECTUS SUMMARY
------------------------------------------------------------
<TABLE>
<S> <C>
THE The Fund is organized as a Massachusetts business trust and is an open-end
FUND diversified management investment company. The Fund is comprised of twelve
separate portfolios: the MONEY MARKET PORTFOLIO, the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the
BALANCED PORTFOLIO, the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO,
the VALUE-ADDED MARKET PORTFOLIO, the CORE EQUITY PORTFOLIO, the AMERICAN
VALUE PORTFOLIO, the GLOBAL EQUITY PORTFOLIO, the DEVELOPING GROWTH
PORTFOLIO and the EMERGING MARKETS PORTFOLIO (see pages 11 through 28 ).
The Trustees of the Fund may establish additional Portfolios at any time.
To the extent that shares are sold to the Companies in order to fund the
benefits under Contracts, the structure of the Fund permits Contract
Owners, within the limitations described in the Contracts, to allocate the
investments underlying the Contracts in response to or in anticipation of
changes in market or economic conditions. See the Prospectus for the
Variable Annuity Contracts for a description of the relationship between
increases or decreases in the net asset value of Fund shares and any
distributions on such shares, and benefits provided under a Contract.
Each Portfolio is managed for investment purposes as if it were a separate
fund issuing a separate class of shares of beneficial interest, with $.01
par value. The assets of each Portfolio are segregated, so that an interest
in the Fund is limited to the assets of the Portfolio in which shares are
held and shareholders, such as the Companies, are each entitled to a pro
rata share of all dividends and distributions arising from the net
investment income and capital gains, if any, of such Portfolio (see pages
45 and 46).
- ----------------------------------------------------------------------------------------------
INVESTMENT Each Portfolio has distinct investment objectives and policies, and is
OBJECTIVES AND subject to various investment restrictions, some of which apply to all the
POLICIES Portfolios. The MONEY MARKET PORTFOLIO seeks high current income,
preservation of capital and liquidity by investing in the following money
market instruments: U.S. Government securities, obligations of U.S.
regulated banks and savings institutions having total assets of more than
$1 billion, or less than $1 billion if such are fully federally insured as
to principal (the interest may not be insured), and high grade corporate
debt obligations maturing in thirteen months or less (see pages 11-12 ).
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO seeks to earn a high
level of current income while maintaining relatively low volatility of
principal, by investing primarily in investment grade fixed-income
securities issued or guaranteed by the U.S., Canadian or Mexican
governments (see pages 12-15). The DIVERSIFIED INCOME PORTFOLIO seeks, as a
primary objective, to earn a high level of current income and, as a
secondary objective, to maximize total return, but only to the extent
consistent with its primary objective, by equally allocating its assets
among three separate groupings of fixed-income securities. Up to one-third
of the securities in which the DIVERSIFIED INCOME PORTFOLIO may invest will
include securities rated Baa/BBB or lower (such securities are commonly
known as "junk bonds") (see pages 15-17). The BALANCED PORTFOLIO seeks to
achieve high total return through a combination of income and capital
appreciation, by investing in a diversified portfolio of common stocks and
investment grade fixed-income securities (see pages 17-18). The UTILITIES
PORTFOLIO seeks to provide current income and long-term growth of income
and capital by investing in equity and fixed-income securities of companies
in the public utilities industry (see pages 18-19). The DIVIDEND GROWTH
PORTFOLIO seeks to provide reasonable current income and long-term growth
of income and capital by investing primarily in common stock of companies
with a record of paying dividends and the potential for increasing
dividends (see page 20). The VALUE-ADDED MARKET PORTFOLIO seeks to achieve
a high level of total return on its assets through a combination of capital
appreciation and current income, by investing, on an equally-weighted
basis, in a diversified portfolio of common stocks of the companies which
are represented in the Standard & Poor's 500 Composite Stock Price Index
(see pages 20-21). The CORE EQUITY PORTFOLIO seeks long-term growth of
capital by investing primarily in common stocks and securities convertible
into common stocks issued by domestic
</TABLE>
3 - PROSPECTUS
<PAGE>
<TABLE>
<S> <C>
and foreign companies (see pages 21-22). The AMERICAN VALUE PORTFOLIO seeks
long-term capital growth consistent with an effort to reduce volatility, by
investing principally in common stock of companies in industries which, at
the time of the investment, are believed to be undervalued in the
marketplace (see pages 22-23). The GLOBAL EQUITY PORTFOLIO seeks a high
level of total return on its assets primarily through long-term capital
growth and, to a lesser extent, from income, through investments in all
types of common stocks and equivalents (such as convertible securities and
warrants), preferred stocks and bonds and other debt obligations of
domestic and foreign companies and governments and international
organizations (see pages 23-24). The DEVELOPING GROWTH PORTFOLIO seeks
long-term capital growth by investing primarily in common stocks of smaller
and medium-sized companies that, in the opinion of the Investment Manager,
have the potential for growing more rapidly than the economy and which may
benefit from new products or services, technological developments or
changes in management (see pages 24-25). The EMERGING MARKETS PORTFOLIO
seeks long-term capital appreciation by investing primarily in equity
securities of companies in emerging market countries. The EMERGING MARKETS
PORTFOLIO may invest up to 35% of its total assets in high risk
fixed-income securities that are rated below investment grade or are
unrated (commonly referred to as "junk bonds") (see pages 25-28).
Contract Owners should review the investment objectives and policies of the
Portfolios carefully to consider their ability to assume the risks involved
in allocating the investments underlying the Contracts (see pages 11-42 and
"Special Risk Considerations" below).
- ----------------------------------------------------------------------------------------------
SPECIAL The MONEY MARKET PORTFOLIO invests solely in U.S. Government securities,
RISK high quality corporate debt obligations and obligations of banks and
CONSIDERATIONS savings and loan associations having assets of $1 billion or more and
certificates of deposit which are fully insured as to principal;
consequently, the portfolio securities of the Portfolio are subject to
minimal risk of loss of income and principal. The Portfolio may enter into
repurchase agreements and reverse repurchase agreements. Although the MONEY
MARKET PORTFOLIO will attempt to maintain a constant net asset value per
share of $1.00, there can be no assurance that the $1.00 net asset value
can be maintained.
The net asset value of the shares of each Portfolio other than the MONEY
MARKET PORTFOLIO will fluctuate with changes in the market value of its
portfolio holdings. The market value of the Portfolios' securities will
increase or decrease due to a variety of economic, market and political
factors which cannot be predicted. A decline in prevailing interest rates
generally increases the value of fixed-income securities, while an increase
in rates generally reduces the value of those securities. Dividends payable
by each Portfolio will vary in relation to the amounts of dividends and/or
interest paid by its securities holdings. The NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO and the BALANCED
PORTFOLIO may invest in mortgage-backed and asset-backed securities.
Mortgage-backed securities are subject to prepayments or refinancings of
the mortgage pools underlying such securities which
may have an impact upon the yield and the net asset value of the
Portfolio's shares. Certain derivative mortgage-backed securities in which
these Portfolios invest are extremely sensitive to changes in interest
rates and in prepayment rates on the underlying mortgage assets, and as a
result may be highly volatile. Asset-backed securities involve risks
resulting from the fact that such securities do not usually contain the
complete benefit of a security interest in the related collateral. Each
Portfolio other than the MONEY MARKET PORTFOLIO may invest, to a different
extent, in foreign securities. The foreign securities markets in which the
Portfolios may invest pose different and generally greater risks than those
risks customarily associated with domestic securities and markets including
fluctuations in foreign currency exchange rates, foreign tax rates and
foreign securities exchange controls. The NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO may invest a significant portion of its assets in
securities issued and guaranteed by the governments of Canada and Mexico.
The Canadian mortgage-backed securities market is of recent origin and is
less well developed and less liquid than the U.S. market. It should be
recognized that the Canadian and Mexican debt securities in which the
Portfolio will invest pose
</TABLE>
4 - PROSPECTUS
<PAGE>
<TABLE>
<S> <C>
different and greater risks than those customarily associated with U.S.
debt securities, including (i) the risks associated with international
investments generally, such as fluctuations in foreign currency exchange
rates, (ii) the risks of investing in Canada and Mexico, which have
smaller, less liquid debt markets, such as limited liquidity, price
volatility, custodial and settlement issues, and (iii) specific risks
associated with the Mexican economy, including high levels of inflation,
large amounts of debt and political and social uncertainties. The NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO may employ the use of inverse
floater classes of collateralized mortgage obligations. These securities
exhibit greater price volatility, and may be less liquid, than the majority
of mortgage pass-through securities or CMOs. Each Portfolio may enter into
repurchase agreements. The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO,
the DIVERSIFIED INCOME PORTFOLIO and the BALANCED PORTFOLIO may utilize the
speculative technique known as leverage through the use of reverse
repurchase agreements and dollar rolls, which entail additional risks; the
DEVELOPING GROWTH PORTFOLIO may seek to enhance its capital appreciation by
leveraging its investments through purchasing securities with borrowed
funds. Certain of the high yield, high risk fixed-income securities in
which the DIVERSIFIED INCOME PORTFOLIO and the EMERGING MARKETS PORTFOLIO
may invest are subject to greater risk of loss of income and principal than
higher-rated lower yielding fixed-income securities; investors in these
Portfolios should carefully consider the relative risks of investing in
high yield securities (commonly referred to as "junk bonds") and should be
cognizant of the fact that such securities are not generally meant for
short-term investing. The UTILITIES PORTFOLIO will concentrate its
investments in utilities securities. The public utilities industry has
certain characteristics and risks, and developments within that industry
will have an impact on the UTILITIES PORTFOLIO. The value of public utility
debt securities (and, to a lesser extent, equity securities) tends to have
an inverse relationship to the movement of interest rates. The AMERICAN
VALUE PORTFOLIO's emphasis on "undervalued" industries reflects investment
views frequently contrary to general market assessments and may involve
risks associated with departure from general investment opinions. The NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO,
the BALANCED PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING
MARKETS PORTFOLIO may enter into forward foreign currency exchange
contracts. The investment by the EMERGING MARKETS PORTFOLIO in emerging
market country securities involves certain risks not typically associated
with investing in securities of United States issuers, including (i)
potential price volatility and reduced liquidity of securities traded on
emerging market country securities markets, (ii) in some cases, lack of
satisfactory custodial arrangements and delays in settlement of securities
transactions in emerging market countries, (iii) generally higher brokerage
commissions and other transaction costs on securities exchanges in emerging
market countries, (iv) political and economic risks, including the risk of
nationalization or expropriation of assets, higher rates of inflation and
the risk of war, (v) currency fluctuations and devaluations in the value of
the foreign currency in which the Portfolio's investments are denominated,
(vi) the cost of converting foreign currency into U.S. dollars and (vii)
restrictions on foreign investment and on repatriation of capital invested
in emerging market countries. In addition, accounting, auditing, financial
and other reporting standards in emerging market countries are not
equivalent to U.S. standards and, therefore, disclosure of certain material
information may not be made and less information may be available to
investors investing in emerging market countries than in the United States.
There is also generally less governmental regulation of the securities
industry in emerging market countries than in the United States. Moreover,
it may be more difficult to obtain a judgment in a court outside the United
States. Many of the emerging market countries in which the EMERGING MARKETS
PORTFOLIO may invest may be subject to a greater degree of economic,
political and social instability than is the case in the United States and
Western European countries. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the UTILITIES PORTFOLIO, the
AMERICAN VALUE PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING
</TABLE>
5 - PROSPECTUS
<PAGE>
<TABLE>
<S> <C>
MARKETS PORTFOLIO may enter into various options and futures transactions;
each of these Portfolios and the VALUE-ADDED MARKET PORTFOLIO may write
call options on securities held in its portfolio without limit. Certain of
the Portfolios of the Fund may experience high portfolio turnover rates
with corresponding higher transaction expenses.
Contract Owners are directed to the discussion of repurchase agreements
(page 36), reverse repurchase agreements and dollar rolls (page 36),
mortgage-backed securities (page 28), asset-backed securities (page 31),
foreign securities (page 32), Canadian government securities (page 13),
Mexican government securities (page 13), leveraging (page 25), lower-rated
securities (page 35), public utilities securities (page 19), forward
foreign currency exchange contracts (page 33), emerging market country
securities (page 26), portfolio trading (page 41), options and futures
transactions (page 38), warrants (page 38), zero coupon securities (page
37), when-issued and delayed delivery securities and forward commitments
(page 36) and "when, as and if issued" securities (page 37), concerning
risks associated with such securities and management techniques. The Fund
is a single diversified investment company, consisting of twelve
Portfolios, and each Portfolio itself is diversified. Diversification does
not eliminate investment risk.
-------------------------------------------------------------------------------------------
INVESTMENT Dean Witter InterCapital Inc., the Investment Manager of the Fund, and its
MANAGER wholly-owned subsidiary, Dean Witter Services Company Inc., serve in
various investment management, advisory, management and administrative
capacities to ninety-one investment companies and other portfolios with
assets of approximately $66.9 billion at December 31, 1994 (see page 10).
-------------------------------------------------------------------------------------------
MANAGEMENT The Investment Manager receives monthly fees at the following annual rates
FEE of the daily net assets of the respective Portfolios of the Fund: MONEY
MARKET PORTFOLIO -- 0.50%; NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO
-- 0.65%; DIVERSIFIED INCOME PORTFOLIO -- 0.40%; BALANCED PORTFOLIO --
0.75%; UTILITIES PORTFOLIO-- 0.65%; DIVIDEND GROWTH PORTFOLIO-- 0.625%;
VALUE-ADDED MARKET PORTFOLIO -- 0.50%; CORE EQUITY PORTFOLIO -- 0.85%;
AMERICAN VALUE PORTFOLIO -- 0.625%; GLOBAL EQUITY PORTFOLIO -- 1.0%;
DEVELOPING GROWTH PORTFOLIO -- 0.50%; and EMERGING MARKETS PORTFOLIO --
1.25%. The management fees for the BALANCED PORTFOLIO, the UTILITIES
PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CORE EQUITY PORTFOLIO, the
AMERICAN VALUE PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING
MARKETS PORTFOLIO are higher than those paid by most investment companies
(see page 10).
-------------------------------------------------------------------------------------------
SUB-ADVISER TCW Funds Management, Inc. (the "Sub-Adviser") has been retained by the
Investment Manager to provide investment advice and manage the portfolios
of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the BALANCED
PORTFOLIO, the CORE EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO,
subject to the overall supervision of the Investment Manager. The
Sub-Adviser also serves as adviser to thirteen investment companies for
which Dean Witter Services Company Inc. serves as manager, and, at December
31, 1994, had approximately $48.3 billion under management or committed to
management in various fiduciary or advisory capacities, primarily from
institutional investors (see page 10).
-------------------------------------------------------------------------------------------
SUB-ADVISORY The Sub-Adviser receives monthly fees from the Investment Manager equal to
FEE 40% of the Investment Manager's monthly fee in respect of each of the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the BALANCED PORTFOLIO, the CORE
EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO (see page 10).
-------------------------------------------------------------------------------------------
SHAREHOLDERS Currently, shares are sold only to (1) Hartford Life Insurance Company for
allocation to certain of its separate accounts to fund the benefits under
certain flexible premium deferred variable annuity contracts it issues, and
to (2) ITT Hartford Life and Annuity Insurance Company for allocation to
certain of its separate accounts to fund the benefits under certain
flexible premium deferred variable annuity contracts it issues. Such
separate accounts are sometimes referred to individually as an "Account"
and collectively as the "Accounts." The variable annuity contracts issued
by Hartford Life Insurance Company and ITT Hartford Life and Annuity
Insurance Company (the "Companies") are somtimes referred to as the
"Variable Annuity Contracts" or the "Contracts". Accordingly, the interest
of the Contract Owner with respect to the Fund is subject to the terms of
the Contract and is described in the Prospectus for the Contracts, which
should be
</TABLE>
6 - PROSPECTUS
<PAGE>
<TABLE>
<S> <C>
reviewed carefully by a person considering the purchase of a Contract. The
Prospectus for the Contracts describes the relationship between increases
or decreases in the net asset value of Fund shares and any distributions on
such shares, and the benefits provided under a Contract. The rights of the
Companies as shareholders of the Fund should be distinguished from the
rights of a Contract Owner which are described in the Contract. In the
future, shares may be allocated to certain other separate accounts or sold
to affiliated or non-affiliated entities of the Companies. ITT Hartford
Life and Annuity Insurance Company is a wholly-owned indirect subsidiary of
Hartford Life Insurance Company. As long as shares of the Fund are sold
only to the Companies, the term "shareholder" or "shareholders" in this
Prospectus shall refer to the Companies (see pages 44 and 46).
-------------------------------------------------------------------------------------------
PURCHASES AND Shares of the Fund are sold and redeemed at net asset value, I.E., without
REDEMPTIONS sales charge (see page 44).
</TABLE>
- --------------------------------------------------------------------------------
THE ABOVE IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION APPEARING
ELSEWHERE IN THIS PROSPECTUS, THE STATEMENT OF ADDITIONAL INFORMATION, AND THE
PROSPECTUS FOR THE VARIABLE ANNUITY CONTRACTS.
7 - PROSPECTUS
<PAGE>
FINANCIAL HIGHLIGHTS
------------------------------------------------------------
The following ratios and per share data for a share of beneficial interest
outstanding throughout the period for each of the Money Market Portfolio, the
North American Government Securities Portfolio, the Diversified Income
Portfolio, the Balanced Portfolio, the Utilities Portfolio, the Dividend Growth
Portfolio, the Value-Added Market Portfolio, the Core Equity Portfolio, the
American Value Portfolio, the Global Equity Portfolio, the Developing Growth
Portfolio and the Emerging Markets Portfolio have been audited by Price
Waterhouse LLP, independent accountants. The financial
<TABLE>
<CAPTION>
NET ASSET
PERIOD VALUE, NET NET REALIZED TOTAL FROM DIVIDENDS DISTRIBUTIONS
ENDED BEGINNING OF INVESTMENT AND UNREALIZED INVESTMENT TO TO TOTAL DIVIDENDS
DEC. 31* PERIOD INCOME GAIN (LOSS) OPERATIONS SHAREHOLDERS SHAREHOLDERS AND DISTRIBUTIONS
-------- ------------ ----------- --------------- ----------- ----------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Money Market
1994 $ 1.00 $ 0.01 $ -- $ 0.01 $ (0.01) $ -- $ (0.01)
North American Government Securities
1994 10.00 0.06 -- 0.06 (0.02) -- (0.02)
Diversified Income
1994 10.00 0.08 -- 0.08 (0.03) -- (0.03)
Balanced
1994 10.00 0.08 (0.02) 0.06 (0.02) -- (0.02)
Utilities
1994 10.00 0.07 -- 0.07 (0.03) -- (0.03)
Dividend Growth
1994 10.00 0.08 (0.09) (0.01) (0.02) -- (0.02)
Value-Added Market
1994 10.00 0.06 (0.14) (0.08) (0.02) -- (0.02)
Core Equity
1994 10.00 0.07 -- 0.07 (0.02) -- (0.02)
American Value
1994 10.00 0.06 0.01 0.07 (0.02) -- (0.02)
Global Equity
1994 10.00 0.07 (0.10) (0.03) (0.03) -- (0.03)
Developing Growth
1994 10.00 0.08 0.08 0.16 (0.03) -- (0.03)
Emerging Markets
1994 10.00 0.06 -- 0.06 (0.02) -- (0.02)
</TABLE>
- --------
Note: The per share amounts reported are not necessarily consistent with the
corresponding amounts reported on the Statements of Operations due to
fluctuations in capital stock activity during the period.
* For the period November 9, 1994 (commencement of operations) through
December 31, 1994.
** After application of the Fund's expense limitation.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
8 - PROSPECTUS
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
highlights should be read in conjunction with the financial statements, the
notes thereto and the unqualified report of independent accountants which are
contained in this Prospectus commencing on page 47. See the discussion under the
caption "Charges Under the Contract" in the prospectus for the Variable Annuity
Contracts for a description of charges which may be imposed on the Contracts by
the applicable Account. Any such charges are not reflected in the financial
highlights below.
<TABLE>
<CAPTION>
RATIOS TO RATIOS TO
AVERAGE NET ASSETS AVERAGE NET ASSETS
(BEFORE EXPENSES WERE (AFTER EXPENSES WERE
ASSUMED)** ASSUMED)
NET ASSET NET ASSETS ------------------------- ---------------------------
VALUE, TOTAL AT END OF NET NET PORTFOLIO
END OF INVESTMENT PERIOD INVESTMENT INVESTMENT TURNOVER
PERIOD RETURN(1) (000'S) EXPENSES(2) INCOME(2) EXPENSES(2) INCOME(2) RATE(1)
- --------- ----- ---------- ------------ ---------- ------------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1.00 0.76% $ 1,234 2.50% 3.33% -- % 5.83% N/A%
10.04 0.61 122 2.50 1.78 -- 4.28 --
10.05 0.76 402 2.50 3.08 -- 5.58 --
10.04 0.60 796 2.50 2.90 -- 5.40 --
10.04 0.65 498 2.50 2.79 -- 5.29 --
9.97 (0.05) 1,378 2.50 3.28 -- 5.78 --
9.90 (0.76) 349 2.50 1.25 -- 3.75 --
10.05 0.67 316 2.50 2.32 -- 4.82 --
10.05 0.69 823 2.50 1.60 -- 4.10 10
9.94 (0.30) 1,194 2.50 2.20 -- 4.70 --
10.13 1.58 380 2.50 2.31 -- 4.81 3
10.04 0.57 448 2.50 2.22 -- 4.72 --
</TABLE>
9 - PROSPECTUS
<PAGE>
THE FUND AND ITS MANAGEMENT
--------------------------------------------------------------------
Dean Witter Select Dimensions Investment Series (the "Fund") is an open-end
diversified management investment company. The Fund is a trust of the type
commonly known as a "Massachusetts business trust" and was organized under the
laws of The Commonwealth of Massachusetts on June 2, 1994.
Dean Witter InterCapital Inc. ("InterCapital" or the "Investment Manager"),
whose address is Two World Trade Center, New York, New York 10048, is the Fund's
Investment Manager. The Investment Manager, which was incorporated in July,
1992, is a wholly-owned subsidiary of Dean Witter, Discover & Co. ("DWDC"), a
balanced financial services organization providing a broad range of nationally
marketed credit and investment products.
InterCapital and its wholly-owned subsidiary, Dean Witter Services Company Inc.,
serve in various investment management, advisory, management and administrative
capacities to ninety-one investment companies, thirty of which are listed on the
New York Stock Exchange, with combined total assets of $64.9 at December 31,
1994. The Investment Manager also manages portfolios of pension plans, other
institutions and individuals which aggregated approximately $2.0 billion at such
date.
The Fund has retained the Investment Manager to provide administrative services,
manage its business affairs and manage the investment of the Fund's assets,
including the placing of orders for the purchase and sale of portfolio
securities. InterCapital has retained Dean Witter Services Company Inc. to
perform the aforementioned administrative services for the Fund.
With regard to the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the BALANCED
PORTFOLIO, the CORE EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO, under a
Sub-Advisory Agreement between TCW Funds Management, Inc. (the "Sub-Adviser")
and the Investment Manager, the Sub-Adviser provides these Portfolios with
investment advice and portfolio management, in each case subject to the overall
supervision of the Investment Manager. The Sub-Adviser, whose address is 865
South Figueroa Street, Suite 1800, Los Angeles, California 90017, also serves as
investment adviser to thirteen investment companies for which Dean Witter
Services Company Inc. serves as manager. The Sub-Adviser, which was organized in
1987, is a wholly-owned subsidiary of The TCW Group, Inc., whose subsidiaries
provide a variety of trust, investment management and investment advisory
services. Robert A. Day, who is Chairman of the Board of Directors of the
Sub-Adviser, may be deemed to be a control person of the Sub-Adviser by virtue
of the aggregate ownership by Mr. Day and his family of more than 25% of the
outstanding voting stock of The TCW Group, Inc. The Sub-Adviser in turn has
entered into further sub-advisory agreements with two other wholly-owned
subsidiaries of The TCW Group, Inc., TCW Asia Limited and TCW London
International, Limited, to assist it in performing its sub-advisory functions in
respect of the EMERGING MARKETS PORTFOLIO. The address of TCW Asia Limited is
One Pacific Place, 88 Queensway, Hong Kong, and the address of TCW London
International, Limited is 27 Albemarle Street, London W1X 3FA. As of December
31, 1994, the Sub-Adviser and its affiliates had approximately $48.3 billion
under management or committed to management, primarily from institutional
investors.
The Fund's Board of Trustees reviews the various services provided by or under
the direction of the Investment Manager (and, for the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the BALANCED PORTFOLIO, the CORE EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO, by the Sub-Adviser) to ensure that the Fund's
general investment policies and programs are being properly carried out and that
administrative services are being provided to the Fund in a satisfactory manner.
As full compensation for the services and facilities furnished to the Fund and
expenses of the Fund assumed by the Investment Manager, the Fund currently pays
the Investment Manager monthly compensation calculated daily by applying the
annual rate of 0.50% to the net assets of the MONEY MARKET PORTFOLIO; 0.65% to
the net assets of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO; 0.40% to
the net assets of the DIVERSIFIED INCOME PORTFOLIO; 0.75% to the net assets of
the BALANCED PORTFOLIO; 0.65% to the net assets of the UTILITIES PORTFOLIO;
0.625% to the net assets of the DIVIDEND GROWTH PORTFOLIO; 0.50% to the net
assets of the VALUE-ADDED MARKET PORTFOLIO; 0.85% to the net assets of the CORE
EQUITY PORTFOLIO; 0.625% to the net assets of the AMERICAN VALUE PORTFOLIO; 1.0%
to the net assets of the GLOBAL EQUITY PORTFOLIO; 0.50% to the net assets of the
DEVELOPING GROWTH PORTFOLIO; and 1.25% to the net assets of the EMERGING MARKETS
PORTFOLIO, in each case determined as of the close of each business day. As
compensation for its services provided to the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the BALANCED PORTFOLIO, the CORE EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO pursuant to the Sub-Advisory Agreement in respect of
those Portfolios, the Investment Manager pays the Sub-Adviser monthly
compensation equal to 40% of its monthly compensation in respect of each of
those Portfolios.
The Fund's expenses include: the fee of the Investment Manager; taxes; certain
legal, transfer agent, custodian and auditing fees; and printing and other
expenses relating to the Fund's operations which are not expressly assumed by
the Investment Manager under its Investment Management Agreement with the Fund.
The Investment Manager has undertaken to assume all operating expenses of each
Portfolio (except for any brokerage fees and a portion of organizational
expenses) and waive the compensation provided for each Portfolio in its
Management Agreement with the Fund until such time as the pertinent Portfolio
has $50 million of net assets or until six months from the date of the
Portfolio's commencement of operations, whichever occurs first.
10 - PROSPECTUS
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
--------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO
The investment objectives of the MONEY MARKET PORTFOLIO are high current income,
preservation of capital and liquidity. The investment objectives may not be
changed without approval of the shareholders of the MONEY MARKET PORTFOLIO. The
Portfolio seeks to achieve its objectives by investing in the following money
market instruments:
U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed as to principal and
interest by the United States or its agencies (such as the Export-Import Bank of
the United States, Federal Housing Administration, and Government National
Mortgage Association) or its instrumentalities (such as the Federal Home Loan
Bank, Federal Intermediate Credit Banks and Federal Land Bank), including
Treasury bills, notes and bonds;
BANK OBLIGATIONS. Obligations (including certificates of deposit, bank notes and
bankers' acceptances) of banks subject to regulation by the U.S. Government and
having total assets of $1 billion or more, and instruments secured by such
obligations, not including obligations of foreign branches of domestic banks;
OBLIGATIONS OF SAVINGS INSTITUTIONS. Certificates of deposit of savings banks
and savings and loan associations, having total assets of $1 billion or more;
FULLY INSURED CERTIFICATES OF DEPOSIT. Certificates of deposit of banks and
savings institutions having total assets of less than $1 billion, if the
principal amount of the obligation is federally insured by the Bank Insurance
Fund or the Savings Association Insurance Fund (each of which is administered by
the Federal Deposit Insurance Corporation), limited to $100,000 principal amount
per certificate and to 10% or less of the Portfolio's total assets in all such
obligations and in all illiquid assets, in the aggregate;
COMMERCIAL PAPER AND CORPORATE OBLIGATIONS. Commercial paper and corporate debt
obligations maturing in thirteen months or less which are rated in one of the
two highest rating categories for short-term debt obligations, or, if not rated,
have been issued by issuers which have another short-term debt obligation that
is comparable in priority and security to such non-rated securities and is so
rated, by at least two nationally recognized statistical rating organizations
("NRSROs") (or one NRSRO if the instrument was rated by only one such
organization) or which, if unrated, are of comparable quality as determined in
accordance with procedures established by the Trustees. The NRSROs currently
rating instruments of the type the Portfolio may purchase are Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff and
Phelps, Inc., Fitch Investors Service, Inc., IBCA Limited and IBCA Inc., and
Thomson BankWatch, Inc. Their rating criteria are described in the Appendix to
the Fund's Statement of Additional Information. See the Appendix to this
Prospectus for an explanation of Moody's and S&P ratings.
The foregoing rating limitations apply at the time of acquisition of a security.
Any subsequent change in any rating by a rating service will not require
elimination of any security from the portfolio. However, in accordance with
procedures adopted by the Fund's Trustees pursuant to federal securities
regulations governing money market funds, if the Investment Manager becomes
aware that a portfolio security has received a new rating from an NRSRO that is
below the second highest rating, then, unless the security is disposed of within
five days, the Investment Manager will perform a creditworthiness analysis of
any such downgraded securities, which analysis will be reported to the Trustees
who will, in turn, determine whether the securities continue to present minimal
credit risks to the MONEY MARKET PORTFOLIO.
The ratings assigned by the NRSROs represent their opinions as to the quality of
the securities they undertake to rate. It should be emphasized, however, that
the ratings are general and not absolute standards of quality.
Subject to the foregoing requirements, the MONEY MARKET PORTFOLIO may invest in
commercial paper which has been issued pursuant to the "private placement"
exemption afforded by Section 4(2) of the Securities Act of 1933 (the
"Securities Act") and which may be sold to institutional investors pursuant to
Rule 144A under the Securities Act. Management considers such legally
restricted, but readily marketable, commercial paper to be liquid. However,
pursuant to procedures approved by the Trustees of the Fund, if a particular
investment in such commercial paper is determined to be illiquid, that
investment will be included within the 10% limitation on illiquid investments.
If at any time the MONEY MARKET PORTFOLIO's investments in illiquid securities
exceed 10% of the Portfolio's total assets, the Portfolio will dispose of
illiquid securities in an orderly fashion to reduce the Portfolio's holdings in
such securities to less than 10% of its total assets.
VARIABLE RATE AND FLOATING RATE OBLIGATIONS. Certain of the types of investments
described above may be variable rate or floating rate obligations. The interest
rates payable on variable rate or floating rate obligations are not fixed and
may fluctuate based upon changes in market rates. The interest rate payable on a
variable rate obligation may be adjusted at predesignated periodic intervals and
on a floating rate obligation whenever there is a change in the market rate of
interest on which the interest rate payable is based.
Although the MONEY MARKET PORTFOLIO will generally not seek profits through
short-term trading, it may dispose of any portfolio security prior to its
maturity if, on the basis of a revised credit evaluation of the issuer or other
circumstances or considerations, it believes such disposition advisable.
The MONEY MARKET PORTFOLIO may enter into repurchase agreements and reverse
repurchase agreements, in accordance with the description of those investments
(and subject to the risks) set
11 - PROSPECTUS
<PAGE>
forth under "General Portfolio Techniques" below and in the Statement of
Additional Information.
The MONEY MARKET PORTFOLIO will attempt to balance its objectives of high
income, capital preservation and liquidity by investing in securities of varying
maturities and risks. The MONEY MARKET PORTFOLIO will not, however, invest in
securities that mature in more than thirteen months from the date of purchase.
The amounts invested in obligations of various maturities of thirteen months or
less will depend on management's evaluation of the risks involved. Longer-term
issues, while generally paying higher interest rates, are subject, as a result
of general changes in interest rates, to greater fluctuations in value than
shorter-term issues. Thus, when rates on new debt securities increase, the value
of outstanding securities may decline, and vice versa. Such changes may also
occur, but to a lesser degree, with short-term issues. These changes, if
realized, may cause fluctuations in the amount of daily dividends and, in
extreme cases, could cause the net asset value per share to decline (see
"Determination of Net Asset Value"). Longer-term issues also increase the risk
that the issuer may be unable to pay an installment of interest or principal at
maturity. Also, in the event of unusually large redemption demands, such
securities may have to be sold at a loss prior to maturity, or the MONEY MARKET
PORTFOLIO might have to borrow money and incur interest expense. Either
occurrence would adversely impact the amount of daily dividend and could result
in a decline in the daily net asset value per share. The MONEY MARKET PORTFOLIO
will attempt to minimize these risks by investing in longer-term securities when
it appears to management that interest rates on such securities are not likely
to increase substantially during the period of expected holding, and then only
in securities of high quality which are readily marketable. However, there can
be no assurance that the Portfolio will be successful in achieving this or its
other objectives.
The foregoing investment policies are not fundamental and may be changed by the
Trustees without shareholder vote.
THE NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO
The investment objective of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO
is to earn a high level of current income while maintaining relatively low
volatility of principal. This objective may not be changed without the approval
of the shareholders of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO. There
is no assurance that the objective will be achieved. The following investment
policies may be changed by the Trustees of the Fund without shareholder
approval:
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO seeks to achieve its
investment objective by investing under normal circumstances at least 65% of its
total assets in investment grade fixed-income securities issued or guaranteed by
the U.S., Canadian or Mexican governments or their subdivisions, or the agencies
or instrumentalities of any of the foregoing ("Government Securities"). Such
securities may include U.S. Treasury securities, U.S. Mortgage-Backed
Securities, the sovereign debt of Canada or any of its Provinces, Canadian
Mortgage-Backed Securities, and the sovereign debt of Mexico or any of its
government agencies. See the discussion of sovereign debt obligations in the
Statement of Additional Information. In the case of the United States and
Canada, a substantial portion of such investments will be fixed rate and
adjustable rate mortgage-backed securities, including collateralized mortgage
obligations ("Mortgage-Backed Securities"). The term investment grade consists
of fixed-income securities rated Baa or higher by Moody's Investors Service,
Inc. ("Moody's") or BBB or higher by Standard & Poor's Corporation ("S&P") or,
if not rated, determined to be of comparable quality by the Sub-Adviser (see
"General Portfolio Techniques" below for a discussion of the characteristics and
risks of investments in fixed-income securities rated Baa or BBB). A portion of
the Government Securities purchased by the Portfolio may be zero coupon
securities. The Portfolio intends to limit its use of zero coupon securities
(other than Treasury bills with one year or less to maturity) to 10% of its
total assets (see "General Portfolio Techniques" below for a discussion of the
characteristics and risks of investments in zero coupon securities). The
Portfolio will invest in zero coupon securities only when the Sub-Adviser
believes that there will be cash in the portfolio representing return of
principal on portfolio securities of the Portfolio at least equal to the imputed
income on the zero coupon securities.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO may invest up to 35% of its
total assets in securities which are not Government Securities, including
corporate debt securities and securities backed by other assets, such as
automobile or credit card receivables and home equity loans ("Asset-Backed
Securities") (see "General Portfolio Techniques" below and in the Statement of
Additional Information for a discussion of the characteristics and risks of
investments in Asset-Backed Securities) and money market instruments, which are
short-term (maturities of up to thirteen months) fixed-income securities, issued
by private institutions. Such securities (except for Eurodollar certificates of
deposit) must be issued by U.S., Canadian or Mexican issuers and (except for
money market instruments) must be rated at least Aa by Moody's or AA by S&P or,
if not rated, determined to be of comparable quality by the Sub-Adviser. Money
market instruments in which the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO
may invest are set forth under "General Portfolio Techniques" below.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO expects that under normal
circumstances the market value dollar weighted average life (or period until the
next reset date) of the Portfolio's portfolio securities will be no greater than
three years. In addition, the Portfolio will purchase only Mexican Government
Securities with remaining maturities of one year or less. The Portfolio seeks to
achieve relatively low volatility by investing in a portfolio of securities
which the Sub-Adviser believes will, in the aggregate, be resistant to
significant fluctuations in market value. Although the values of fixed-income
securities generally increase during periods of declining interest rates and
decrease during periods of increasing interest rates, the extent of these
12 - PROSPECTUS
<PAGE>
fluctuations has historically generally been smaller for short term securities
than for securities with longer maturities. Conversely, the yield available on
shorter term securities has also historically been lower on average than those
available from longer term securities.
Under normal circumstances the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO
will invest at least 50% of its total assets in U.S. Government Securities. The
Portfolio will invest no more than 25% of its total assets in Canadian
Government Securities and no more than 20% of its total assets in Mexican
Government Securities. Subject to the foregoing guidelines, the Sub-Adviser will
invest the Portfolio's assets, and allocate its investments from time to time
among U.S., Canadian and Mexican Government Securities, based on its analysis of
market conditions and changes in general economic conditions in the United
States, Canada and Mexico. In such analysis, the Sub-Adviser will consider
various factors, including its expectations regarding interest rate changes and
changes in currency exchange rates among the U.S. dollar, the Canadian dollar
and the Mexican peso, as well as general market, economic and political factors,
to attempt to take advantage of favorable investment opportunities in each
country.
There may be periods during which, in the opinion of the Sub-Adviser, market
conditions warrant reduction of some or all of the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO's securities holdings. During such periods, the Portfolio
may adopt a temporary "defensive" posture in which greater than 35% of its total
assets are invested in U.S. money market instruments or cash.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO may enter into repurchase
agreements, reverse repurchase agreements, dollar rolls and forward foreign
currency exchange contracts, engage in futures contracts and options
transactions, purchase securities which are issued in private placements or are
otherwise not readily marketable, and purchase securities on a when-issued or
delayed delivery basis or a "when, as and if issued" basis, and purchase or sell
securities on a forward commitment basis, in each case in accordance with the
description of these investments and techniques (and subject to the risks) set
forth under "General Portfolio Techniques" below and in the Statement of
Additional Information. Investors should carefully consider the risks of
investing in securities of foreign issuers and securities denominated in
non-U.S. currencies (see "Canadian Government Securities," "Mexican Government
Securities," "Canadian Mortgage-Backed Securities" and "Risks of Investing in
Canadian and Mexican Securities" below and see "General Portfolio Techniques"
below for a discussion of the characteristics and risks of investments in
foreign securities).
UNITED STATES GOVERNMENT SECURITIES. Securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities include: (i) U.S. Treasury
obligations, all of which are backed by the full faith and credit of the United
States and which differ only in their interest rates, maturities and times of
issuance: U.S. Treasury bills (maturities of one year or less), U.S. Treasury
notes (maturities of one to ten years), and U.S. Treasury bonds (generally
maturities of greater than ten years); and (ii) obligations issued or guaranteed
by U.S. Government agencies or instrumentalities, including government
guaranteed Mortgage-Backed Securities, some of which are backed by the full
faith and credit of the U.S. Treasury (e.g., Government National Mortgage
Association direct pass-through certificates), some of which are supported by
the right of the issuer to borrow from the U.S. Government (e.g., obligations of
Federal Home Loan Banks), and some of which are backed only by the credit of the
issuer itself (e.g., obligations of the Student Loan Marketing Association). The
U.S. Government may also guarantee other debt obligations of special purpose
borrowers.
CANADIAN GOVERNMENT SECURITIES. Canadian Government Securities include
securities issued or guaranteed by the Government of Canada, the Government of a
Province of Canada or their agencies and Crown corporations. These securities
may be denominated or payable in U.S. dollars or Canadian dollars.
The Bank of Canada, acting on behalf of the federal government, is responsible
for the distribution of Government of Canada Treasury bills and federal bond
issues. The Bank of Canada holds weekly auctions of Treasury bills (maturities
of one year or less) and offers new issues of federal bonds through investment
dealers and banks. An offering of Government of Canada bonds frequently consists
of several different issues with various maturity dates, representing different
segments of the yield curve and generally having maturities ranging from three
to 25 years. The Bank of Canada usually purchases a previously announced amount
of each offering of bonds. Mortgage-Backed Securities issued pursuant to the
program established under the National Housing Act of Canada are also Canadian
Government Securities because they benefit from a guarantee by the Canada
Mortgage and Housing Corporation, but are not distributed by the Bank of Canada.
All Canadian Provinces have outstanding bond issues and several Provinces also
guarantee bond issues of Provincial authorities, agencies and provincial Crown
corporations. Spreads in the marketplace are determined by various factors,
including the relative supply and the rating assigned by the rating agencies.
Most Provinces also issue treasury bills.
Many municipalities and municipal financial authorities in Canada raise funds
through the bond market in order to finance capital expenditures. Unlike U.S.
municipal securities, which have special tax status, Canadian municipal
securities have the same tax status as other Canadian Government Securities and
trade similarly to such securities. The Canadian municipal market may be less
liquid than the Provincial bond market.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO will only invest in Canadian
Government Securities which are rated at least A by Moody's or S&P or, if not
rated, are determined to be of comparable quality by the Sub-Adviser.
MEXICAN GOVERNMENT SECURITIES. Mexican Government Securities include those
securities which are issued or guaranteed by the Mexican Treasury or by Mexican
government agencies or instrumentalities. These securities may be denominated
and payable in Mexican pesos or U.S. dollars.
13 - PROSPECTUS
<PAGE>
The debt market in Mexico began to develop rapidly after the promulgation of the
Securities Market Law in 1975. Since 1975, the government has authorized a range
of Mexican government issued debt securities, all of which are traded on the
Mexican Stock Exchange: (i) CETES -- peso-denominated discount debt securities
having maturities of two years or less sold through auctions regulated by Banco
de Mexico; (ii) BONDES -- peso-denominated long-term development bonds sold
through auctions regulated by Banco de Mexico; (iii) AJUSTABONOS -- peso-
denominated bonds with a fixed coupon rate on a variable face amount which is
adjusted in proportion to fluctuations in the Mexican consumer price index; (iv)
TESOBONOS -- U.S. dollar-denominated securities sold at auctions which are paid
in pesos equal to the value of the U.S. dollar calculated at the prevailing
exchange rate; and (v) NAFINSA PAGARES -- peso-denominated promissory notes,
with maturities approximating those of Cetes, issued by the Nacional Financiera
(Nafinsa), an agency of the Mexican government.
In addition, a variety of other special purpose bonds are issued by the Mexican
federal government or its agencies, such as development bonds, bank indemnity
bonds and urban renovation bonds, as well as bank development bonds and
industrial development bonds.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO will only invest in Mexican
Government Securities which are rated at least Baa by Moody's or BBB by S&P or,
if not rated, are determined to be of comparable quality by the Sub-Adviser.
MORTGAGE-BACKED SECURITIES. Mortgage-Backed Securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans secured by real property. The term Mortgage-Backed
Securities as used herein includes adjustable rate mortgage securities and
derivative mortgage products such as collateralized mortgage obligations,
stripped Mortgage-Backed Securities and other products described below.
U.S. MORTGAGE-BACKED SECURITIES. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO's investments in U.S. Mortgage-Backed Securities are subject to
certain risks (see the description of U.S. Mortgage-Backed Securities and the
risks associated with investments in such securities set forth under "General
Portfolio Techniques" below and in the Statement of Additional Information).
CANADIAN MORTGAGE-BACKED SECURITIES. Canadian Mortgage-Backed Securities may be
issued in several ways, the most common of which is a modified pass-through
vehicle issued pursuant to the program established under the National Housing
Act of Canada. Certficates issued pursuant to this program have some structural
similarities to GNMA securities and benefit from the guarantee of the Canada
Mortgage and Housing Corporation, a federal Crown corporation that is (except
for certain limited purposes) an agent of the Government of Canada.
Canadian private issuers such as banks and trust companies also issue
Mortgage-Backed Securities backed by private insurance or other forms of credit
support. Such Mortgage-Backed Securities are not considered Government
Securities for purposes of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO.
While most Canadian Mortgage-Backed Securities are subject to voluntary
prepayments, some pools are not subject to such prepayments and thus have yield
characteristics similar to bonds.
RISKS OF INVESTING IN CANADIAN AND MEXICAN SECURITIES. The Canadian debt
securities market is significantly smaller than the U.S. debt securities market.
In particular, the Canadian Mortgage-Backed Securities market is of recent
origin, and, although continued growth is anticipated, is less well developed
and less liquid than its U.S. counterpart.
Because the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO intends to invest in
Mexican debt instruments, investors in the Portfolio should be aware of certain
special considerations associated with investing in debt obligations of the
Mexican government.
The Mexican government has exercised and continues to exercise a significant
influence over many aspects of the private sector in Mexico. Mexican government
actions concerning the economy could have a significant effect on market
conditions and prices and yields of Mexican debt obligations, including those in
which the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO invests. Mexico is
currently a major debtor nation (among developing countries) to commercial banks
and foreign governments.
The value of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO's investments
may be affected by changes in oil prices, interest rates, taxation and other
political or economic developments in Mexico, including recent rates of
inflation which have exceeded the rates of inflation in the U.S. and Canada. The
Fund can provide no assurance that future developments in the Mexican economy
will not impair the North American Government Income Portfolio's investment
flexibility, operations or ability to achieve its investment objective.
In September, 1982, Mexico imposed foreign exchange controls and maintained a
dual foreign exchange rate system, with a "controlled" rate and a "free market"
rate. Under economic policy initiatives implemented since December, 1987, the
Mexican government introduced a schedule of gradual devaluation of the
controlled rate which initially amounted to an average depreciation of the
Mexican peso against the U.S. dollar of one Mexican peso per day. The extended
initiatives include an adjustment in the scheduled devaluation rate of the
Mexican peso against the U.S. dollar. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO's net asset value and its computation and distribution of income to
its shareholders will be adversely affected by continued reductions in the value
of the Mexican peso relative to the U.S. dollar because all Portfolio assets
must be converted to U.S. dollars prior to any distributions to shareholders. On
December 22, 1994, the Mexican government determined to allow
14 - PROSPECTUS
<PAGE>
the Mexican peso to trade freely against the U.S. dollar rather than within a
controlled band, which action resulted in a significant devaluation of the
Mexican peso against the U.S. dollar.
Risks of investing in foreign securities are discussed further under "General
Portfolio Techniques" below.
THE DIVERSIFIED INCOME PORTFOLIO
The primary investment objective of the DIVERSIFIED INCOME PORTFOLIO is to
provide a high level of current income. As a secondary objective the DIVERSIFIED
INCOME PORTFOLIO seeks to maximize total return but only to the extent
consistent with its primary objective. The investment objectives of the
DIVERSIFIED INCOME PORTFOLIO may not be changed without the approval of the
shareholders of the Portfolio. There is no assurance that the objectives will be
achieved. The following investment policies may be changed by the Trustees of
the Fund without shareholder approval:
The DIVERSIFIED INCOME PORTFOLIO will seek to achieve its investment objectives
by investing at least 65% of its total assets in fixed-income securities and by
equally allocating, under normal circumstances, an approximately one-third
portion of its total assets among three separate groupings of various types of
fixed-income securities. The Investment Manager will adjust the DIVERSIFIED
INCOME PORTFOLIO's assets not less than quarterly to reflect any changes in the
relative values of the securities in each grouping so that following the
adjustment the value of the Portfolio's investments in each grouping will be
equal to the extent practicable.
The three groupings in which the DIVERSIFIED INCOME PORTFOLIO will invest its
total assets are as follows:
GROUPING (1). High quality fixed-income securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities or high quality fixed income
securities issued or guaranteed by a foreign government or supranational
organization or any of their political subdivisions, authorities, agencies or
instrumentalities or fixed-income securities issued by a corporation, all of
which are rated AAA or AA by Standard & Poor's Corporation ("S&P") or Aaa or Aa
by Moody's Investors Service, Inc. ("Moody's") or, if unrated, are determined by
the Investment Manager to be of equivalent quality; in certificates of deposit
and bankers' acceptances issued or guaranteed by, or time deposits maintained
at, banks (including foreign branches of U.S. banks or U.S. or foreign branches
of foreign banks) having total assets of more than $500 million and determined
by the Investment Manager to be of high creditworthiness; commercial paper rated
A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's or Duff 1 or Duff 2 by Duff &
Phelps Inc. or, if unrated, issued by U.S. or foreign companies having
outstanding debt securities rated A or higher by S&P or Moody's; and in loan
participation interests having a remaining term not exceeding one year in loans
extended by banks to such companies. Certain foreign securities purchased by the
Portfolio will not have received ratings by a recognized U.S. rating agency. In
such cases the Investment Manager will review the issuers of such securities
with respect to the quality of their management, balance sheet and financial
ratios, cash flows and earnings to establish that the securities purchased by
the Portfolio are of a comparable quality to issuers receiving high quality
ratings by a recognized U.S. rating agency. All of the securities described
above will have remaining maturities, at the time of purchase, of not more than
three years.
The Investment Manager will actively manage the assets of the DIVERSIFIED INCOME
PORTFOLIO in this grouping in accordance with a global market strategy (see
"Portfolio Trading" below). Consistent with such a strategy, the Investment
Manager intends to allocate the Portfolio's investments among securities
denominated in the currencies of a number of foreign countries and, within each
such country, among different types of debt securities. The Investment Manager
will adjust the Portfolio's exposure to different currencies based on its
perception of the most favorable markets and issuers. In allocating the
DIVERSIFIED INCOME PORTFOLIO's assets among various markets, the Investment
Manager will assess the relative yield and anticipated direction of interest
rates in particular markets, the level of inflation, liquidity and financial
soundness of each market, and the general market and economic conditions
existing in each market as well as the relationship of currencies of various
countries to the U.S. dollar and to each other. In its evaluations, the
Investment Manager will utilize its internal financial, economic and credit
analysis resources as well as information obtained from other sources.
A portion of the DIVERSIFIED INCOME PORTFOLIO's investments in securities of
U.S. issuers is likely to be in commercial paper, bankers' acceptances and other
short-term debt instruments issued by U.S. corporations. However, at times
during which there exists large-scale political or economic uncertainty, the
Portfolio is likely to increase its investments in U.S. Government securities.
In such cases, the securities which the Portfolio is most likely to purchase are
U.S. Treasury bills and U.S. Treasury notes with remaining maturities of under
three years, both of which are direct obligations of the U.S. Government. The
DIVERSIFIED INCOME PORTFOLIO may also purchase securities issued by various
agencies and instrumentalities of the U.S. Government. These will include
obligations backed by the full faith and credit of the United States (such as
those issued by the Government National Mortgage Association); obligations whose
issuing agency or instrumentality has the right to borrow, to meet its
obligations, from an existing line of credit with the U.S. Treasury (such as
those issued by the Federal National Mortgage Association); and obligations
backed by the credit of the issuing agency or instrumentality (such as those
issued by the Federal Farm Credit System).
The securities in which the DIVERSIFIED INCOME PORTFOLIO will be investing may
be denominated in any currency or multinational currency, including the U.S.
dollar. In addition to the U.S. dollar, such currencies will include, among
others; the Australian dollar; Deutsche mark; Japanese yen; French franc;
British pound; Canadian dollar; Swiss franc; Dutch guilder; Austrian schilling;
15 - PROSPECTUS
<PAGE>
Spanish peseta; Swedish krona; and European Currency Unit ("ECU").
The DIVERSIFIED INCOME PORTFOLIO may invest, without limitation in this
grouping, in notes and commercial paper, the principal amount of which is
indexed to certain specific foreign currency exchange rates. Indexed notes and
commercial paper typically provide that their principal amount is adjusted
upwards or downwards (but not below zero) at maturity to reflect fluctuations in
the exchange rate between two currencies during the period the obligation is
outstanding, depending on the terms of the specific security. In selecting the
two currencies, the Investment Manager will consider the correlation and
relative yields of various currencies.The Portfolio will purchase an indexed
obligation using the currency in which it is denominated and, at maturity, will
receive interest and principal payments thereon in that currency. The amount of
principal payable by the issuer at maturity, however, will vary (i.e., increase
or decrease) in response to the change (if any) in the exchange rates between
the two specified currencies during the period from the date the instrument is
issued to its maturity date. The potential for realizing gains as a result of
changes in foreign currency exchange rates may enable the DIVERSIFIED INCOME
PORTFOLIO to hedge the currency in which the obligation is denominated (or to
effect cross-hedges against other currencies) against a decline in the U.S.
dollar value of investments denominated in foreign currencies, while providing
an attractive money market rate of return. The Portfolio will purchase such
indexed obligations to generate current income or for hedging purposes and will
not speculate in such obligations.
As indicated above, the DIVERSIFIED INCOME PORTFOLIO may invest in securities
denominated in a multi-national currency unit. An illustration of a
multi-national currency unit is the ECU, which is a "basket" consisting of
specified amounts of the currencies of the member states of the European
Community, a Western European economic cooperative organization that includes,
among other countries, France, West Germany, The Netherlands and the United
Kingdom. The specific amounts of currencies comprising the ECU may be adjusted
by the Council of Ministers of the European Community to reflect changes in
relative values of the underlying currencies. The Investment Manager does not
believe that such adjustments will adversely affect holders of ECU-denominated
obligations or the marketability of such securities. European supranational
entities, in particular, issue ECU-denominated obligations. The Portfolio may
invest in securities denominated in the currency of one nation although issued
by a governmental entity, corporation or financial institution of another
nation. For example, the Portfolio may invest in a British pound-denominated
obligation issued by a United States corporation. Such investments involve
credit risks associated with the issuer and currency risks associated with the
currency in which the obligation is denominated.
GROUPING (2). (i) Fixed-rate and adjustable rate mortgage-backed securities
("Mortgage-Backed Securities") which are issued or guaranteed by the United
States Government, its agencies or instrumentalities or by private issuers which
are rated Aaa by Moody's or AAA by S&P or, if not rated, are determined to be of
comparable quality by the Investment Manager and (ii) securities backed by other
assets such as automobile or credit card receivables and home equity loans
("Asset-Backed Securities") which are rated Aaa by Moody's or AAA by S&P or, if
not rated, are determined to be of comparable quality by the Investment Manager.
See "General Portfolio Techniques" below and in the Statement of Additional
Information for a discussion of Mortgage-Backed Securities and Asset-Backed
Securities and the risks of investments in such securities. The term Mortgage-
Backed Securities as used herein includes adjustable rate mortgage securities
and derivative mortgage products such as collateralized mortgage obligations and
stripped mortgage-backed securities, all as described under "General Portfolio
Techniques" below and in the Statement of Additional Information.
GROUPING (3). High yield, high risk fixed-income securities rated Baa or lower
by Moody's or BBB or lower by S&P or, if not rated, are determined by the
Investment Manager to be of comparable quality. The high yield, high risk
fixed-income securities in this grouping may include both convertible and
nonconvertible debt securities and preferred stock. Fixed-income securities
rated Baa by Moody's or BBB by S&P have speculative characteristics greater than
those of more highly rated bonds, while fixed-income securities rated Ba or BB
or lower by Moody's and S&P, respectively, are considered to be speculative
investments. Furthermore, the DIVERSIFIED INCOME PORTFOLIO does not have any
minimum quality rating standard for its investments. As such, the Portfolio may
invest in securities rated as low as Caa, Ca or C by Moody's or CCC, CC, C or C1
by S&P. Fixed-income securities rated Caa or Ca by Moody's may already be in
default on payment of interest or principal, while bonds rated C by Moody's,
their lowest bond rating, can be regarded as having extremely poor prospects of
ever attaining any real investment standing. Bonds rated C1 by S&P are no longer
making interest payments. See "Special Investment Considerations" and "General
Portfolio Techniques" below.
A description of Moody's and S&P ratings is contained in the Appendix. Non-rated
securities will also be considered for investment by the DIVERSIFIED INCOME
PORTFOLIO when the terms of the securities themselves makes them appropriate
investments for the Portfolio.
The ratings of fixed-income securities by Moody's and S&P are a generally
accepted barometer of credit risk. However, as the creditworthiness of issuers
of lower-rated fixed-income securities is more problematical than that of
issuers of higher-rated fixed-income securities, the achievement of the
investment objectives of the DIVERSIFIED INCOME PORTFOLIO will be more dependent
upon the Investment Manager's own credit analysis than would be the case with a
mutual fund investing primarily in higher quality bonds. The Investment Manager
will utilize a security's credit rating as simply one indication of an issuer's
creditworthiness and will principally rely upon its own analysis of any security
currently held by the DIVERSIFIED INCOME PORTFOLIO or potentially purchasable by
the Portfolio. See "General Portfolio Techniques" below for a discussion of
credit risk and interest
16 - PROSPECTUS
<PAGE>
rate risk, to which risks all fixed-income securities are subject, and a
discussion of the actions to be taken if a security held by grouping (1) or (2)
of the Portfolio is downgraded by a rating agency to a rating of below Baa or
BBB, as well as a discussion of the characteristics and risks of investments in
fixed-income securities rated Baa or BBB.
A portion of the fixed-income securities purchased by the Portfolio may be zero
coupon securities (see "General Portfolio Techniques" below).
The DIVERSIFIED INCOME PORTFOLIO may enter into repurchase agreements, reverse
repurchase agreements, dollar rolls and forward foreign currency exchange
contracts, engage in futures contracts and options transactions, purchase
securities which are issued in private placements or are otherwise not readily
marketable, purchase securities on a when-issued or delayed delivery basis or a
"when, as and if issued" basis, and purchase or sell securities on a forward
commitment basis, in each case in accordance with the description of these
investments and techniques (and subject to the risks) set forth under "General
Portfolio Techniques" below and in the Statement of Additional Information.
Investors should carefully consider the risks of investing in securities of
foreign issuers and securities denominated in non-U.S. currencies (see "General
Portfolio Techniques" below for a discussion of the characteristics and risks of
investments in foreign securities).
COMMON STOCKS. The DIVERSIFIED INCOME PORTFOLIO may invest in common stocks in
an amount up to 20% of its total assets in the circumstances described below
when consistent with the Portfolio's investment objectives.
The DIVERSIFIED INCOME PORTFOLIO may acquire common stocks when attached to or
included in a unit with fixed-income securities, or when acquired upon
conversion of fixed-income securities or upon exercise of warrants attached to
fixed-income securities and may purchase common stocks directly when such
acquisitions are determined by the Investment Manager to further the Portfolio's
investment objectives (see the discussions of warrants and convertible
securities under "General Portfolio Techniques" below).
For example, the DIVERSIFIED INCOME PORTFOLIO may purchase the common stock of
companies involved in takeovers or recapitalizations where the issuer, or a
controlling stockholder, has offered, or pursuant to a "going private"
transaction is effecting, an exchange of its common stock for newly-issued
fixed-income securities. By purchasing the common stock of the company issuing
the fixed-income securities prior to the consummation of the transaction or
exchange offer, the DIVERSIFIED INCOME PORTFOLIO will be able to obtain the
fixed-income securities directly from the issuer at their face value,
eliminating the payment of a dealer's mark-up otherwise payable when
fixed-income securities are acquired from third parties, thereby increasing the
net yield to the shareholders of the Portfolio. While the Portfolio will incur
brokerage commissions in connection with its purchase of common stocks, it is
anticipated that the amount of such commissions will be significantly less than
the amount of such mark-up.
Fixed-income securities acquired by the DIVERSIFIED INCOME PORTFOLIO through the
purchase of common stocks under the circumstances described in the preceding
paragraph are subject to the general credit risks and interest rate risks to
which all fixed-income securities purchased by the Portfolio are subject. Such
securities generally will be rated Baa/BBB or lower as are the other high yield,
high risk fixed-income securities in which the Portfolio may invest. In
addition, since corporations involved in take-over situations are often highly
leveraged, that factor will be evaluated by the Investment Manager as part of
its credit risk determination with respect to the purchase of particular common
stocks for the Portfolio's investment portfolio. In the event the Portfolio
purchases common stock of a corporation in anticipation of a transaction
(pursuant to which the common stock is to be exchanged for fixed-income
securities) which fails to take place, the Investment Manager will continue to
hold such common stock for the Portfolio only if it determines that continuing
to hold such common stock under those circumstances is consistent with the
Portfolio's investment objectives.
SPECIAL INVESTMENT CONSIDERATIONS. Because of the special nature of the
DIVERSIFIED INCOME PORTFOLIO's investment in high yield securities, commonly
known as "junk bonds," the Investment Manager must take account of certain
special considerations in assessing the risks associated with such investments.
Investors should carefully consider the risks of investing in high yield
securities (see "General Portfolio Techniques" below and in the Statement of
Additional Information for a discussion of the risks of investments in high
yield securities).
THE BALANCED PORTFOLIO
The investment objective of the BALANCED PORTFOLIO is to achieve high total
return through a combination of income and capital appreciation. This objective
may not be changed without the approval of the shareholders of the BALANCED
PORTFOLIO. There is no assurance that the objective will be achieved. The
following investment policies may be changed by the Trustees of the Fund without
shareholder approval:
The BALANCED PORTFOLIO seeks to obtain its objective by investing in a
diversified portfolio of common stocks and investment grade fixed-income
securities. The percentage of assets allocated between equity and fixed-income
securities will vary from time to time depending on the judgment of the
Sub-Adviser as to general economic and market conditions, changes in fiscal or
monetary policies and trends in yields and interest rates. However, under normal
circumstances, it is expected that common stocks will represent approximately
60-70% of the BALANCED PORTFOLIO's total assets. In addition, the BALANCED
PORTFOLIO under normal circumstances will maintain at least 25% of its total
assets in fixed-income securities.
17 - PROSPECTUS
<PAGE>
Investments in the equity portion of the portfolio of the BALANCED PORTFOLIO
will be determined pursuant to a "top down" investment process ranging from the
overall economic outlook, to the development of industry/sector preferences, and
last, to specific stock selections. The following disciplines generally apply
with regard to stock selection of the equity component of the Portfolio: (i) any
industry group (as determined by the Adviser) with at least a 1% position in the
Standard & Poor's 500 Composite Stock Price Index (the "S&P 500") will in most
cases be represented in the Portfolio; (ii) industry groups within the equity
component of the Portfolio may be underweighted up to 50% or overweighted up to
200% compared with the weightings of those industries in the S&P 500, in
accordance with the discretion of the Sub-Adviser; (iii) no single issuer's
equity securities will represent at the time of purchase more than 5% of the
BALANCED PORTFOLIO's total assets; and (iv) at least 95% of the companies
represented will have minimum market capitalizations at the time of purchase in
excess of $1.5 billion. Subject to the BALANCED PORTFOLIO's investment
objective, the Sub-Adviser may modify the foregoing disciplines without notice.
The fixed-income portion of the portfolio of the BALANCED PORTFOLIO may consist
of securities issued or guaranteed by the U.S. Government (Treasury bills, notes
and bonds), investment grade corporate debt securities (including convertible
securities), mortgage-backed and asset-backed securities and money market
securities (as set forth under "General Portfolio Techniques" below). A portion
of the fixed-income securities purchased by the Portfolio may be zero coupon
securities (see "General Portfolio Techniques" below). All fixed-income
securities in which the BALANCED PORTFOLIO invests will be either issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or rated at
least BBB by Standard & Poor's Corporation ("S&P") or Baa by Moody's Investors
Service, Inc. ("Moody's") or, if not rated, determined by the Sub-Adviser to be
of comparable quality.
The BALANCED PORTFOLIO will invest primarily in equity securities and
fixed-income corporate debt securities. Under normal circumstances, no more than
10% of the fixed-income portion of the portfolio of the BALANCED PORTFOLIO will
be rated BBB by S&P or Baa by Moody's (see "General Portfolio Techniques" below
for a description of the characteristics and risks of investments in
fixed-income securities rated Baa or BBB and for a discussion of credit risk and
interest rate risk, to which risks all fixed-income securities are subject).
The BALANCED PORTFOLIO may invest in securities convertible into common stock
and warrants, invest up to 25% of the value of its total assets in foreign
securities (including up to 5% in a type of Mexican government money market
securities known as Cetes, which are described above under "The North American
Government Securities Portfolio," if such investments meet the rating standard
for the fixed-income portion of the portfolio of the BALANCED PORTFOLIO), enter
into repurchase a greements, reverse repurchase agreements, dollar rolls and
forward foreign currency exchange contracts, purchase securities which are
issued in private placements or are otherwise not readily marketable, purchase
securities on a when-issued or delayed delivery basis or a "when, as and if
issued" basis, and purchase or sell securities on a forward commitment basis, in
each case in accordance with the description of these investments and techniques
(and subject to the risks) set forth under "General Portfolio Techniques" below
and in the Statement of Additional Information.
The BALANCED PORTFOLIO is authorized to engage in transactions involving options
and futures contracts that would be eligible for use by the UTILITIES PORTFOLIO,
as described under "Options and Futures Transactions" under "General Portfolio
Techniques" below and in the Statement of Additional Information. The BALANCED
PORTFOLIO does not, however, presently intend to engage in such options and
futures transactions and will not do so unless and until the Fund's prospectus
has been revised to reflect this.
THE UTILITIES PORTFOLIO
The investment objective of the UTILITIES PORTFOLIO is to provide current income
and long-term growth of income and capital, by investing primarily in equity and
fixed-income securities of companies engaged in the public utilities industry.
The investment objective of the UTILITIES PORTFOLIO may not be changed without
the approval of the shareholders of the Portfolio. There can be no assurance
that the objective will be achieved. The term "public utilities industry"
consists of companies engaged in the manufacture, production, generation,
transmission, sale and distribution of gas and electric energy, as well as
companies engaged in the communications field, including telephone, telegraph,
satellite, microwave and other companies providing communication facilities for
the public, but excluding public broadcasting companies. For purposes of the
UTILITIES PORTFOLIO, a company will be considered to be in the public utilities
industry if, during the most recent twelve month period, at least 50% of the
company's gross revenues, on a consolidated basis, is derived from the public
utilities industry. The following investment policies may be changed by the
Trustees of the Fund without shareholder approval:
In seeking to achieve its objective, the UTILITIES PORTFOLIO will normally
invest at least 65% of its total assets in securities of companies in the public
utilities industry. The Investment Manager believes the UTILITIES PORTFOLIO's
investment policies are suited to benefit from certain characteristics and
historical performance of the securities of public utility companies. Many of
these companies have historically set a pattern of paying regular dividends and
increasing their common stock dividends over time, and the average common stock
dividend yield of utilities historically has substantially exceeded that of
industrial stocks. The Investment Manager believes that these factors may not
only provide current income but also generally tend to moderate risk and thus
may enhance the opportunity for appreciation of securities owned by the
UTILITIES PORTFOLIO, although the potential for capital appreciation has
historically been lower for many utility stocks compared with most industrial
stocks. There can be no assurance that the historical investment performance of
the public utilities industry will be indicative of future events and
performance.
18 - PROSPECTUS
<PAGE>
The UTILITIES PORTFOLIO will invest in both equity securities (common stocks and
securities convertible into common stock) (see "General Portfolio Techniques"
below) and fixed-income securities (bonds and preferred stock) in the public
utilities industry. The UTILITIES PORTFOLIO does not have any set policies to
concentrate within any particular segment of the utilities industry. The
UTILITIES PORTFOLIO will shift its asset allocation without restriction between
types of utilities and between equity and fixed-income securities based upon the
Investment Manager's determination of how to achieve the UTILITIES PORTFOLIO's
investment objective in light of prevailing market, economic and financial
conditions. For example, at a particular time the Investment Manager may choose
to allocate up to 100% of the UTILITIES PORTFOLIO's assets in a particular type
of security (for example, equity securities) or in a specific utility industry
segment (for example, electric utilities).
Criteria to be utilized by the Investment Manager in the selection of equity
securities include the following screens: earnings and dividend growth; book
value; dividend discount; and price/ earnings relationships. In addition, the
Investment Manager makes continuing assessments of management, the prevailing
regulatory framework and industry trends such as an increasing emphasis on
competition. The Investment Manager may also utilize computer-based equity
selection models in connection with stock allocation in the equity portion of
the portfolio. In keeping with the UTILITIES PORTFOLIO's objective, if in the
opinion of the Investment Manager favorable conditions for capital growth of
equity securities are not prevalent at a particular time, the UTILITIES
PORTFOLIO may allocate its assets predominantly or exclusively in debt
securities with the aim of obtaining current income as well as preserving
capital and thus benefiting long term growth of capital.
The UTILITIES PORTFOLIO may purchase equity securities sold on the New York,
American and other stock exchanges and in the over-the-counter market.
Fixed-income securities in which the UTILITIES PORTFOLIO may invest are debt
securities and preferred stocks which are rated at the time of purchase Baa or
better by Moody's Investors Service, Inc. ("Moody's") or BBB or better by
Standard & Poor's Corporation ("S&P") or which, if unrated, are deemed to be of
comparable quality by the Investment Manager (see "General Portfolio Techniques"
below for a discussion of the characteristics and risks of investments in
fixed-income securities rated Baa or BBB and a discussion of credit risk and
interest rate risk, to which risks all fixed-income securities are subject).
Under normal circumstances the average weighted maturity of the debt portion of
the portfolio is expected to be in excess of seven years. A description of
Moody's and S&P ratings is contained in the Appendix.
While the UTILITIES PORTFOLIO will invest primarily in the securities of public
utility companies, under ordinary circumstances it may invest up to 35% of its
total assets in U.S. Government securities (securities issued or guaranteed as
to principal and interest by the United States or its agencies and
instrumentalities, including zero coupon securities), money market instruments,
repurchase agreements, options and futures (see "General Portfolio Techniques"
below and in the Statement of Additional Information). The UTILITIES PORTFOLIO
may acquire warrants attached to other securities purchased by the Portfolio
(see "General Portfolio Techniques" below).
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant reduction of some or all of the UTILITIES PORTFOLIO's
securities holdings. During such periods, the UTILITIES PORTFOLIO may adopt a
temporary "defensive" posture in which greater than 35% of its total assets are
invested in cash or money market instruments.
The UTILITIES PORTFOLIO may enter into repurchase agreements, invest in foreign
securities (including American Depository Receipts (ADRs), European Depository
Receipts (EDRs) or other similar securities convertible into securities of
foreign issuers), purchase securities which are issued in private placements or
are otherwise not readily marketable, purchase securities on a when-issued or
delayed delivery basis or a "when, as and if issued" basis, and purchase or sell
securities on a forward commitment basis, in each case in accordance with the
description of those investments and techniques (and subject to the risks) set
forth under "General Portfolio Techniques" below and in the Statement of
Additional Information.
PUBLIC UTILITIES INDUSTRY. The public utilities industry as a whole has certain
characteristics and risks particular to that industry. Unlike industrial
companies, the rates which utility companies may charge their customers
generally are subject to review and limitation by governmental regulatory
commissions. Although rate changes of a utility usually fluctuate in approximate
correlation with financing costs, due to political and regulatory factors rate
changes ordinarily occur only following a delay after the changes in financing
costs. This factor will tend to favorably affect a utility company's earnings
and dividends in times of decreasing costs, but conversely will tend to
adversely affect earnings and dividends when costs are rising. In addition, the
value of public utility debt securities (and, to a lesser extent, equity
securities) tends to have an inverse relationship to the movement of interest
rates.
Among the risks affecting the utilities industry are the following: risks of
increases in fuel and other operating costs; the high cost of borrowing to
finance capital construction during inflationary periods; restrictions on
operations and increased costs and delays associated with compliance with
environmental and nuclear safety regulations; the difficulties involved in
obtaining natural gas for resale or fuel for generating electricity at
reasonable prices; the risks in connection with the construction and operation
of nuclear power plants; the effects of energy conservation and the effects of
regulatory changes, such as the possible adverse effects of profits on recent
increased competition within the telecommunications, electric and natural gas
industries and the uncertainties resulting from companies within these
industries diversifying into new domestic and international businesses, as well
as from agreements by many such companies linking future rate increases to
inflation or other factors not directly related to the actual operating profits
of the enterprise.
19 - PROSPECTUS
<PAGE>
THE DIVIDEND GROWTH PORTFOLIO
The investment objective of the DIVIDEND GROWTH PORTFOLIO is to provide
reasonable current income and long-term growth of income and capital. There is
no assurance that the objective will be achieved. The DIVIDEND GROWTH PORTFOLIO
seeks to achieve its investment objective primarily through investments in
common stock of companies with a record of paying dividends and the potential
for increasing dividends. The net asset value of the DIVIDEND GROWTH PORTFOLIO'S
shares will fluctuate with changes in market values of portfolio securities. The
DIVIDEND GROWTH PORTFOLIO will attempt to avoid speculative securities or those
with speculative characteristics.
The investment objective of the DIVIDEND GROWTH PORTFOLIO may not be changed
without the approval of the shareholders of the DIVIDEND GROWTH PORTFOLIO. The
following policies may be changed by the Trustees of the Fund without
shareholder approval:
(1) Up to 30% of the value of the DIVIDEND GROWTH PORTFOLIO's total assets may
be invested in: (a) convertible debt securities (see "General Portfolio
Techniques" below), convertible preferred securities, warrants (see "General
Portfolio Techniques" below), U.S. Government securities (securities issued or
guaranteed as to principal and interest by the United States or its agencies and
instrumentalities, including zero coupon securities), corporate debt securities
which are rated at the time of purchase Baa or better by Moody's Investors
Service, Inc. or BBB or better by Standard & Poor's Corporation or which, if
unrated, are deemed to be of comparable quality by the Investment Manager (see
"General Portfolio Techniques" below for a discussion of the characteristics and
risks of investments in zero coupon securities and fixed-income securities rated
Baa or BBB and a discussion of credit risk and interest rate risk, to which
risks all fixed-income securities are subject) and/or money market instruments
(see "General Portfolio Techniques" below) when, in the opinion of the
Investment Manager, the projected total return on such securities is equal to or
greater than the expected total return on equity securities or when such
holdings might be expected to reduce the volatility of the portfolio (for
purposes of this provision, the term "total return" means the difference between
the cost of a security and the aggregate of its market value and dividends
received); or (b) in money market instruments under any one or more of the
following circumstances: (i) pending investment of proceeds of sale of the
DIVIDEND GROWTH PORTFOLIO'S shares or of portfolio securities; (ii) pending
settlement of purchases of portfolio securities; or (iii) to maintain liquidity
for the purpose of meeting anticipated redemptions.
(2) Notwithstanding any of the foregoing limitations, the DIVIDEND GROWTH
PORTFOLIO may invest more than 30% of the value of its total assets in money
market instruments to maintain, temporarily, a "defensive" posture when, in the
opinion of the Investment Manager, it is advisable to do so because of economic
or market conditions.
The DIVIDEND GROWTH PORTFOLIO may enter into repurchase agreements, invest in
American Depository Receipts (ADRs), purchase securities which are issued in
private placements or are otherwise not readily marketable, purchase securities
on a when-issued or delayed delivery basis or a "when, as and if issued" basis,
and purchase or sell securities on a forward commitment basis, in each case in
accordance with the description of those investments and techniques (and subject
to the risks) set forth under "General Portfolio Techniques" below and in the
Statement of Additional Information.
The DIVIDEND GROWTH PORTFOLIO is authorized to engage in transactions involving
options and futures contracts which would be eligible for use by the UTILITIES
PORTFOLIO, as described under "Options and Futures Transactions" under "General
Portfolio Techniques" below and in the Statement of Additional Information. The
DIVIDEND GROWTH PORTFOLIO does not, however, presently intend to engage in such
options and futures transactions and will not do so unless and until the Fund's
prospectus has been revised to reflect this.
THE VALUE-ADDED MARKET PORTFOLIO
The investment objective of the VALUE-ADDED MARKET PORTFOLIO is to achieve a
high level of total return on its assets through a combination of capital
appreciation and current income. The investment objective of the VALUE-ADDED
MARKET PORTFOLIO may not be changed without the approval of the shareholders of
the Portfolio. There can be no assurance that the objective will be achieved.
The investment policies discussed below may be changed by the Trustees of the
Fund without shareholder approval:
The VALUE-ADDED MARKET PORTFOLIO will seek to attain its investment objective by
investing, on an equally-weighted basis, in a diversified portfolio of common
stocks of the companies which are included in the Standard & Poor's 500
Composite Stock Price Index (the "S&P Index"). Standard & Poor's 500 is a
trademark of Standard & Poor's Corporation ("S&P") and has been licensed for use
by the Fund. The VALUE-ADDED MARKET PORTFOLIO is not sponsored, endorsed, sold
or promoted by S&P and S&P makes no representation regarding the advisability of
investing in the VALUE-ADDED MARKET PORTFOLIO. The S&P Index consists of 500
common stocks selected by S&P, most of which are listed on the New York Stock
Exchange. Inclusion of a stock in the S&P Index implies no opinion by S&P as to
the quality of the stock as an investment. The S&P Index is determined, composed
and calculated by S&P without regard to the VALUE-ADDED MARKET PORTFOLIO. S&P is
neither a sponsor of, nor in any way affiliated with, the VALUE-ADDED MARKET
PORTFOLIO, and S&P makes no representation or warranty, express or implied, on
the advisability of investing in the VALUE-ADDED MARKET PORTFOLIO or as to the
ability of the S&P Index to track general stock market performance, and S&P
disclaims all warranties of merchantability or fitness for a particular purpose
or use with respect to the S&P Index or any data included therein. S&P has no
connection with the VALUE-ADDED MARKET PORTFOLIO other than
20 - PROSPECTUS
<PAGE>
the licensing to the Investment Manager of the use of the S&P Index in
connection with the VALUE-ADDED MARKET PORTFOLIO.
The VALUE-ADDED MARKET PORTFOLIO invests in the stocks included in the S&P Index
on an equally-weighted basis; that is, to the extent practicable and subject to
the specific investment policies and restrictions described below, an equal
portion of the VALUE-ADDED MARKET PORTFOLIO's assets is invested in each of the
500 securities in the S&P Index. This differs from the S&P Index and nearly all
other major indexes, which generally are weighted on a market-capitalization
basis. For example, the 50 largest capitalization issuers in the S&P Index
represent approximately 45% of the S&P Index. However, in accordance with its
investment policies, the VALUE-ADDED MARKET PORTFOLIO will strive to maintain
each stock holding equally, so that, subject to the specific investment policies
and investment restrictions described below, approximately 0.20 of 1% of the
VALUE-ADDED MARKET PORTFOLIO's total invested assets will be invested in each of
the 500 companies included in the S&P Index. The equal weighting technique is
based on the Investment Manager's statistical analysis that most portfolio
performance is usually generated by only one-quarter to one-third of the
portfolio. Since there is no certainty that any specific company or industry
selection, even within a broad-based index such as the S&P Index, will achieve
superior performance, the Investment Manager believes equal-weighting may
benefit the VALUE-ADDED MARKET PORTFOLIO in seeking to attain its investment
objective.
The holdings of the VALUE-ADDED MARKET PORTFOLIO will be adjusted by the
Investment Manager not less than quarterly to reflect changes in the VALUE-ADDED
MARKET PORTFOLIO's asset levels and in the relative values of the common stocks
held by the VALUE-ADDED MARKET PORTFOLIO so that following each adjustment the
value of the VALUE-ADDED MARKET PORTFOLIO's investment in each security will be
equal to the extent practicable. In addition, whenever a company is eliminated
from or added to the S&P Index, the VALUE-ADDED MARKET PORTFOLIO will sell or
purchase the stock of such company, as the case may be, as soon as practicable.
Accordingly, securities may be purchased and sold by the VALUE-ADDED MARKET
PORTFOLIO when such purchases and sales would not be made under traditional
investment criteria.
In addition, while the Investment Manager will not actively manage the portfolio
other than to follow the guidelines set forth above for following an
equally-weighted S&P Index, it may eliminate one or more securities (or elect
not to increase the VALUE-ADDED MARKET PORTFOLIO's position in such securities),
notwithstanding the continued listing of such securities in the S&P Index, in
the following circumstances: (a) the stock is no longer publicly traded, such as
in the case of a leveraged buyout or merger; (b) an unexpected adverse
development with respect to a company, such as bankruptcy or insolvency; (c) in
the view of the Investment Manager, there is a high degree of risk with respect
to a company that bankruptcy or insolvency will occur; or (d) in the view of the
Investment Manager, based on its consideration of the price of a company's
securities, the depth of the market in those securities and the amount of those
securities held or to be held by the VALUE-ADDED MARKET PORTFOLIO, retaining
shares of a company or making any additional purchases would be inadvisable
because of liquidity risks. The Investment Manager will monitor on an ongoing
basis all companies falling within any of the circumstances described in this
paragraph, and will return such company's shares to the VALUE-ADDED MARKET
PORTFOLIO's holdings, or recommence purchases, when and if those conditions
cease to exist.
The VALUE-ADDED MARKET PORTFOLIO may purchase futures contracts on stock indexes
at a time when it is not fully invested on account of additional cash invested
in the Portfolio or income received by the Portfolio. Purchase of a futures
contract in those circumstances serves as a temporary substitute for the
purchase of individual stocks which may then be purchased in orderly fashion.
The VALUE-ADDED MARKET PORTFOLIO may enter into repurchase agreements and may
purchase common stock, including American Depository Receipts (ADRs), of foreign
corporations represented in the S&P Index (such common stock and ADRs are listed
on the New York Stock Exchange, the American Stock Exchange or the NASDAQ Market
System) (see "General Portfolio Techniques" below and in the Statement of
Additional Information).
A portion of the VALUE-ADDED MARKET PORTFOLIO's assets, not exceeding 25% of its
total assets, may be invested temporarily in money market instruments (see
"General Portfolio Techniques" below) under any one or more of the following
circumstances: (a) pending investment of proceeds of sale of shares of the
VALUE-ADDED MARKET PORTFOLIO; (b) pending settlement of purchases of portfolio
securities; or (c) to maintain liquidity for the purposes of meeting anticipated
redemptions.
THE CORE EQUITY PORTFOLIO
The investment objective of the CORE EQUITY PORTFOLIO is long-term growth of
capital. This objective may not be changed without the approval of the
shareholders of the CORE EQUITY PORTFOLIO. There is no assurance that the
objective will be achieved. The following investment policies may be changed by
the Trustees of the Fund without shareholder approval:
The CORE EQUITY PORTFOLIO invests primarily in common stocks and securities
convertible into common stocks of companies which offer the prospect for growth
of earnings. The Portfolio seeks to achieve its investment objective by
investing under normal circumstances at least 65% of its total assets in common
stocks and convertible securities, including warrants (see "General Portfolio
Techniques" below). There are no minimum rating or quality requirements with
respect to convertible securities in which the Portfolio may invest and, thus,
all or some of such securities may be below investment grade (see "General
Portfolio Techniques" below). See the Appendix for a discussion of ratings of
fixed-income securities.
The Sub-Adviser invests the assets of the CORE EQUITY PORTFOLIO by pursuing its
"top down sector rotational core equity" philosophy. That strategy involves a
three-step process to achieve value for the Portfolio's shareholders by taking
advantage of unrecognized appreciation potential created by changes in the
economic, social and political environments. Pursuant to its
21 - PROSPECTUS
<PAGE>
approach, the Sub-Adviser first determines those market sectors,and the
industries within those sectors, that the Sub-Adviser believes offer
opportunities for capital appreciation. The Sub-Adviser makes this determination
by utilizing an industry matrix to divide the stock market by economic sectors
and industries, and then by continuously reviewing those industries. Following
the identification of those specific industries, individual companies within
those industries are chosen for investment by the CORE EQUITY PORTFOLIO, based
on factors including but not limited to: potential growth in earnings and
dividends; quality of management; new products and/or new markets; research and
development capabilities; historical rate of return on equity and invested
capital; cash flow and balance sheet strength; and forcing value through company
initiatives such as cost reduction or share repurchase. As the third step, the
Sub-Adviser determines the weightings that the selected industries and companies
will have in the portfolio.
The CORE EQUITY PORTFOLIO intends to invest primarily, but not exclusively, in
companies having stock market capitalizations (calculated by multiplying the
number of outstanding shares of a company by the current market price) of at
least $1 billion. The Sub-Adviser anticipates that the CORE EQUITY PORTFOLIO
will focus its investments in a relatively limited number of companies, although
the Sub-Adviser continuously monitors up to 250 companies for possible
investment by the Portfolio. The Portfolio's holdings are changed by the
Sub-Adviser as warranted based on changes in the overall market or economic
environment, as well as factors specific to particular companies.
While the CORE EQUITY PORTFOLIO invests primarily in common stocks and
securities convertible into common stock, under ordinary circumstances it may
invest up to 35% of its total assets in money market instruments, which are
short-term (maturities of up to thirteen months) fixed-income securities issued
by private and governmental institutions. Money market instruments in which the
CORE EQUITY PORTFOLIO may invest are set forth under "General Portfolio
Techniques" below.
There may be periods during which, in the opinion of the Sub-Adviser, market
conditions warrant reduction of some or all of the CORE EQUITY PORTFOLIO's
securities holdings. During such periods, the Portfolio may adopt a temporary
"defensive" posture in which greater than 35% of its total assets is invested in
money market instruments or cash.
The CORE EQUITY PORTFOLIO may enter into repurchase agreements, invest in
foreign securities (including American Depository Receipts (ADRs), European
Depository Receipts (EDRs) or other similar securities convertible into
securities of foreign issuers), purchase securities which are issued in private
placements or are otherwise not readily marketable, purchase securities on a
when-issued or delayed delivery basis or a "when, as and if issued" basis, and
purchase or sell securities on a forward commitment basis, in each case in
accordance with the description of these investments and techniques (and subject
to the risks) set forth under "General Portfolio Techniques" below and in the
Statement of Additional Information.
The CORE EQUITY PORTFOLIO is authorized to engage in transactions involving
options and futures contracts that would be eligible for use by the UTILITIES
PORTFOLIO, as described under "Options and Futures Transactions" under "General
Portfolio Techniques" below and in the Statement of Additional Information. The
CORE EQUITY PORTFOLIO does not, however, presently intend to engage in such
options and futures transactions and will not do so unless and until the Fund's
prospectus has been revised to reflect this.
THE AMERICAN VALUE PORTFOLIO
The investment objective of the AMERICAN VALUE PORTFOLIO is long-term capital
growth consistent with an effort to reduce volatility. This objective may not be
changed without the approval of the shareholders of the AMERICAN VALUE
PORTFOLIO. There is no assurance that the objective will be achieved. The
investment policies discussed below may be changed by the Trustees of the Fund
without shareholder approval:
The AMERICAN VALUE PORTFOLIO seeks to achieve its investment objective by
investing in a diversified portfolio of securities consisting principally of
common stocks. The AMERICAN VALUE PORTFOLIO utilizes an investment process that
places primary emphasis on seeking to identify industries, rather than
individual companies, as prospects for capital appreciation and whereby the
Investment Manager seeks to invest assets of the AMERICAN VALUE PORTFOLIO in
industries it considers to be undervalued at the time of purchase and to sell
those it considers overvalued.
After selection of the AMERICAN VALUE PORTFOLIO's target industries, specific
company investments are selected. In this process, the Investment Manager seeks
to identify companies whose prospects are deemed attractive on the basis of an
evaluation of valuation screens and prospective company fundamentals.
Following selection of the AMERICAN VALUE PORTFOLIO's specific investments, the
Investment Manager will attempt to allocate the assets of the AMERICAN VALUE
PORTFOLIO so as to reduce the volatility of its portfolio. In doing so, the
AMERICAN VALUE PORTFOLIO may hold a portion of its portfolio in fixed-income
securities in an effort to moderate extremes of price fluctuations. The AMERICAN
VALUE PORTFOLIO may invest up to 35% of its total assets in common stocks of
non-U.S. companies including American Depository Receipts (see "General
Portfolio Techniques" below), in companies in industries which have not been
determined to be undervalued by the Investment Manager, and in convertible debt
securities and warrants (see "General Portfolio Techniques" below), convertible
preferred securities, U.S. Government securities (securities issued or
guaranteed as to principal and interest by the United States or its agencies and
instrumentalities, including zero coupon securities) (see "General Portfolio
Techniques" below) and investment grade corporate debt securities when, in the
opinion of the Investment Manager, the projected total return on such securities
is equal to or greater than the expected total return on common stocks, or when
such holdings might be expected to reduce the volatility of the portfolio, and
in money market instruments (see "General Portfolio Techniques" below) under any
one or more of the following
22 - PROSPECTUS
<PAGE>
circumstances: (i) pending investment of proceeds of sale of shares of the
AMERICAN VALUE PORTFOLIO or of portfolio securities; (ii) pending settlement of
purchases of portfolio securities; or (iii) to maintain liquidity for the
purpose of meeting anticipated redemptions. Greater than 35% of the AMERICAN
VALUE PORTFOLIO's total assets may be invested in money market instruments to
maintain, temporarily, a "defensive" posture when, in the opinion of the
Investment Manager, it is advisable to do so because of economic or market
conditions. The term investment grade consists of fixed-income securities rated
Baa or higher by Moody's Investors Service Inc. or BBB or higher by Standard &
Poor's Corporation or, if not rated, determined to be of comparable quality by
the Investment Manager (see "General Portfolio Techniques" below for a
discussion of the characteristics and risks of investments in fixed-income
securities rated Baa or BBB and a discussion of credit risk and interest rate
risk, to which risks all fixed-income securities are subject).
Because prices of stocks fluctuate from day to day, the value of an investment
in the AMERICAN VALUE PORTFOLIO will vary based upon the Portfolio's investment
performance. The AMERICAN VALUE PORTFOLIO's emphasis on "undervalued" industries
reflects investment views which are frequently contrary to general market
assessments and which may involve risks associated with departure from general
investment opinions.
Under normal circumstances, at least 65% of the AMERICAN VALUE PORTFOLIO's total
assets will be invested in common stocks of U.S. companies which, at the time of
purchase, were in undervalued or moderately valued industries as determined by
the Investment Manager.
The foregoing limitations apply at the time of acquisition based on the last
determined market value of the assets of the AMERICAN VALUE PORTFOLIO, and any
subsequent change in any applicable percentage resulting from market
fluctuations or other changes in total assets will not require elimination of
any security from the portfolio.
Since the investment strategy of the AMERICAN VALUE PORTFOLIO involves an
ongoing process of determination by the Investment Manager of undervalued
industries and appropriate specific company selections within those industries,
it is anticipated that the Portfolio will have more frequent purchase and sale
transactions than most other Portfolios. Therefore, as noted below under
"General Portfolio Techniques -- Portfolio Trading," the annual portfolio
turnover rate of the AMERICAN VALUE PORTFOLIO may exceed 400%.
The AMERICAN VALUE PORTFOLIO may enter into repurchase agreements, engage in
futures contracts and options transactions, purchase securities which are issued
in private placements or are otherwise not readily marketable, and purchase
securities on a when-issued or delayed delivery basis or a "when, as and if
issued" basis, and purchase or sell securities on a forward commitment basis, in
each case in accordance with the description of these investments and techniques
(and subject to the risks) set forth under "General Portfolio Techniques" below
and in the Statement of Additional Information.
THE GLOBAL EQUITY PORTFOLIO
The investment objective of the GLOBAL EQUITY PORTFOLIO is to seek to obtain
total return on its assets primarily through long-term capital growth and to a
lesser extent from income. There can be no assurance that the GLOBAL EQUITY
PORTFOLIO will achieve its objective. The investment objective cannot be changed
without the approval of the shareholders of the GLOBAL EQUITY PORTFOLIO. The
investment policies discussed below may be changed by the Trustees of the Fund
without shareholder approval:
The GLOBAL EQUITY PORTFOLIO will invest at least 65% of its total assets in
equity securities issued by issuers located in various countries, around the
world. The Portfolio's investment portfolio will normally be invested in at
least five separate countries. With the exception of Australia, Canada, France,
Japan, The United Kingdom and Germany, no more than 20% of the value of the
Portfolio's net assets may be invested in securities of issuers located in any
one foreign country.
The GLOBAL EQUITY PORTFOLIO will seek to achieve its investment objective
through investments in all types of common stocks and equivalents (such as
convertible debt securities and warrants) (see "General Portfolio Techniques"
below), preferred stocks and bonds and other investment grade debt obligations
of domestic and foreign companies and governments and international
organizations. There is no limitation on the percentage or amount of the GLOBAL
EQUITY PORTFOLIO's assets which may be invested for growth or income. The term
investment grade consists of fixed-income securities rated Baa or higher by
Moody's Investors Service Inc. or BBB or higher by Standard & Poor's Corporation
or, if not rated, determined to be of comparable quality by the Investment
Manager (see "General Portfolio Techniques" below for a discussion of the
characteristics and risks of investments in fixed-income securities rated Baa or
BBB and a discussion of credit risk and interest rate risk, to which risks all
fixed-income securities are subject).
The GLOBAL EQUITY PORTFOLIO will maintain a flexible investment policy and,
based on a worldwide investment strategy, will invest in a diversified portfolio
of securities of companies and governments located throughout the world. Such
securities will generally be those with a record of paying dividends and the
potential for increasing dividends. The percentage of the GLOBAL EQUITY
PORTFOLIO's assets invested in particular geographic sectors will shift from
time to time in accordance with the judgment of the Investment Manager.
The GLOBAL EQUITY PORTFOLIO may also invest in securities of foreign issuers in
the form of American Depository Receipts (ADRs), European Depository Receipts
(EDRs) or other similar securities convertible into securities of foreign
issuers, and invest up to 10% of its total assets in securities issued by other
investment companies (see the discussion of these securities under "General
Portfolio Techniques" below).
Notwithstanding the GLOBAL EQUITY PORTFOLIO's investment objective of seeking
total return, the GLOBAL EQUITY PORTFOLIO may, for defensive purposes, without
limitation, invest in: obligations of
23 - PROSPECTUS
<PAGE>
the United States Government, its agencies or instrumentalities, including zero
coupon securities (see "General Portfolio Techniques" below); cash and cash
equivalents in major currencies; repurchase agreements (see "General Portfolio
Techniques" below) and money market instruments. Money market instruments in
which the GLOBAL EQUITY PORTFOLIO may invest are set forth under "General
Portfolio Techniques" below.
Investors should carefully consider the risks of investing in securities of
foreign issuers and securities denominated in non-U.S. currencies (see "General
Portfolio Techniques" below for a discussion of the characteristics and risks of
investments in foreign securities).
The GLOBAL EQUITY PORTFOLIO may enter into forward foreign currency exchange
contracts, engage in futures contracts and options transactions, purchase
securities which are issued in private placements or are otherwise not readily
marketable, purchase securities on a when-issued or delayed delivery basis or a
"when, as and if issued" basis, and purchase or sell securities on a forward
commitment basis, in each case in accordance with the description of those
investments and techniques (and subject to the risks) set forth under "General
Portfolio Techniques" below and in the Statement of Additional Information.
THE DEVELOPING GROWTH PORTFOLIO
The investment objective of the DEVELOPING GROWTH PORTFOLIO is long-term capital
growth. This objective may not be changed without the approval of the
shareholders of the DEVELOPING GROWTH PORTFOLIO. There is no assurance that the
objective will be achieved. The following policies may be changed by the
Trustees of the Fund without shareholder approval:
The DEVELOPING GROWTH PORTFOLIO seeks to achieve capital growth which
significantly exceeds the historical total return of common stocks as measured
by the Standard & Poor's 500 index. The primary emphasis is on the securities of
smaller and medium-sized companies that, in the opinion of the Investment
Manager, have the potential to grow much more rapidly than the economy; at
times, investments may also be made in the securities of larger, established
companies which also have such growth potential. The DEVELOPING GROWTH PORTFOLIO
will normally invest at least 65% of its total assets in the securities of such
companies. In addition to common stock, this portion of the portfolio may also
include convertible securities (see "General Portfolio Techniques" below),
preferred stocks and warrants (see "General Portfolio Techniques" below).
The Investment Manager attempts to identify companies whose earnings growth will
be significantly higher than the average. Dividend income is not generally a
consideration in the selection of stocks for purchase.
The Investment Manager focuses its stock selection for the DEVELOPING GROWTH
PORTFOLIO upon a diversified group of emerging growth companies which have moved
beyond the difficult and extremely risky "start-up" phase and which at the time
of selection show positive earnings with the prospects of achieving significant
further profit gains in at least the next two-to-three years after acquisition.
New technologies, techniques, products or services, cost-reducing measures,
changes in management, capitalization or asset deployment, changes in government
regulations or favorable shifts in other external circumstances may all
contribute to the anticipated phase of growth.
The application of the DEVELOPING GROWTH PORTFOLIO's investment policies is
basically dependent upon the judgment of the Investment Manager. The proportions
of the Portfolio's assets invested in particular industries will shift from time
to time in accordance with the judgment of the Investment Manager.
The DEVELOPING GROWTH PORTFOLIO may invest up to 35% of its total assets in
corporate debt securities which are rated at the time of purchase Baa or better
by Moody's Investors Service Inc. or BBB or better by Standard & Poor's
Corporation or which, if unrated, are deemed to be of comparable quality by the
Investment Manager (see "General Portfolio Techniques" below for a discussion of
the characteristics and risks of investments in fixed-income securities rated
Baa or BBB and a discussion of credit risk and interest rate risk, to which
risks all fixed-income securities are subject) and money market instruments.
Money market instruments in which the Portfolio may invest are set forth under
"General Portfolio Techniques" below. There may be periods during which, in the
opinion of the Investment Manager, general market conditions warrant reduction
of some or all of the DEVELOPING GROWTH PORTFOLIO's securities holdings. During
such periods, the Portfolio may adopt a temporary "defensive" posture in which
greater than 35% of its total assets are invested in cash or money market
instruments.
The securities in which the DEVELOPING GROWTH PORTFOLIO invests may or may not
be listed on a national stock exchange, but if they are not so listed, will
generally have an established over-the-counter market.
Since the investment strategy of the DEVELOPING GROWTH PORTFOLIO involves an
ongoing process of determination by the Investment Manager of emerging growth
companies that meet the stock selection process discussed above, it is
anticipated that the Portfolio will have more frequent purchase and sale
transactions than most other Portfolios. Therefore, as noted below under
"General Portfolio Techniques -- Portfolio Trading," the annual portfolio
turnover rate of the DEVELOPING GROWTH PORTFOLIO may exceed 300%.
The DEVELOPING GROWTH PORTFOLIO may also enter into repurchase agreements,
invest in foreign securities, including American Depository Receipts (ADRs) and
European Depository Receipts (EDRs) or similar securities convertible into
securities of foreign issuers, purchase securities which are issued in private
placements or which are not otherwise readily marketable, purchase securities on
a when-issued or delayed delivery basis or a "when, as and if issued" basis, and
purchase or sell securities on a forward commitment basis, in each case in
accordance with
24 - PROSPECTUS
<PAGE>
the description of those investments and techniques (and subject to the risks)
set forth under "General Portfolio Techniques" below and in the Statement of
Additional Information.
The DEVELOPING GROWTH PORTFOLIO is authorized to engage in transactions
involving options and futures contracts that would be eligible for use by the
UTILITIES PORTFOLIO, as described under "Options and Futures Transactions" under
"General Portfolio Techniques" below and in the Statement of Additional
Information. The DEVELOPING GROWTH PORTFOLIO does not, however, presently intend
to engage in such options and futures transactions and will not do so unless and
until the Fund's prospectus has been revised to reflect this.
LEVERAGING. The DEVELOPING GROWTH PORTFOLIO may borrow money, but only from a
bank and in an amount up to 25% of the value of the Portfolio's total assets,
taken at the lower of market value or cost, not including the amount borrowed.
When the Portfolio borrows it will be because it seeks to enhance capital
appreciation by leveraging its investments through purchasing securities with
the borrowed funds. Any investment gains (and/ or investment income) made with
the additional monies in excess of interest paid will cause the net asset value
of the Portfolio's shares (and/or the Portfolio's net income per share) to rise
to a greater extent than would otherwise be the case. Conversely, if the
investment performance of the additional monies fails to cover their cost to the
Portfolio, net asset value (and/or net income per share) will decrease to a
greater extent than would otherwise be the case. This is the speculative factor
involved in leverage. The Portfolio will be required to maintain an asset
coverage (including the proceeds of borrowings) of at least 300% of such
borrowings in accordance with the provisions of the Investment Company Act of
1940, as amended (the "Act"). The investment policy also provides that the
Portfolio may not purchase or sell a security on margin.
THE EMERGING MARKETS PORTFOLIO
The investment objective of the EMERGING MARKETS PORTFOLIO is long-term capital
appreciation. This objective may not be changed without the approval of the
shareholders of the EMERGING MARKETS PORTFOLIO. There can be no assurance that
the objective will be achieved. The following policies may be changed by the
Trustees of the Fund without shareholder approval:
The EMERGING MARKETS PORTFOLIO will seek to achieve its investment objective by
investing at least 65% of its total assets at all times, except for temporary
and defensive purposes, in equity securities of companies in emerging market
countries. For the purposes of this Portfolio, an "emerging market country" is
any country that is considered an emerging or developing country by the
International Bank of Reconstruction and Development (the "World Bank"), as well
as Hong Kong and Singapore. Presently, there are approximately 130 countries
considered to be emerging market countries, approximately 40 of which currently
have established securities markets. These countries generally include every
nation in the world except the United States, Canada, Japan, Australia, New
Zealand, most nations located in Western Europe and certain other nations
located in Asia. A list of the countries not falling within the World Bank
definition of an emerging market country is set forth in the Statement of
Additional Information.
Under current market conditions, the EMERGING MARKETS PORTFOLIO expects that its
investments in equity securities of companies in emerging market countries
initially will consist primarily of equity securities of "Asian Companies" (as
defined below) and, to a lesser extent, equity securities of "Latin American
Companies" (as defined below). Under normal circumstances, the Portfolio will
invest in at least five emerging market countries. The EMERGING MARKETS
PORTFOLIO may not invest more than 20% of its total assets in the securities of
issuers located in any one emerging market country or in any one developed
foreign country other than Australia, Canada, France, Japan, the United Kingdom
and Germany. Substantially all of the Portfolio's investments may be denominated
in currencies other than the U.S. dollar.
The EMERGING MARKETS PORTFOLIO will invest primarily in equity securities of
companies that (i) are organized under the laws of emerging market countries;
(ii) regardless of where organized, derive at least 50% of their revenues from
goods produced or sold, investments made, or services performed in emerging
market countries; (iii) maintain at least 50% of their assets in emerging market
countries; or (iv) have securities which are traded principally on a stock
exchange in an emerging market country. As used herein, "Asian Companies" and
"Latin American Companies" include any companies meeting the foregoing
requirements with respect to Asian emerging market countries or Latin American
emerging market countries, respectively. See "Risks of Investing in Emerging
Market Countries" below.
The EMERGING MARKETS PORTFOLIO may invest up to 35% of its total assets in (i)
convertible and non-convertible fixed-income securities of government or
corporate issuers located in emerging market countries; (ii) equity and
fixed-income securities of issuers in developed countries; and (iii) cash and
money market instruments. See "General Portfolio Techniques" below for a
discussion of investments in convertible securities and money market
instruments.
There may be periods during which, in the opinion of the Sub-Adviser, market
conditions warrant reduction of some or all of the EMERGING MARKETS PORTFOLIO's
securities holdings. During such periods, the Portfolio may adopt a temporary
"defensive" posture in which any amount of its total assets may be invested in
obligations of the United States government, its agencies or instrumentalities,
including zero coupon securities (see "General Portfolio Techniques" below),
money market instruments and cash.
The equity securities in which the EMERGING MARKETS PORTFOLIO may invest include
common and preferred stock (including convertible preferred stock), stock
purchase warrants and rights, equity interests in trusts and partnerships and
American or other types of Depository Receipts. These securities may be listed
on
25 - PROSPECTUS
<PAGE>
securities exchanges, traded in various over-the-counter markets or have no
organized market. See "General Portfolio Techniques" below for a discussion of
investments in warrants, other investment companies and American or other types
of Depository Receipts.
The fixed-income securities (including convertible securities) of government or
corporate issuers located in emerging market countries, the United States or
other developed countries in which the EMERGING MARKETS PORTFOLIO may invest may
consist of fixed-income securities that are unrated or rated Ba or lower by
Moody's Investors Service, Inc. ("Moody's") or BB or lower by Standard & Poor's
Corporation ("S&P"), including zero coupon securities. There is no limit on the
percentage of the Portfolio's total assets which may be invested in fixed-income
securities which are unrated or rated below investment grade. Since the EMERGING
MARKETS PORTFOLIO does not have any minimum quality rating standard for such
investments, the Portfolio may invest in fixed-income securities rated as low as
C by Moody's or D by S&P. See "General Portfolio Techniques" below for a
discussion of the special investment considerations involved in investment in
lower-rated securities, commonly known as "junk bonds," a discussion of zero
coupon securities, and a discussion of credit risk and interest rate risk, to
which risks all fixed-income securities are subject. The Portfolio is not
subject to any restrictions on the maturities of the fixed-income securities it
holds. A description of Moody's and S&P ratings is set forth in the Appendix.
The EMERGING MARKETS PORTFOLIO's investments in debt obligations of government
issuers in emerging market countries will consist of: (i) debt securities or
obligations issued or guaranteed by governments, governmental agencies or
instrumentalities and political subdivisions located in emerging market
countries (including participations in loans between governments and financial
institutions), (ii) debt securities or obligations issued by government owned,
controlled or sponsored entities located in emerging market countries, and (iii)
interests in issuers organized and operated for the purpose of restructuring the
investment characteristics of instruments issued by any of the entities
described above ("Sovereign Debt"). The Sovereign Debt held by the Portfolio
will take the form of bonds (including Brady Bonds), notes, bills, debentures,
warrants, short-term paper, loan participations, loan assignments and securities
or interests issued by entities organized and operated for the purpose of
restructuring the investment characteristics of such Sovereign Debt. Certain
Sovereign Debt held by the Portfolio will not be traded on any securities
exchange. See the discussion of Sovereign Debt and Brady Bonds below and in the
Statement of Additional Information.
U.S. and non-U.S. corporate fixed-income securities in which the EMERGING
MARKETS PORTFOLIO may invest include debt securities, convertible securities and
preferred stocks of corporate issuers.
The EMERGING MARKETS PORTFOLIO may also enter into repurchase agreements and
forward foreign currency exchange contracts, engage in various futures and
options transactions, purchase securities which are issued in private placements
or are otherwise not readily marketable, purchase securities on a when-issued or
delayed delivery basis or a "when, as and if issued" basis, and purchase or sell
securities on a forward commitment basis, in each case in accordance with the
description of these investments and techniques (and subject to the risks) set
forth under "General Portfolio Techniques" below and in the Statement of
Additional Information.
In its investment strategy, the Sub-Adviser primarily adopts a top-down
approach, beginning with an evaluation of the country in which the proposed
investment is to be made, including relevant external developments and their
implications. Following the country level of review, investments in specific
securities will be made after completion of a fundamental analysis of
securities, industries and companies by the Sub-Adviser, including consideration
of liquidity, market capitalization, a company's existing and expected future
financial position, relative competitive position in the domestic and export
markets, technology, recent developments and profitability, together with
overall growth prospects. Other considerations include management expertise,
government regulation and costs of labor and raw materials. The EMERGING MARKETS
PORTFOLIO's investments will be allocated among emerging market countries in
accordance with the Sub-Adviser's judgment as to where the best investment
opportunities exist.
RISKS OF INVESTING IN EMERGING MARKET COUNTRIES. Investors should carefully
consider the risks of investing in securities of foreign issuers and securities
denominated in non-U.S. currencies. See "General Portfolio Techniques" below for
a discussion of the characteristics and risks of investments in foreign
securities. Investors should recognize that investing in securities of emerging
market countries involves certain risks, and special considerations, including
those set forth below, which are not typically associated with investing in
securities of U.S. companies or issuers located in foreign developed countries.
The securities markets of emerging market countries are substantially smaller,
less developed, less liquid and more volatile than the major securities markets
in the United States. The limited size of many emerging securities markets and
limited trading volume in issuers compared to volume of trading in U.S.
securities could cause prices to be erratic for reasons apart from factors that
affect the quality of the securities. For example, limited market size may cause
prices to be unduly influenced by traders who control large positions. Adverse
publicity and investors' perceptions, whether or not based on fundamental
analysis, may decrease the value and liquidity of portfolio securities,
especially in these markets.
In addition, emerging market countries' exchanges and broker-dealers are
generally subject to less government and exchange scrutiny and regulation than
their American counterparts. Brokerage commissions, dealer concessions,
custodial expenses and other transaction costs may be higher on foreign markets
than in the U.S. Thus, the EMERGING MARKETS PORTFOLIO's operating expenses are
expected to be higher than those of investment
26 - PROSPECTUS
<PAGE>
companies investing primarily in domestic or other more established market
regions. Also, differences in clearance and settlement procedures on foreign
markets may occasion delays in settlements of Portfolio trades effected in such
markets. Inability to dispose of portfolio securities due to settlement delays
could result in losses to the Portfolio due to subsequent declines in value of
such securities and the inability of the Portfolio to make intended security
purchases due to settlement problems could result in a failure of the Portfolio
to make potentially advantageous investments.
Many of the emerging market countries may be subject to a greater degree of
economic, political and social instability than is the case in the United States
and Western European countries. Such instability may result from, among other
things, the following: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes in government through
extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic and social conditions; (iii) internal insurgencies;
(iv) hostile relations with neighboring countries; and (v) ethnic, religious and
racial disaffection. Such social, political and economic instability could
significantly disrupt the principal financial markets in which the EMERGING
MARKETS PORTFOLIO invests and adversely affect the value of the Portfolio's
assets.
The economies of most of the emerging market countries are heavily dependent
upon international trade and are accordingly affected by protective trade
barriers and the economic conditions of their trading partners, principally, the
United States, Japan, China and the European Economic Community. The enactment
by the United States or other principal trading partners of protectionist trade
legislation, reduction of foreign investment in the local economies and general
declines in the international securities markets could have a significant
adverse effect upon the securities markets of emerging market countries. In
addition, the economies of some of the emerging market countries such as
Indonesia, Malaysia, Mexico and Venezuela, for example, are vulnerable to
weakness in world prices for their commodity exports, including crude oil. There
may be the possibility of expropriations, confiscatory taxation, political,
economic or social instability or diplomatic developments which would adversely
affect assets of the Portfolio held in foreign countries.
Governments in certain emerging market countries participate to a significant
degree, through ownership interests or regulation, in their respective
economies. Action by these governments could have a significant adverse effect
on market prices of securities and payment of dividends.
Certain emerging market countries are among the largest debtors to commercial
banks and foreign governments. Trading in Sovereign Debt involves a high degree
of risk, since the governmental entity that controls the repayment of Sovereign
Debt may not be willing or able to repay the principal and/or interest of such
debt obligations when they become due, due to factors such as debt service
burden, political constraints, cash flow situation and other national economic
factors. As a result, governments of emerging market countries may default on
their Sovereign Debt, which may require holders of such Sovereign Debt to
participate in debt rescheduling or additional lending to defaulting
governments. There is no bankruptcy proceeding by which defaulted Sovereign Debt
may be collected in whole or in part. Currently, Brazil is the largest debtor
among developing countries, Mexico is the second largest and Argentina the
third. At times certain emerging market countries have declared moratoria on the
payment of principal and/or interest on external debt.
"Brady Bonds," which were issued under the "Brady Plan" in exchange for loans
and cash in connection with restructurings in various emerging market countries'
external debt markets in 1990, have been issued in various currencies, primarily
the U.S. dollar, and are actively traded in the over-the-counter secondary
market for the debt of emerging market countries. In the case of U.S. dollar
denominated collateralized Brady Bonds, the bonds are collateralized in full as
to principal by U.S. Treasury zero coupon bonds of the same maturity. In
addition, at least one year of rolling interest payments are collateralized by
cash or other investments.
The governments of some emerging market countries, to varying degrees, have been
engaged in programs of selling part or all of their stakes in government-owned
or government-controlled enterprises ("privatizations"). The Sub-Adviser
believes that privatizations may offer investors opportunities for significant
capital appreciation and intends to invest assets of the EMERGING MARKETS
PORTFOLIO in privatizations in appropriate circumstances. In certain emerging
market countries, the ability of foreign persons, such as the Portfolio, to
participate in privatizations may be limited by local law, or the terms on which
the Portfolio may be permitted to participate may be less advantageous than
those for local investors. There can be no assurance that privatization programs
will continue or be successful.
Most emerging market countries have experienced substantial, and in some periods
extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of certain emerging market
countries.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or the companies with the most
actively traded securities. Also, the Act limits the Portfolio's investments in
any equity security of an issuer which, in its most recent fiscal year, derived
more than 15% of its revenues from "securities related activities," as defined
by the rules thereunder.
Many of the currencies of emerging market countries have experienced steady
devaluations relative to the U.S. dollar, and major devaluations have
historically occurred in certain countries. Any devaluations in the currencies
in which portfolio securities are denominated may have a detrimental impact on
the EMERGING MARKETS PORTFOLIO.
Some emerging market countries also may have managed currencies which are not
free floating against the U.S. dollar. In
27 - PROSPECTUS
<PAGE>
addition, there is risk that certain emerging market countries may restrict the
free conversion of their currencies into other currencies. Further, certain
emerging market currencies may not be internationally traded.
Currently, only a limited market, if any, exists for hedging transactions
relating to currencies in most emerging markets or to securities of issuers
domiciled or principally engaged in business in emerging markets. This may limit
the Portfolio's ability to effectively hedge its investments in emerging
markets. Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also limit the opportunity
for gain if the value of the hedged currencies should rise. In addition, it may
not be possible for the Portfolio to hedge against a devaluation that is so
generally anticipated that the Portfolio is not able to contract to sell the
currency at a price above the devaluation level it anticipates.
As a result of the absence of established securities markets and publicly-owned
corporations in certain emerging market countries, as well as restrictions on
direct investment by foreign entities, the Portfolio may be able to invest in
such countries solely or primarily through American Depository Receipts ("ADRs")
(See "General Portfolio Techniques" below) or similar securities and government
approved investment vehicles. For example, due to Chile's current investment
restrictions (in most cases capital invested directly in Chile cannot be
repatriated for at least one year), the Portfolio's investments in Chile
primarily will be through investment in ADRs and established Chilean investment
companies not subject to repatriation restrictions.
The EMERGING MARKETS PORTFOLIO may not invest more than 15% of its net assets in
illiquid securities. The Portfolio will treat any emerging market country's
securities that are subject to restrictions on repatriation for more than seven
days, as well as any securities issued in connection with an emerging market
country's debt conversion programs that are restricted as to remittance of
invested capital or profits, as illiquid securities for purposes of this
limitation.
Certain emerging market countries may impose unusually high withholding taxes on
dividends payable to the EMERGING MARKETS PORTFOLIO, thereby effectively
reducing the Portfolio's investment income.
GENERAL PORTFOLIO TECHNIQUES
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
MORTGAGE-BACKED SECURITIES. The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO,
the DIVERSIFIED INCOME PORTFOLIO and the BALANCED PORTFOLIO may invest in
fixed-rate and adjustable rate United States mortgage-backed securities
("Mortgage-Backed Securities"). There are currently three basic types of U.S.
Mortgage-Backed Securities: (i) those issued or guaranteed by the United States
Government or one of its agencies or instrumentalities, such as the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC")
(securities issued by GNMA, but not those issued by FNMA or FHLMC, are backed by
the "full faith and credit" of the United States); (ii) those issued by private
issuers that represent an interest in or are collateralized by Mortgage-Backed
Securities issued or guaranteed by the United States Government or one of its
agencies or instrumentalities; and (iii) those issued by private issuers that
represent an interest in or are collateralized by whole mortgage loans or
Mortgage-Backed Securities without a government guarantee but usually having
some form of private credit enhancement. (Mortgage-Backed Securities of the
latter category are not considered Government Securities for purposes of the
investment policies of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO.
Canadian Mortgage-Backed Securities, in which that Portfolio may also invest,
are described above under "The North American Government Securities Portfolio.")
The Portfolios will invest in mortgage pass-through securities representing
participation interests in pools of residential mortgage loans originated by
United States governmental or private lenders such as banks, broker-dealers and
financing corporations and guaranteed, to the extent provided in such
securities, by the United States Government or one of its agencies or
instrumentalities. Such securities, which are ownership interests in the
underlying mortgage loans, differ from conventional debt securities, which
provide for periodic payment of interest in fixed amounts (usually
semi-annually) and principal payments at maturity or on specified call dates.
Mortgage pass-through securities provide for monthly payments that are a "pass-
through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees paid to the guarantor of such securities and the servicer of the
underlying mortgage loans.
The guaranteed mortgage pass-through securities in which the Portfolios may
invest include those issued or guaranteed by GNMA, FNMA and FHLMC. GNMA
certificates are direct obligations of the U.S. Government and, as such, are
backed by the "full faith and credit" of the United States. FNMA is a federally
chartered, privately owned corporation and FHLMC is a corporate instrumentality
of the United States. FNMA and FHLMC certificates are not backed by the full
faith and credit of the United States, but the issuing agency or instrumentality
has the right to borrow, to meet its obligations, from an existing line of
credit with the U.S. Treasury. The U.S. Treasury has no legal obligation to
provide such line of credit and may choose not to do so. Each of GNMA, FNMA and
FHLMC guarantee timely distribution of interest to certificate holders. GNMA and
FNMA also guarantee timely distribution of scheduled principal payments. FHLMC
generally guarantees only the ultimate collection of principal of the underlying
mortgage loans.
Certificates for Mortgage-Backed Securities evidence an interest in a specific
pool of mortgages. These certificates are, in most cases, "modified
pass-through" instruments, wherein the issuing agency guarantees the payment of
principal and interest on
28 - PROSPECTUS
<PAGE>
mortgages underlying the certificates, whether or not such amounts are collected
by the issuer on the underlying mortgages.
ADJUSTABLE RATE MORTGAGE SECURITIES. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO and the BALANCED PORTFOLIO may also
invest in adjustable rate mortgage securities ("ARMs"), which are pass-through
mortgage securities collateralized by mortgages with adjustable rather than
fixed rates. ARMs eligible for inclusion in a mortgage pool generally provide
for a fixed initial mortgage interest rate for either the first three, six,
twelve or thirteen scheduled monthly payments. Thereafter, the interest rates
are subject to periodic adjustment based on changes to a designated benchmark
index.
ARMs contain maximum and minimum rates beyond which the mortgage interest rate
may not vary over the lifetime of the security. In addition, certain ARMs
provide for additional limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. Alternatively,
certain ARMs contain limitations on changes in the required monthly payment. In
the event that a monthly payment is not sufficient to pay the interest accruing
on an ARM, any such excess interest is added to the principal balance of the
mortgage loan, which is repaid through future monthly payments. If the monthly
payment for such an instrument exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment required at such
point to amortize the outstanding principal balance over the remaining term of
the loan, the excess is utilized to reduce the then outstanding principal
balance of the ARM.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES. The NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO and the BALANCED
PORTFOLIO may invest in private mortgage pass-through securities, which are
structured similarly to the GNMA, FNMA and FHLMC mortgage pass-through
securities and are issued by originators of and investors in mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. These
securities usually are backed by a pool of conventional fixed rate or adjustable
rate mortgage loans. Since private mortgage pass-through securities typically
are not guaranteed by an entity having the credit status of GNMA, FNMA and
FHLMC, such securities generally are structured with one or more types of credit
enhancement.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES. The
NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO
and the BALANCED PORTFOLIO may invest in collateralized mortgage obligations or
"CMOs," which are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. The BALANCED PORTFOLIO does not intend to invest more
than 5% of its total assets in CMOs. Typically, CMOs are collateralized by GNMA,
FNMA or FHLMC Certificates, but also may be collateralized by whole loans or
private mortgage pass-through securities (such collateral collectively
hereinafter referred to as "Mortgage Assets"). Multiclass pass-through
securities are equity interests in a trust composed of Mortgage Assets. Payments
of principal of and interest on the Mortgage Assets, and any reinvestment income
thereon, provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the United States government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. The issuer of a series of CMOs may elect
to be treated as a Real Estate Mortgage Investment Conduit ("REMIC"). REMICs
include governmental and/or private entities that issue a fixed pool of
mortgages secured by an interest in real property. REMICs are similar to CMOs in
that they issue multiple classes of securities, but unlike CMOs, which are
required to be structured as debt securities, REMICs may be structured as
indirect ownership interests in the underlying assets of the REMICs themselves.
However, there are no effects on the Portfolio from investing in CMOs issued by
entities that have elected to be treated as REMICs, and all future references to
CMOs shall also be deemed to include REMICs. In addition, in reliance upon an
interpretation by the staff of the Securities and Exchange Commission, the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO and
the BALANCED PORTFOLIO may invest without limitation in CMOs and other
Mortgage-Backed Securities which are not by definition excluded from the
provisions of the Act, and which have obtained exemptive orders from such
provisions from the Securities and Exchange Commission.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche," is issued at a specific fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. Certain CMOs may have variable or floating interest rates
and others may be stripped (securities which provide only the principal or
interest feature of the underlying security).
The principal of and interest on the Mortgage Assets may be allocated among the
several classes of a CMO series in a number of different ways. Generally, the
purpose of the allocation of the cash flow of a CMO to the various classes is to
obtain a more predictable cash flow to the individual tranches than exists with
the underlying collateral of the CMO. As a general rule, the more predictable
the cash flow is on a CMO tranche, the lower the anticipated yield will be on
that tranche at the time of issuance relative to prevailing market yields on
Mortgage-Backed Securities. As part of the process of creating more predictable
cash flows on most of the tranches in a series of CMOs, one or more tranches
generally must be created that absorb most of the volatility in the cash flows
on the underlying mortgage loans.
29 - PROSPECTUS
<PAGE>
The yields on these tranches, which may include, in the case of the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the BALANCED PORTFOLIO, inverse
floaters, and, in the case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO
and the DIVERSIFIED INCOME PORTFOLIO, Stripped Mortgage-Backed Securities, as
described below, are generally higher than prevailing market yields on
Mortgage-Backed Securities with similar maturities. As a result of the
uncertainty of the cash flows of these tranches, the market prices of and yield
on these tranches generally are more volatile.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO may invest up to 10% of its
total assets, and the BALANCED PORTFOLIO may invest up to 5% of its total
assets, in inverse floaters. Inverse floaters constitute a class of CMOs with a
coupon rate that moves inversely to a designated index, such as the LIBOR
(London Inter-Bank Offered Rate) Index. Inverse floaters have coupon rates that
typically change at a multiple of the changes of the relevant index rate. Any
rise in the index rate (as a consequence of an increase in interest rates)
causes a drop in the coupon rate of an inverse floater while any drop in the
index rate causes an increase in the coupon of an inverse floater. In addition,
like most other fixed-income securities, the value of inverse floaters will
decrease as interest rates increase. Inverse floaters exhibit greater price
volatility than the majority of mortgage pass-through securities or CMOs. In
addition, some inverse floaters exhibit sensitivity to changes in prepayments.
As a result, the yield to maturity of an inverse floater is sensitive not only
to changes in interest rates but also to changes in prepayment rates on the
related underlying Mortgage Assets. The Sub-Adviser believes that,
notwithstanding the fact that inverse floaters exhibit price volatility, the use
of inverse floaters as a component of the Portfolio's overall portfolio, in
light of the Portfolio's anticipated portfolio composition in the aggregate, is
compatible with the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO's objective
to earn a high level of current income while maintaining relatively low
volatility of principal.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO and the BALANCED PORTFOLIO also may invest in, among other things,
parallel pay CMOs and Planned Amortization Class CMOs ("PAC Bonds"). Parallel
pay CMOs are structured to provide payments of principal on each payment date to
more than one class. These simultaneous payments are taken into account in
calculating the stated maturity date or final distribution date of each class,
which, as with other CMO structures, must be retired by its stated maturity date
or final distribution date but may be retired earlier. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds always are parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes.
STRIPPED MORTGAGE-BACKED SECURITIES. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO and the DIVERSIFIED INCOME PORTFOLIO may invest in Stripped
Mortgage-Backed Securities, which are derivative multiclass mortgage securities.
Stripped Mortgage-Backed Securities may be issued by agencies or
instrumentalities of the United States Government, or by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing.
Stripped Mortgage-Backed Securities usually are structured with two classes that
receive different proportions of the interest and principal distribution on a
pool of Mortgage Assets. A common type of Stripped Mortgage-Backed Securities
will have one class receiving some of the interest and most of the principal
from the Mortgage Assets, while the other class will receive most of the
interest and the remainder of the principal. In the most extreme case, one class
will receive all of the interest (the interest-only or "IO" class), while the
other class will receive all of the principal (the principal-only or "PO"
class). PO classes generate income through the accretion of the deep discount at
which such securities are purchased, and, while PO classes do not receive
periodic payments of interest, they receive monthly payments associated with
scheduled amortization and principal prepayment from the Mortgage Assets
underlying the PO class. The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying Mortgage Assets, and a rapid rate of principal repayments may
have a material adverse effect on the Portfolio's yield to maturity. If the
underlying Mortgage Assets experience greater than anticipated prepayments of
principal, the Portfolio may fail to fully recoup its initial investment in
these securities even if the securities are rated Aaa by Moody's or AAA by S&P.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the DIVERSIFIED INCOME
PORTFOLIO may purchase Stripped Mortgage-Backed Securities for income, or for
hedging purposes to protect the Portfolio against interest rate fluctuations.
For example, since an IO class will tend to increase in value as interest rates
rise, it may be utilized to hedge against a decrease in value of other
fixed-income securities in a rising interest rate environment. The Fund's
management understands that the staff of the Securities and Exchange Commission
considers privately issued Stripped Mortgage-Backed Securities representing
interest only or principal only components of U.S. Government or other debt
securities to be illiquid securities. The Fund will treat such securities as
illiquid so long as the staff maintains such a position. Stripped
Mortgage-Backed Securities issued by the U.S. Government or its agencies, and
which are backed by fixed-rate mortgages, will be treated as liquid provided
they are so determined by, or under procedures approved by, the Trustees of the
Fund. Each Portfolio may not invest more than 15% of its total assets in
illiquid securities.
TYPES OF CREDIT ENHANCEMENT. Mortgage-Backed Securities are often backed by a
pool of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make payments,
those securities may contain elements of credit support, which fall into two
categories: (i) liquidity protection and (ii) protection against
30 - PROSPECTUS
<PAGE>
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from default ensures ultimate payment of the obligations on at least a
portion of the assets in the pool. This protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches. The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquencies or
losses in excess of those anticipated could adversely affect the return on an
investment in a security. In addition, any circumstance adversely affecting the
ability of third parties, such as insurance companies, to satisfy any of their
obligations with respect to any Mortgage-Backed Securities, such as a
diminishment of their creditworthiness, could affect the rating, and thus the
value, of the securities. The Portfolios will not pay any fees for credit
support, although the existence of credit support may increase the price of a
security.
ASSET-BACKED SECURITIES. The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO and the BALANCED PORTFOLIO may invest in
Asset-Backed Securities. Asset-Backed Securities represent the securitization
techniques used to develop Mortgage-Backed Securities applied to a broad range
of other assets. Through the use of trusts and special purpose corporations,
various types of assets, primarily automobile and credit card receivables and
home equity loans, are being securitized in pass-through structures similar to
the mortgage pass-through structures described above or in a pay-through
structure similar to the CMO structure.
RISKS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Mortgage-Backed and
Asset-Backed Securities have certain different characteristics than traditional
debt securities. Among the major differences are that interest and principal
payments are made more frequently, usually monthly, and that principal may be
prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. As a result, if a Portfolio purchases such
a security at a premium, a prepayment rate that is faster than expected may
reduce yield to maturity, while a prepayment rate that is slower than expected
may have the opposite effect of increasing yield to maturity. Alternatively, if
a Portfolio purchases these securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments may reduce,
yield to maturity. Each of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO
and the DIVERSIFIED INCOME PORTFOLIO may invest a portion of its assets in
derivative Mortgage-Backed Securities such as Stripped Mortgage-Backed
Securities which are highly sensitive to changes in prepayment and interest
rates. The Investment Manager and/or the Sub-Adviser will seek to manage these
risks (and potential benefits) by investing in a variety of such securities.
Mortgage-Backed and Asset-Backed Securities, like all fixed-income securities,
generally decrease in value as a result of increases in interest rates. In
addition, although generally the value of fixed-income securities increases
during periods of falling interest rates and decreases during periods of rising
interest rates, as a result of prepayments and other factors, this is not always
the case with respect to Mortgage-Backed and Asset-Backed Securities.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by a Portfolio are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested at
lower interest rates than during a period of rising interest rates. Asset-Backed
Securities, although less likely to experience the same prepayment rates as
Mortgage-Backed Securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors, such as changes
in credit use and payment patterns resulting from social, legal and economic
factors, will predominate. Mortgage-Backed and Asset-Backed Securities generally
decrease in value as a result of increases in interest rates and may benefit
less than other fixed income securities from declining interest rates because of
the risk of prepayment.
There are certain risks associated specifically with CMOs. CMOs issued by
private entities are not U.S. Government securities and are not guaranteed by
any government agency, although the securities underlying a CMO may be subject
to a guarantee. Therefore, if the collateral securing the CMO, as well as any
third party credit support or guarantees, is insufficient to make payment, the
holder could sustain a loss. However, the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO will invest in CMOs issued by private entities only if the CMOs are
rated Aa or higher by Moody's or AA or higher by S&P, the BALANCED PORTFOLIO
will invest in such CMOs only if the CMOs are rated Baa or higher by Moody's or
BBB or higher by S&P, and the DIVERSIFIED INCOME PORTFOLIO will invest in such
CMOs only if the CMOs are rated Aaa by Moody's or AAA by S&P, or, if unrated,
such CMOs are determined to be of comparable quality to the permitted rated
investments. Also, a number of different factors, including the extent of
prepayment of principal of the Mortgage Assets, affect the availability of cash
for principal payments by the CMO issuer on any payment date and, accordingly,
affect the timing of principal payments on each CMO class.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO and the BALANCED PORTFOLIO may invest in mortgage derivative
securities, such as CMOs, the average life of which is determined using
mathematical models that incorporate prepayment assumptions and other factors
that involve estimates of future economic and market conditions. These
31 - PROSPECTUS
<PAGE>
estimates may vary from actual future results, particularly during periods of
extreme market volatility. In addition, under certain market conditions, such as
those that developed in 1994, the average weighted life of mortgage derivative
securities may not accurately reflect the price volatility of such securities.
For example, in periods of supply and demand imbalances in the market for such
securities and/or in periods of sharp interest rate movements, the prices of
mortgage derivative securities may fluctuate to a greater extent than would be
expected from interest rate movements alone.
The investments by the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO and the BALANCED PORTFOLIO in mortgage derivative
securities also subject those Portfolios to extension risk. Extension risk is
the possibility that rising interest rates may cause prepayments to occur at a
slower than expected rate. This particular risk may effectively change a
security which was considered short or intermediate-term at the time of purchase
into a long-term security. Long-term securities generally fluctuate more widely
in response to changes in interest rates than short or intermediate-term
securities. In addition, as stated above, inverse floaters, a class of CMOs in
which the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO may invest up to 10% of
its total assets and the BALANCED PORTFOLIO may invest up to 5% of its total
assets, exhibit greater price volatility than the majority of CMOs.
Asset-Backed Securities involve certain risks that are not posed by
Mortgage-Backed Securities, resulting mainly from the fact that Asset-Backed
Securities do not usually contain the complete benefit of a security interest in
the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, some of which may reduce the ability to obtain
full payment. In the case of automobile receivables, due to various legal and
economic factors, proceeds from repossessed collateral may not always be
sufficient to support payments on these securities.
New instruments and variations of existing Mortgage-Backed Securities and
Asset-Backed Securities continue to be developed. The NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO and the BALANCED
PORTFOLIO, following revision to the Fund's Prospectus, may invest in any such
instruments or variations as may be developed, to the extent consistent with
their investment objectives and policies and applicable regulatory requirements.
FOREIGN SECURITIES. The EMERGING MARKETS PORTFOLIO will invest primarily in
foreign securities. The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO and the GLOBAL EQUITY PORTFOLIO will invest
extensively in foreign securities. The CORE EQUITY PORTFOLIO may invest up to
25% of the value of its total assets, and the DEVELOPING GROWTH PORTFOLIO may
invest up to 10% of the value of its total assets, in each case at the time of
purchase, in foreign securities (other than securities of Canadian issuers
registered under the Securities Exchange Act of 1934 or American Depository
Receipts ("ADRs") (described below), on which there is no such limit). The
BALANCED PORTFOLIO may invest up to 25% of the value of its total assets, at the
time of purchase, in non-U.S. dollar denominated foreign securities (other than
securities of Canadian issuers registered under the Securities Exchange Act of
1934 or ADRs, on which there is no such limit). Investments in certain Canadian
issuers may be speculative due to certain political risks and may be subject to
substantial price fluctuations. The AMERICAN VALUE PORTFOLIO may invest up to
35% of the value of its total assets, and the UTILITIES PORTFOLIO may invest up
to 10% of the value of its total assets, in each case at the time of purchase,
in foreign securities. The DIVIDEND GROWTH PORTFOLIO may invest in ADRs. The
VALUE-ADDED MARKET PORTFOLIO may purchase common stock, including ADRs, of
foreign corporations represented in the S&P Index (such securities are listed on
the New York Stock Exchange, the American Stock Exchange or the NASDAQ Market
System). Each Portfolio other than the MONEY MARKET PORTFOLIO may invest in
Eurodollar certificates of deposit. Each Portfolio's investments in unlisted
foreign securities, if any, are subject to the Portfolio's overall policy
limiting its investments in illiquid securities to 15% or less of net assets.
Investors should carefully consider the risks of investing in securities of
foreign issuers and securities denominated in non-U.S. currencies. Fluctuations
in the relative rates of exchange among the currencies of the United States and
foreign countries will affect the value of a Portfolio's investments. Changes in
foreign currency exchange rates relative to the U.S. dollar will affect the U.S.
dollar value of the Portfolio's assets denominated in that currency and thereby
impact upon the Portfolio's total return on such assets.
Foreign currency exchange rates are determined by forces of supply and demand on
the foreign exchange markets. These forces are themselves affected by the
international balance of payments and other economic and financial conditions,
government intervention, speculation and other factors. Moreover, foreign
currency exchange rates may be affected by the regulatory control of the
exchanges on which the currencies trade. The foreign currency transactions of a
Portfolio will be conducted on a spot basis or, in the case of the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the
BALANCED PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS
PORTFOLIO, through forward foreign currency exchange contracts (described below)
or futures contracts (described below under "Options and Futures Transactions").
A Portfolio will incur certain costs in connection with these currency
transactions.
Investments in foreign securities will also occasion risks relating to political
and economic developments abroad, including the possibility of expropriations or
confiscatory taxation, limitations on the use or transfer of Portfolio assets
and any effects of foreign social, economic or political instability. Political
and economic developments in Europe, especially as they relate to changes in
32 - PROSPECTUS
<PAGE>
the structure of the European Union and the anticipated development of a unified
common market, may have profound effects upon the value of a large segment of
the GLOBAL EQUITY PORTFOLIO, in particular. Continued progress in the evolution
of, for example, a united European common market may be slowed by unanticipated
political or social events and may, therefore, adversely affect the value of
certain of the securities held by a Portfolio. Foreign companies are not subject
to the regulatory requirements of U.S. companies and, as such, there may be less
publicly available information about such companies. Moreover, foreign companies
are not subject to uniform accounting, auditing and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
Securities of foreign issuers may be less liquid than comparable securities of
U.S. issuers and, as such, their price changes may be more volatile.
Furthermore, foreign exchanges and broker-dealers are generally subject to less
government and exchange scrutiny and regulation than their American
counterparts. Brokerage commissions, dealer concessions and other transaction
costs may be higher on foreign markets than in the U.S. In addition, differences
in clearance and settlement procedures on foreign markets may occasion delays in
settlements of Portfolio trades effected in such markets. Inability to dispose
of portfolio securities due to settlement delays could result in losses to a
Portfolio due to subsequent declines in value of such securities and the
inability of the Portfolio to make intended security purchases due to settlement
problems could result in a failure of the Portfolio to make potentially
advantageous investments. To the extent a Portfolio purchases Eurodollar
certificates of deposit, consideration will be given to their domestic
marketability, the lower reserve requirements normally mandated for overseas
banking operations, the possible impact of interruptions in the flow of
international currency transactions, and future international political and
economic developments which might adversely affect the payment of principal or
interest.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the BALANCED PORTFOLIO,
the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may engage in
transactions involving forward foreign currency exchange contracts ("forward
contracts"). A forward contract involves an obligation to purchase or sell a
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These Portfolios may enter into forward contracts as a hedge against
fluctuations in future foreign exchange rates.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also limit the opportunity
for gain if the value of the hedged currency should rise. Moreover, it may not
be possible for the Portfolio to hedge against a devaluation that is so
generally anticipated that the Portfolio is not able to contract to sell the
currency at a price above the devaluation level it anticipates.
The Portfolios will enter into forward contracts under various circumstances.
When a Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may, for example, desire to "lock in" the
price of the security in U.S. dollars or some other foreign currency which the
Portfolio is temporarily holding in its portfolio. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars or other
currency, of the amount of foreign currency involved in the underlying security
transactions, the Portfolio will be able to protect itself against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar or other currency which is being used for the security purchase and the
foreign currency in which the security is denominated during the period between
the date on which the security is purchased or sold and the date on which
payment is made or received.
At other times, when, for example, it is believed that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar or some other foreign currency, a Portfolio may enter into a forward
contract to sell, for a fixed amount of dollars or other currency, the amount of
foreign currency approximating the value of some or all of the Portfolio's
securities (or securities which the Portfolio has purchased for its portfolio)
denominated in such foreign currency. Under identical circumstances, the
Portfolio may enter into a forward contract to sell, for a fixed amount of U.S.
dollars or other currency, an amount of foreign currency other than the currency
in which the securities to be hedged are denominated approximating the value of
some or all of the portfolio securities to be hedged. This method of hedging,
called "cross-hedging," will be selected when it is determined that the foreign
currency in which the portfolio securities are denominated has insufficient
liquidity or is trading at a discount as compared with some other foreign
currency with which it tends to move in tandem.
In addition, when a Portfolio anticipates purchasing securities at some time in
the future, and wishes to lock in the current exchange rate of the currency in
which those securities are denominated against the U.S. dollar or some other
foreign currency, it may enter into a forward contract to purchase an amount of
currency equal to some or all of the value of the anticipated purchase, for a
fixed amount of U.S. dollars or other currency.
Lastly, the Portfolios are permitted to enter into forward contracts with
respect to currencies in which certain of their portfolio securities are
denominated and on which options have been written (see "Options and Futures
Transactions" below and in the Statement of Additional Information).
In all of the above circumstances, if the currency in which portfolio securities
(or anticipated portfolio securities) are denominated rises in value with
respect to the currency which is being purchased (or sold), then the Portfolio
will have realized fewer gains than had the Portfolio not entered into the
forward contracts. Moreover, the precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible,
since the future value of such securities in foreign currencies will change as a
consequence of market
33 - PROSPECTUS
<PAGE>
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the BALANCED PORTFOLIO,
the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO are not required
to enter into such transactions with regard to their foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Investment Manager or the Sub-Adviser. Currently, only a limited market
exists for certain hedging transactions in future foreign exchange rates. This
may limit the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO's ability to
effectively hedge its investments in Mexico. The Portfolios generally will not
enter into a forward contract with a term of greater than one year, although
they may enter into forward contracts for periods of up to five years. The
Portfolios may be limited in their ability to enter into hedging transactions
involving forward contracts by the Internal Revenue Code requirements relating
to qualification as a regulated investment company (see "Dividends,
Distributions and Taxes").
AMERICAN DEPOSITORY RECEIPTS AND EUROPEAN DEPOSITORY RECEIPTS. The DIVERSIFIED
INCOME PORTFOLIO, the BALANCED PORTFOLIO, the UTILITIES PORTFOLIO, the CORE
EQUITY PORTFOLIO, the GLOBAL EQUITY PORTFOLIO, the DEVELOPING GROWTH PORTFOLIO
and the EMERGING MARKETS PORTFOLIO may also invest in securities of foreign
issuers in the form of American Depository Receipts (ADRs), European Depository
Receipts (EDRs) or other similar securities convertible into securities of
foreign issuers, including ADRs sponsored by persons other than the underlying
issuers ("unsponsored ADRs"). In addition, the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the VALUE-ADDED MARKET
PORTFOLIO and the AMERICAN VALUE PORTFOLIO may invest in ADRs. These securities
may not necessarily be denominated in the same currency as the securities into
which they may be converted. ADRs are receipts typically issued by a United
States bank or trust company evidencing ownership of the underlying securities.
EDRs are European receipts evidencing a similar arrangement. Generally, ADRs, in
registered form, are designed for use in the United States securities markets
and EDRs, in bearer form, are designed for use in European securities markets.
Generally, issuers of the stock of unsponsored ADRs are not obligated to
distribute material information in the United States and, therefore, there may
not be a correlation between such information and the market value of such ADRs.
SECURITIES OF OTHER INVESTMENT COMPANIES. Each of the GLOBAL EQUITY PORTFOLIO
and the EMERGING MARKETS PORTFOLIO may invest up to 10% of its total assets in
securities issued by other investment companies. Such investments are necessary
in order to participate in certain foreign markets where foreigners are
prohibited from investing directly in the securities of individual issuers. The
Portfolio will incur any indirect expenses incurred through investment in an
investment company, such as the payment of a management fee (which may result in
the payment of an additional advisory fee). Furthermore, it should be noted that
foreign investment companies are not subject to the U.S. securities laws and may
be subject to fewer or less stringent regulations than U.S. investment
companies.
INVESTMENTS IN FIXED-INCOME SECURITIES. Each Portfolio may invest in
fixed-income securities. All fixed-income securities are subject to two types of
risks: the credit risk and the interest rate risk. The credit risk relates to
the ability of the issuer to meet interest or principal payments or both as they
come due. Generally, higher yielding fixed-income securities are subject to a
credit risk to a greater extent than lower yielding fixed-income securities (see
below). The interest rate risk refers to the fluctuations in the net asset value
of any portfolio of fixed-income securities resulting from the inverse
relationship between price and yield of fixed-income securities; that is, when
the general level of interest rates rises, the prices of outstanding
fixed-income securities generally decline, and when interest rates fall, prices
generally rise.
INVESTMENTS IN SECURITIES RATED BAA BY MOODY'S OR BBB BY S&P. The NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the BALANCED PORTFOLIO, the UTILITIES
PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the
DEVELOPING GROWTH PORTFOLIO and the GLOBAL EQUITY PORTFOLIO may invest a portion
of their assets in fixed-income securities rated at the time of purchase Baa or
better by Moody's Investors Service, Inc. ("Moody's") or BBB or better by
Standard & Poor's Corporation ("S&P"). Investments in fixed-income securities
rated either Baa by Moody's or BBB by S&P (the lowest credit ratings designated
"investment grade") may have speculative characteristics and, therefore, changes
in economic conditions or other circumstances are more likely to weaken their
capacity to make principal and interest payments than would be the case with
investments in securities with higher credit ratings. If a bond held by any of
these Portfolios is downgraded by a rating agency to a rating below Baa or BBB,
the Portfolio will retain such security in its portfolio until the Investment
Manager or, in the case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO
and the BALANCED PORTFOLIO, the Sub-Adviser determines that it is practicable to
sell the security without undue market or tax consequences to the Portfolio. In
the event that such downgraded securities constitute 5% or more of the
Portfolio's assets, the Investment Manager or, in the case of the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO and the BALANCED PORTFOLIO, the Sub-Adviser will
seek to sell immediately sufficient securities to reduce the total to below 5%.
The risks of holding lower-rated securities are described below. See the
Appendix for an explanation of Moody's and S&P ratings.
Groupings (1) and (2) of the DIVERSIFIED INCOME PORTFOLIO may continue to hold
fixed-income securities which have been downgraded by a rating agency to a
rating as low as Baa or BBB. However, if a bond held by either of these
groupings is downgraded by a rating agency to a rating below Baa or BBB, the
Portfolio will seek to sell such security immediately.
34 - PROSPECTUS
<PAGE>
SPECIAL CONSIDERATIONS FOR INVESTMENTS IN HIGH YIELD SECURITIES. Because of the
special nature of the DIVERSIFIED INCOME PORTFOLIO's and the EMERGING MARKETS
PORTFOLIO's investments in high yield securities, commonly known as "junk
bonds," the Investment Manager or, in the case of the EMERGING MARKETS
PORTFOLIO, the Sub-Adviser must take account of certain special considerations
in assessing the risks associated with such investments. Although the growth of
the high yield securities market in the 1980s had paralleled a long economic
expansion, recently many issuers have been affected by adverse economic and
market conditions. It should be recognized that an economic downturn or increase
in interest rates is likely to have a negative effect on the high yield bond
market and on the value of the high yield securities held by the Portfolios, as
well as on the ability of the securities' issuers to repay principal and
interest on their borrowings.
The prices of high yield securities have been found to be less sensitive to
changes in prevailing interest rates than higher-rated investments, but are
likely to be more sensitive to adverse economic changes or individual corporate
developments. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress which
would adversely affect their ability to service their principal and interest
payment obligations, to meet their projected business goals or to obtain
additional financing. If the issuer of a fixed-income security owned by a
Portfolio defaults, the Portfolio may incur additional expenses to seek
recovery. In addition, periods of economic uncertainty and change can be
expected to result in an increased volatility of market prices of high yield
securities and a concomitant volatility in the net asset value of a share of the
Portfolio. Moreover, the market prices of certain of the securities which are
structured as zero coupon and payment-in-kind securities are affected to a
greater extent by interest rate changes and thereby tend to be more volatile
than securities which pay interest periodically and in cash (see "Dividends,
Distributions and Taxes" for a discussion of the tax ramifications of
investments in such securities).
The secondary market for high yield securities may be less liquid than the
markets for higher quality securities and, as such, may have an adverse effect
on the market prices of certain securities. The limited liquidity of the market
may also adversely affect the ability of the Fund's Trustees to arrive at a fair
value for certain high yield securities at certain times and could make it
difficult for the Portfolios to sell certain securities.
New laws and proposed new laws may have a potentially negative impact on the
market for high yield bonds. For example, present legislation requires
federally-insured savings and loan associations to divest their investments in
high yield bonds. This legislation and other proposed legislation may have an
adverse effect upon the value of high yield securities and a concomitant
negative impact upon the net asset value of a share of the DIVERSIFIED INCOME
PORTFOLIO and the EMERGING MARKETS PORTFOLIO.
CONVERTIBLE SECURITIES. The DIVERSIFIED INCOME PORTFOLIO, the BALANCED
PORTFOLIO, the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CORE
EQUITY PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the GLOBAL EQUITY PORTFOLIO, the
DEVELOPING GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO may invest a
portion of their assets in convertible securities. A convertible security is a
bond, debenture, note, preferred stock or other security that may be converted
into or exchanged for a prescribed amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. Convertible securities rank senior to common stocks in a corporation's
capital structure and, therefore, entail less risk than the corporation's common
stock. The value of a convertible security is a function of its "investment
value" (its value as if it did not have a conversion privilege), and its
"conversion value" (the security's worth if it were to be exchanged for the
underlying security, at market value, pursuant to its conversion privilege).
To the extent that a convertible security's investment value is greater than its
conversion value, its price will be primarily a reflection of such investment
value and its price will be likely to increase when interest rates fall and
decrease when interest rates rise, as with a fixed-income security (the credit
standing of the issuer and other factors may also have an effect on the
convertible security's value). If the conversion value exceeds the investment
value, the price of the convertible security will rise above its investment
value and, in addition, will sell at some premium over its conversion value.
(This premium represents the price investors are willing to pay for the
privilege of purchasing a fixed-income security with a possibility of capital
appreciation due to the conversion privilege.) At such times the price of the
convertible security will tend to fluctuate directly with the price of the
underlying equity security.
Because of the special nature of the permitted investments of the DIVERSIFIED
INCOME PORTFOLIO, the CORE EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO
in lower rated convertible securities, the Investment Manager or, in the case of
the CORE EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO, the Sub-Adviser
must take account of certain special considerations in assessing the risks
associated with such investments. The prices of lower rated securities have been
found to be less sensitive to changes in prevailing interest rates than higher
rated investments, but are likely to be more sensitive to adverse economic
changes or individual corporate developments. During an economic downturn or
substantial period of rising interest rates, highly leveraged issuers may
experience financial stress which would adversely affect their ability to
service their principal and interest payment obligations, to meet their
projected business goals or to obtain additional financing. If the issuer of a
fixed-income security owned by the Portfolio defaults, the Portfolio may incur
additional expenses to seek recovery. In addition, periods of economic
uncertainty and change can be expected to result in an increased volatility of
market prices of lower rated securities and a corresponding volatility in the
net asset value of a share of the Portfolio.
MONEY MARKET INSTRUMENTS. Money market instruments in which each Portfolio other
than the MONEY MARKET PORTFOLIO and
35 - PROSPECTUS
<PAGE>
the DIVERSIFIED INCOME PORTFOLIO may invest are securities issued or guaranteed
by the U.S. Government (Treasury bills, notes and bonds); obligations of banks
subject to regulation by the U.S. Government and having total assets of $1
billion or more; Eurodollar certificates of deposit; obligations of savings
banks and savings and loan associations having total assets of $1 billion or
more; fully insured certificates of deposit; and commercial paper rated within
the two highest grades by Moody's or S&P or, if not rated, issued by a company
having an outstanding debt issue rated AAA by S&P or Aaa by Moody's, and which
mature within thirteen months from the date of purchase. Money market
instruments in which the MONEY MARKET PORTFOLIO and the DIVERSIFIED INCOME
PORTFOLIO may invest are described above under "The Money Market Portfolio" and
"The Diversified Income Portfolio."
REPURCHASE AGREEMENTS. Each Portfolio of the Fund may enter into repurchase
agreements, which may be viewed as a type of secured lending by the Portfolio,
and which typically involve the acquisition by the Portfolio of debt securities,
from a selling financial institution such as a bank, savings and loan
association or broker-dealer. The agreement provides that the Portfolio will
sell back to the institution, and that the institution will repurchase, the
underlying security at a specified price and at a fixed time in the future,
usually not more than seven days from the date of purchase.
While repurchase agreements involve certain risks not associated with direct
investments in debt securities, each Portfolio follows procedures designed to
minimize such risks. These procedures include effecting repurchase transactions
only with large, well-capitalized and well-established financial institutions
whose financial condition will be continually monitored by the Investment
Manager or, in the case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO,
the BALANCED PORTFOLIO, the CORE EQUITY PORTFOLIO and the EMERGING MARKETS
PORTFOLIO, the Sub-Adviser, subject to procedures established by the Trustees of
the Fund. In addition, as described above, the value of the collateral
underlying the repurchase agreement will be at least equal to the repurchase
price, including any accrued interest earned on the repurchase agreement. In the
event of a default or bankruptcy by selling a financial institution, the
Portfolio will seek to liquidate such collateral. However, the exercising of the
Portfolio's right to liquidate such collateral could involve certain costs or
delays and, to the extent that proceeds from any sale upon a default of the
obligation to repurchase were less than the repurchase price, the Portfolio
could suffer a loss. It is the current policy of each Portfolio not to invest in
repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by the Portfolio,
amounts to more than 15% (10% in the case of the MONEY MARKET PORTFOLIO) of its
net assets.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. Each of the MONEY MARKET
PORTFOLIO, the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
INCOME PORTFOLIO and the BALANCED PORTFOLIO may also use reverse repurchase
agreements, and each of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO and the BALANCED PORTFOLIO may also use dollar
rolls, as part of its investment strategy. Reverse repurchase agreements involve
sales by the Portfolio of portfolio assets concurrently with an agreement by the
Portfolio to repurchase the same assets at a later date at a fixed price. During
the reverse repurchase agreement period, the Portfolio continues to receive
principal and interest payments on these securities. Generally, the effect of
such a transaction is that the Portfolio can recover all or most of the cash
invested in the portfolio securities involved during the term of the reverse
repurchase agreement, while it will be able to keep the interest income
associated with those portfolio securities. Such transactions are only
advantageous if the interest cost to the Portfolio of the reverse repurchase
transaction is less than the cost of obtaining the cash otherwise.
A Portfolio may enter into dollar rolls in which the Portfolio sells securities
for delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Portfolio forgoes principal and interest paid
on the securities. The Portfolio is compensated by the difference between the
current sales price and the lower forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale.
The Portfolio will establish a segregated account with its custodian bank in
which it will maintain cash, U.S. Government securities or other liquid high
grade debt obligations equal in value to its obligations in respect of reverse
repurchase agreements and dollar rolls. Reverse repurchase agreements and dollar
rolls involve the risk that the market value of the securities the Portfolio is
obligated to repurchase under the agreement may decline below the repurchase
price. In the event the buyer of securities under a reverse repurchase agreement
or dollar roll files for bankruptcy or becomes insolvent, the Portfolio's use of
the proceeds of the agreement may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the Portfolio's
obligation to repurchase the securities. Reverse repurchase agreements and
dollar rolls are speculative techniques involving leverage, and are considered
borrowings by the Portfolio. Under the requirements of the Act, each Portfolio
is required to maintain an asset coverage (including the proceeds of the
borrowings) of at least 300% of all borrowings. The NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO and the BALANCED
PORTFOLIO do not expect to engage in reverse repurchase agreements and dollar
rolls with respect to greater than 25% of the Portfolio's total assets. For
purposes other than meeting redemptions, reverse repurchase agreements may not
exceed 5% of the MONEY MARKET PORTFOLIO's total assets.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From time
to time, in the ordinary course of business, each Portfolio (other than the
VALUE-ADDED MARKET PORTFOLIO) may purchase securities on a when-issued or
delayed delivery basis or may purchase or sell securities on a forward
36 - PROSPECTUS
<PAGE>
commitment basis. When such transactions are negotiated, the price is fixed at
the time of the commitment, but delivery and payment can take place a month or
more after the date of the commitment. While a Portfolio will only purchase
securities on a when-issued, delayed delivery or forward commitment basis with
the intention of acquiring the securities, a Portfolio may sell the securities
before the settlement date, if it is deemed advisable. The securities so
purchased or sold are subject to market fluctuation and no interest accrues to
the purchaser during this period. At the time a Portfolio makes the commitment
to purchase or sell securities on a when-issued, delayed delivery or forward
commitment basis, it will record the transaction and thereafter reflect the
value, each day, of such security purchased or, if a sale, the proceeds to be
received, in determining its net asset value. At the time of delivery of the
securities, their value may be more or less than the purchase or sale price. A
Portfolio will also establish a segregated account with its custodian bank in
which it will continually maintain cash, U.S. Government securities or other
liquid high grade debt portfolio securities equal in value to commitments to
purchase securities on a when-issued, delayed delivery or forward commitment
basis. An increase in the percentage of a Portfolio's assets committed to the
purchase of securities on a when-issued, delayed delivery or forward commitment
basis may increase the volatility of the Portfolio's net asset value.
WHEN, AS AND IF ISSUED SECURITIES. Each Portfolio (other than the MONEY MARKET
PORTFOLIO and the VALUE-ADDED MARKET PORTFOLIO) may purchase securities on a
"when, as and if issued" basis under which the issuance of the security depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization or debt restructuring. The commitment for the purchase
of any such security will not be recognized in the portfolio until the
Investment Manager or, in the case of the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the BALANCED PORTFOLIO, the CORE EQUITY PORTFOLIO and the EMERGING
MARKETS PORTFOLIO, the Sub-Adviser determines that the issuance of the security
is probable, whereupon the accounting treatment for such commitment will be the
same as for a commitment to purchase a security on a when-issued, delayed
delivery or forward commitment basis, described above and in the Statement of
Additional Information. An increase in the percentage of a Portfolio's assets
committed to the purchase of securities on a "when, as and if issued" basis may
increase the volatility of its net asset value.
PRIVATE PLACEMENTS AND RESTRICTED SECURITIES. Each of the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the BALANCED
PORTFOLIO, the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CORE
EQUITY PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the GLOBAL EQUITY PORTFOLIO, the
DEVELOPING GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO may invest up to
15% of its total assets in securities for which there is no readily available
market including certain of those which are subject to restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (the "Securities Act") or which are otherwise not readily marketable.
(Securities eligible for resale pursuant to Rule 144A under the Securities Act,
and determined to be liquid pursuant to the procedures discussed in the
following paragraph, are not subject to the foregoing limitation.) These
securities are generally referred to as private placements or restricted
securities. Limitations on the resale of such securities may have an adverse
effect on their marketability, and may prevent the Portfolio from disposing of
them promptly at reasonable prices. The Portfolio may have to bear the expense
of registering such securities for resale and the risk of substantial delays in
effecting such registration.
The Securities and Exchange Commission has adopted Rule 144A under the
Securities Act, which permits the Portfolios to sell restricted securities to
qualified institutional buyers without limitation. The Investment Manager or, in
the case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the BALANCED
PORTFOLIO, the CORE EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO, the
Sub-Adviser, pursuant to procedures adopted by the Trustees of the Fund, will
make a determination as to the liquidity of each restricted security purchased
by the Portfolio. If a restricted security is determined to be "liquid," such
security will not be included within the category "illiquid securities," which
under current policy may not exceed 15% of a Portfolio's total assets.
Restricted securities in which the MONEY MARKET PORTFOLIO may invest are
described above under "The Money Market Portfolio."
ZERO COUPON SECURITIES. A portion of the Government Securities purchased by the
NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, a portion of the U.S. Government
securities purchased by the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO,
the AMERICAN VALUE PORTFOLIO and the GLOBAL EQUITY PORTFOLIO, and a portion of
the fixed-income securities purchased by the DIVERSIFIED INCOME PORTFOLIO, the
BALANCED PORTFOLIO and the EMERGING MARKETS PORTFOLIO may be zero coupon
securities. Such securities are purchased at a discount from their face amount,
giving the purchaser the right to receive their full value at maturity. The
interest earned on such securities is, implicitly, automatically compounded and
paid out at maturity. While such compounding at a constant rate eliminates the
risk of receiving lower yields upon reinvestment of interest if prevailing
interest rates decline, the owner of a zero coupon security will be unable to
participate in higher yields upon reinvestment of interest received on
interest-paying securities if prevailing interest rates rise. For this reason,
zero coupon securities are subject to substantially greater price fluctuations
during periods of changing prevailing interest rates than are comparable
securities which pay interest on a current basis.
The zero coupon securities in which the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO may invest are primarily Canadian Government Securities with remaining
maturities of two years or less issued by Canadian provinces. Such securities
generally are currently readily available only in the form of zero coupon
securities.
37 - PROSPECTUS
<PAGE>
A zero coupon security pays no interest to its holder during its life.
Therefore, to the extent a Portfolio invests in zero coupon securities, it will
not receive current cash available for distribution to shareholders. Management
believes that a limited use of zero coupon securities by a Portfolio may enable
the Portfolio to increase the income available to shareholders (as a result of
the yield premium often obtainable on such securities) without significantly
increasing the volatility of the Portfolio's net asset value, although there is
no assurance this can be achieved.
WARRANTS. Each Portfolio (other than the MONEY MARKET PORTFOLIO, the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the VALUE-ADDED MARKET PORTFOLIO)
may acquire warrants attached to other securities and, in addition, each
Portfolio other than the MONEY MARKET PORTFOLIO, the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the UTILITIES PORTFOLIO
and the VALUE-ADDED MARKET PORTFOLIO may invest up to 5% of the value of its
total assets in warrants not attached to other securities, including up to 2% of
such assets in warrants not listed on either the New York or American Stock
Exchange. Warrants are, in effect, an option to purchase equity securities at a
specific price, generally valid for a specific period of time, and have no
voting rights, pay no dividends and have no rights with respect to the
corporation issuing them. If warrants remain unexercised at the end of the
exercise period, they will lapse and the Portfolio's investment in them will be
lost. The prices of warrants do not necessarily move parallel to the prices of
the underlying securities.
OPTIONS AND FUTURES TRANSACTIONS
Each of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
INCOME PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the
GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may write covered
call options against securities held in its portfolio and covered put options on
eligible portfolio securities (the UTILITIES PORTFOLIO, the AMERICAN VALUE
PORTFOLIO and the GLOBAL EQUITY PORTFOLIO may also write covered put and call
options on stock indexes) and purchase options of the same or similar series to
effect closing transactions, and may hedge against potential changes in the
market value of its investments (or anticipated investments) by purchasing put
and call options on securities which it holds (or has the right to acquire) in
its portfolio and engaging in transactions involving interest rate futures
contracts and bond index futures contracts and options on such contracts. The
UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the GLOBAL EQUITY PORTFOLIO
and the EMERGING MARKETS PORTFOLIO may also hedge against such changes by
entering into transactions involving stock index futures contracts and options
thereon and (except for the EMERGING MARKETS PORTFOLIO) options on stock
indexes. The VALUE-ADDED MARKET PORTFOLIO may purchase futures contracts on
stock indexes such as the S&P Index and the New York Stock Exchange Composite
Index and may sell such futures contracts to effect closing transactions. The
NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may
also hedge against potential changes in the market value of the currencies in
which their investments (or anticipated investments) are denominated by
purchasing put and call options on currencies and engaging in transactions
involving currencies futures contracts and options on such contracts.
Call and put options on U.S. Treasury notes, bonds and bills, on various foreign
currencies and on equity securities are listed on Exchanges and are written in
over-the-counter transactions ("OTC options"). Listed options are issued or
guaranteed by the exchange on which they trade or by a clearing corporation such
as the Options Clearing Corporation ("OCC"). Ownership of a listed call option
gives the Portfolio the right to buy from the OCC (in the U.S.) or other
clearing corporation or exchange the underlying security covered by the option
at the stated exercise price (the price per unit of the underlying security) by
filing an exercise notice prior to the expiration of the option. The writer
(seller) of the option would then have the obligation to sell to the OCC (in the
U.S.) or other clearing corporation or exchange the underlying security at that
exercise price prior to the expiration date of the option, regardless of its
then current market price. Ownership of a listed put option would give the
Portfolio the right to sell the underlying security to the OCC (in the U.S.) or
other clearing corporation or exchange at the stated exercise price. Upon notice
of exercise of the put option, the writer of the put would have the obligation
to purchase the underlying security from the OCC (in the U.S.) or other clearing
corporation or exchange at the exercise price.
Exchange-listed options are issued by the OCC (in the U.S.) or other clearing
corporation or exchange which assures that all transactions in such options are
properly executed. OTC options are purchased from or sold (written) to dealers
or financial institutions which have entered into direct agreements with the
Portfolio. With OTC options, such variables as expiration date, exercise price
and premium will be agreed upon between the Portfolio and the transacting
dealer, without the intermediation of a third party such as the OCC. If the
transacting dealer fails to make or take delivery of the securities (or, in the
case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS
PORTFOLIO, the currency) underlying an option it has written, in accordance with
the terms of that option, the Portfolio would lose the premium paid for the
option as well as any anticipated benefit of the transaction. The Portfolios
will engage in OTC option transactions only with member banks of the Federal
Reserve System or primary dealers in U.S. Government securities or with
affiliates of such banks or dealers which have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least $50
million.
COVERED CALL WRITING. The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE
PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO are
permitted to write covered call options on portfolio securities, without limit,
in order to aid them in achieving their investment objectives. In the
38 - PROSPECTUS
<PAGE>
case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS
PORTFOLIO, such options may be denominated in either U.S. dollars or foreign
currencies and may be on the U.S. dollar and foreign currencies. As a writer of
a call option, the Portfolio has the obligation, upon notice of exercise of the
option, to deliver the security (or amount of currency) underlying the option
prior to the expiration date of the option (certain listed and OTC put options
written by a Portfolio will be exercisable by the purchaser only on a specific
date).
COVERED PUT WRITING. As a writer of covered put options, the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the UTILITIES
PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the GLOBAL EQUITY PORTFOLIO or the
EMERGING MARKETS PORTFOLIO incurs an obligation to buy the security underlying
the option from the purchaser of the put, at the option's exercise price at any
time during the option period, at the purchaser's election (certain listed and
OTC put options written by a Portfolio will be exercisable by the purchaser only
on a specific date). The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE
PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO will
write put options for three purposes: (1) to receive the income derived from the
premiums paid by purchasers; (2) when the Portfolio's management wishes to
purchase the security underlying the option at a price lower than its current
market price, in which case the Portfolio will write the covered put at an
exercise price reflecting the lower purchase price sought; and (3) to close out
a long put option position. The aggregate value of the obligations underlying
the puts determined as of the date the options are sold will not exceed 50% of a
Portfolio's net assets.
PURCHASING CALL AND PUT OPTIONS. The EMERGING MARKETS PORTFOLIO may purchase
listed and OTC call and put options in amounts equaling up to 10% of its total
assets, and each of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the
DIVERSIFIED INCOME PORTFOLIO may purchase such call and put options in amounts
equalling up to 5% of its total assets. Each of the UTILITIES PORTFOLIO, the
AMERICAN VALUE PORTFOLIO and the GLOBAL EQUITY PORTFOLIO may purchase such call
and put options and options on stock indexes in amounts equalling up to 10% of
its total assets, with a maximum of 5% of its total assets invested in the
purchase of stock index options. These Portfolios may purchase call options
either to close out a covered call position or to protect against an increase in
the price of a security a Portfolio anticipates purchasing or, in the case of
call options on a foreign currency, to hedge against an adverse exchange rate
change of the currency in which the security the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO or the EMERGING MARKETS PORTFOLIO anticipates purchasing is
denominated vis-a-vis the currency in which the exercise price is denominated.
The Portfolio may purchase put options on securities which it holds (or has the
right to acquire) in its portfolio only to protect itself against a decline in
the value of the security. Similarly, each of the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO may purchase put options on
currencies in which securities it holds are denominated only to protect itself
against a decline in value of such currency vis-a-vis the currency in which the
exercise price is denominated. The Portfolios may also purchase put options to
close out written put positions in a manner similar to call option closing
purchase transactions. There are no other limits on the ability of these
Portfolios to purchase call and put options.
STOCK INDEX OPTIONS. The UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO and
the GLOBAL EQUITY PORTFOLIO may invest in options on stock indexes, which are
similar to options on stock except that, rather than the right to take or make
delivery of stock at a specified price, an option on a stock index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing level of the stock index upon which the option is based is greater
than, in the case of a call, or lesser than, in the case of a put, the exercise
price of the option. See "Risks of Options on Indexes," in the Statement of
Additional Information.
FUTURES CONTRACTS. The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE
PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may
purchase and sell interest rate futures contracts that are currently traded, or
may in the future be traded, on U.S. commodity exchanges on such underlying
securities as U.S. Treasury bonds, notes, and bills and GNMA Certificates and
bond index futures contracts that are traded on U.S. commodity exchanges on such
indexes as the Moody's Investment-Grade Corporate Bond Index. The UTILITIES
PORTFOLIO, the VALUE-ADDED MARKET PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the
GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may also purchase and
sell stock index futures contracts that are currently traded, or may in the
future be traded, on U.S. commodity exchanges on such indexes as the S&P 500
Index and the New York Stock Exchange Composite Index. The GLOBAL EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO may also purchase and sell futures
contracts that are currently traded, or may in the future be traded, on foreign
commodity exchanges on such underlying securities as common stocks and on such
indexes of foreign equity securities as may exist or come into being, such as
the Financial Times Equity Index. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO may also purchase and sell futures contracts that are
currently traded, or may in the future be traded, on foreign commodity exchanges
on such underlying securities as foreign government fixed-income securities, on
various currencies ("currency futures") and on such indexes of foreign
fixed-income securities as may exist or come into being. As a futures contract
purchaser, a Portfolio incurs an obligation to take delivery of a specified
amount of the obligation underlying the contract at a specified time in the
future for a specified price. As a seller of a futures contract, a Portfolio
incurs an obligation to
39 - PROSPECTUS
<PAGE>
deliver the specified amount of the underlying obligation at a specified time in
return for an agreed upon price.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the GLOBAL
EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO will purchase or sell
interest rate futures contracts and bond index futures contracts for the purpose
of hedging their fixed-income portfolio (or anticipated portfolio) securities
against changes in prevailing interest rates or, in the case of the UTILITIES
PORTFOLIO, to facilitate asset reallocations into and out of the fixed-income
area. The UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO will purchase or sell stock index
futures contracts for the purpose of hedging their equity portfolio (or
anticipated portfolio) securities against changes in their prices or, in the
case of the UTILITIES PORTFOLIO, to facilitate asset reallocations into and out
of the equity area. The VALUE-ADDED MARKET PORTFOLIO will purchase stock index
futures contracts as a temporary substitute for the purchase of individual
stocks which may then be purchased in orderly fashion, and may sell such
contracts to effect closing transactions. The NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO will purchase or sell currency
futures on currencies in which their portfolio securities (or anticipated
portfolio securities) are denominated for the purposes of hedging against
anticipated changes in currency exchange rates.
OPTIONS ON FUTURES CONTRACTS. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the UTILITIES PORTFOLIO, the
AMERICAN VALUE PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS
PORTFOLIO may purchase and write call and put options on futures contracts which
are traded on an exchange and enter into closing transactions with respect to
such options to terminate an existing position. An option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put) at a specified exercise price at any time
during the term of the option. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the UTILITIES PORTFOLIO, the
AMERICAN VALUE PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS
PORTFOLIO will only purchase and write options on futures contracts for
identical purposes to those set forth above for the purchase of a futures
contract (purchase of a call option or sale of a put option) and the sale of a
futures contract (purchase of a put option or sale of a call option), or to
close out a long or short position in futures contracts.
RISKS OF OPTIONS AND FUTURES TRANSACTIONS. A Portfolio may close out its
position as writer of an option, or as a buyer or seller of a futures contract,
only if a liquid secondary market exists for options or futures contracts of
that series. There is no assurance that such a market will exist, particularly
in the case of OTC options, as such options will generally only be closed out by
entering into a closing purchase transaction with the purchasing dealer. Also,
exchanges limit the amount by which the price of a futures contract may move on
any day. If the price moves equal the daily limit on successive days, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased.
The extent to which a Portfolio may enter into transactions involving options
and futures contracts may be limited by the Internal Revenue Code's requirements
for qualification of each Portfolio as a regulated investment company and the
Fund's intention to qualify each Portfolio as such. See "Dividends,
Distributions and Taxes."
While the futures contracts and options transactions to be engaged in by the
NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the GLOBAL
EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO for the purpose of hedging
their portfolio securities are not speculative in nature, there are risks
inherent in the use of such instruments. One such risk is that the Portfolio's
management could be incorrect in its expectations as to the direction or extent
of various interest rate movements or the time span within which the movements
take place. For example, if a Portfolio sold interest rate futures contracts for
the sale of securities in anticipation of an increase in interest rates, and
then interest rates went down instead, causing bond prices to rise, the
Portfolio would lose money on the sale.
Another risk which may arise in employing futures contracts to protect against
the price volatility of portfolio securities is that the prices of securities,
currencies and indexes subject to futures contracts (and thereby the futures
contract prices) may correlate imperfectly with the behavior of the U.S. dollar
cash prices of the portfolio securities (and, in the case of the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL
EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO, the securities' denominated
currencies). Another such risk is that prices of interest rate futures contracts
may not move in tandem with the changes in prevailing interest rates against
which the Portfolio seeks a hedge. A correlation may also be distorted by the
fact that the futures market is dominated by short-term traders seeking to
profit from the difference between a contract or security price objective and
their cost of borrowed funds. Such distortions are generally minor and would
diminish as the contract approached maturity.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO, by
entering into transactions in foreign futures and options markets, will incur
risks similar to those discussed above under "Foreign Securities."
New options and futures contracts and other financial products and various
combinations thereof continue to be developed. The NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the UTILITIES PORTFOLIO,
the AMERICAN VALUE PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING
MARKETS PORTFOLIO may invest in any such options, futures and products as
40 - PROSPECTUS
<PAGE>
may be developed to the extent consistent with their investment objectives and
applicable regulatory requirements, and the Fund will make any and all pertinent
disclosures relating to such investments in its Prospectus and/or Statement of
Additional Information. Except as otherwise noted above, there are no
limitations on the ability of any of these Portfolios to invest in options,
futures and options on futures.
PORTFOLIO TRADING
Although the Fund does not intend to engage in short-term trading of portfolio
securities as a means of achieving the investment objectives of the respective
Portfolios, each Portfolio may sell portfolio securities without regard to the
length of time they have been held whenever such sale will in the opinion of the
Investment Manager (or, in the case of the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the BALANCED PORTFOLIO, the CORE EQUITY PORTFOLIO and the EMERGING
MARKETS PORTFOLIO, the Sub-Adviser) strengthen the Portfolio's position and
contribute to its investment objectives. In determining which securities to
purchase for the Portfolios or hold in a Portfolio, the Investment Manager and,
in the case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the BALANCED
PORTFOLIO, the CORE EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO, the
Sub-Adviser will rely on information from various sources, including research,
analysis and appraisals of brokers and dealers, the views of Trustees of the
Fund and others regarding economic developments and interest rate trends, and
the Investment Manager's and, in the case of the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the BALANCED PORTFOLIO, the CORE EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO, the Sub-Adviser's own analysis of factors they deem
relevant.
Personnel of the Investment Manager and, in the case of the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the BALANCED PORTFOLIO, the CORE EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO, the Sub-Adviser have substantial
experience in the use of the investment techniques described above under the
heading "Options and Futures Transactions," which techniques require skills
different from those needed to select the portfolio securities underlying
various options and futures contracts.
Brokerage commissions are not normally charged on the purchase or sale of money
market instruments and U.S. Government obligations, or on currency conversions,
but such transactions will involve costs in the form of spreads between bid and
asked prices. Orders for transactions in portfolio securities and commodities
may be placed for the Fund with a number of brokers and dealers, including Dean
Witter Reynolds Inc. ("DWR"), a broker-dealer affiliate of InterCapital.
Pursuant to an order of the Securities and Exchange Commission, the Fund may
effect principal transactions in certain money market instruments with DWR. In
addition, the Fund may incur brokerage commissions on transactions conducted
through DWR.
The MONEY MARKET PORTFOLIO is expected to have a high portfolio turnover due to
the short maturities of securities purchased, but this should not affect income
or net asset value as brokerage commissions are not normally charged on the
purchase or sale of money market instruments. It is not anticipated that the
portfolio turnover rates of the Portfolios will exceed the following percentages
in any year: NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO: 100%; DIVERSIFIED
INCOME PORTFOLIO: 150%; BALANCED PORTFOLIO: 100%; UTILITIES PORTFOLIO: 100%;
DIVIDEND GROWTH PORTFOLIO: 90%; VALUE-ADDED MARKET PORTFOLIO: 100%; CORE EQUITY
PORTFOLIO: 100%; AMERICAN VALUE PORTFOLIO: 400%; GLOBAL EQUITY PORTFOLIO: 100%;
DEVELOPING GROWTH PORTFOLIO: 300%; and EMERGING MARKETS PORTFOLIO: 100%. A
portfolio turnover rate exceeding 100% in any one year is greater than that of
many other investment companies. Each Portfolio of the Fund will incur
underwriting discount costs (on underwritten securities) and/or brokerage costs
commensurate with its portfolio turnover rate. The expenses of the GLOBAL EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO relating to their portfolio
management are likely to be greater than those incurred by other investment
companies investing primarily in securities issued by domestic issuers as
custodial costs, brokerage commissions and other transaction charges related to
investing in foreign markets are generally higher than in the United States.
Short-term gains and losses may result from portfolio transactions. See
"Dividends, Distributions and Taxes" for a discussion of the tax implications of
the Portfolios' trading policies. A more extensive discussion of the Portfolios'
brokerage policies is set forth in the Statement of Additional Information.
PORTFOLIO MANAGEMENT
The following individuals are primarily responsible for the day-to-day
management of the Portfolios of the Fund (other than the MONEY MARKET
PORTFOLIO). Except as otherwise noted, each of these individuals has been a
primary portfolio manager of the designated Portfolio since the inception of the
Fund: Philip A. Barach, James M. Goldberg, Frederick H. Horton, Jeffrey E.
Gundlach and Douglas R. Metcalf, Managing Directors of the Sub-Adviser, are the
primary portfolio managers of the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO. Messrs. Barach, Gundlach and Goldberg have been portfolio managers
with affiliates of The TCW Group, Inc. for over five years. Mr. Horton has been
a portfolio manager with affiliates of The TCW Group, Inc. since October, 1993.
From June, 1991-September, 1993, he was Senior Portfolio Manager for Dewey
Square Investors, prior to which time he was Senior Portfolio Manager for the
Putnam Companies. Mr. Metcalf has been a portfolio manager with affiliates of
The TCW Group, Inc. since March, 1990, prior to which time he was Managing
Director of First Interstate Bank Ltd. Peter M. Avelar and Rajesh K. Gupta,
Senior Vice Presidents of InterCapital, and Vinh Q. Tran, Vice President of
InterCapital, are the primary portfolio managers of the DIVERSIFIED INCOME
PORTFOLIO. Mr. Avelar has been a portfolio manager with InterCapital since
December, 1990, prior to which time he was affiliated with PaineWebber Asset
Management as a First Vice President and Portfolio Manager. Messrs. Gupta and
Tran have been portfolio managers with InterCapital for over five years. James
A. Tilton, Managing Director of the Sub-Adviser, is the primary portfolio
manager of the equity portion of the BALANCED
41 - PROSPECTUS
<PAGE>
PORTFOLIO and has been a portfolio manager with affiliates of The TCW Group,
Inc. for over five years. James M. Goldberg (see above) is the primary portfolio
manager of the fixed-income portion of the BALANCED PORTFOLIO. Edward F. Gaylor,
Senior Vice President of InterCapital, is the primary portfolio manager of the
UTILITIES PORTFOLIO and has been a portfolio manager with InterCapital for over
five years. Paul D. Vance, Senior Vice President of InterCapital, is the primary
portfolio manager of the DIVIDEND GROWTH PORTFOLIO and has been a portfolio
manager with InterCapital for over five years. Robert M. Hanisee, Managing
Director of the Sub-Adviser, is the primary portfolio manager of the CORE EQUITY
PORTFOLIO and has been a portfolio manager with affiliates of The TCW Group,
Inc. since April, 1990, prior to which time he was President and Director of
Research for Seidler Amdec Securities. Kenton J. Hinchliffe, Senior Vice
President of InterCapital, is the primary portfolio manager of the VALUE-ADDED
MARKET PORTFOLIO and has been a portfolio manager with InterCapital for over
five years. Anita H. Kolleeny, Senior Vice President of InterCapital, is the
primary portfolio manager of the AMERICAN VALUE PORTFOLIO and has been a
portfolio manager with InterCapital for over five years. Thomas H. Connelly,
Senior Vice President of InterCapital, is the primary portfolio manager of the
GLOBAL EQUITY PORTFOLIO and has been a portfolio manager with InterCapital for
over five years. Ronald J. Worobel, Senior Vice President of InterCapital, and
Jayne Stevlingson Wolff, Vice President of InterCapital, are the primary
portfolio managers of the DEVELOPING GROWTH PORTFOLIO. Mr. Worobel has been a
portfolio manager with InterCapital since June, 1992, prior to which time he was
a portfolio manager at MacKay Shields Financial Corp. Ms. Wolff has been a
portfolio manager with InterCapital since October, 1992, prior to which time she
was a portfolio manager with Bankers Trust New York Corp. (January,
1990-September, 1992) and an analyst with Campbell Advisors (April,
1986-December, 1989). Shaun C.K. Chan, Managing Director of TCW Asia Ltd.,
Robert J.M. Rawe, President, Managing Director, Chief Executive Officer and
Director of TCW London International, Limited, Michael P. Reilly, Senior Vice
President of the Sub-Adviser, and Paul G. Wargnier, Managing Director of the
Sub-Adviser, are the primary portfolio managers of the EMERGING MARKETS
PORTFOLIO. Mr. Chan has been a portfolio manager with affiliates of The TCW
Group, Inc. since 1993, prior to which time he was Director of Wardley
Investment Services (Hong Kong) Ltd. Mr. Rawe has been a portfolio manager with
TCW London International, Limited since August, 1993, prior to which time he was
President and Chief Executive Officer of Dillon, Read International Asset
Management Co. Mr. Reilly has been a portfolio manager with affiliates of The
TCW Group, Inc. since June, 1992, prior to which time he was Vice President of
Security Pacific Bank. Mr. Wargnier has been a portfolio manager with affiliates
of The TCW Group, Inc. since June, 1990, prior to which time he was Vice
President and Director of Research for D.A. Campbell Co., Inc., an institutional
brokerage firm.
INVESTMENT RESTRICTIONS
--------------------------------------------------------------------
The investment restrictions listed below are among the restrictions that have
been adopted as fundamental policies of each Portfolio other than the MONEY
MARKET PORTFOLIO. In addition, the MONEY MARKET PORTFOLIO has adopted
restrictions two and five as fundamental policies. Under the Investment Company
Act of 1940, as amended (the "Act"), a fundamental policy may not be changed
with respect to a Portfolio without the vote of a majority of the outstanding
voting securities of that Portfolio, as defined in the Act.
Each Portfolio of the Fund may not:
1. As to 75% of its total assets, invest more than 5% of the value of
its total assets in the securities of any one issuer (other than obligations
issued or guaranteed by the United States Government, its agencies or
instrumentalities).
2. As to 75% of its total assets, purchase more than 10% of all
outstanding voting securities or any class of securities of any one issuer.
(All of the Portfolios of the Fund may, collectively, purchase more than 10%
of all outstanding voting securities or any class of securities of any one
issuer.)
3. With the exception of the UTILITIES PORTFOLIO, invest 25% or more of
the value of its total assets in securities of issuers in any one industry.
This restriction does not apply to obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities or, in the
case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the
DIVERSIFIED INCOME PORTFOLIO, to Mortgage-Backed Securities.
4. Invest more than 5% of the value of its total assets in securities
of issuers having a record, together with predecessors, of less than three
years of continuous operation. This restriction shall not apply to any
obligation issued or guaranteed by the United States Government, its
agencies or instrumentalities or, in the case of the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO and the DIVERSIFIED INCOME PORTFOLIO, to
Mortgage-Backed Securities and Asset-Backed Securities.
5. Borrow money (except insofar as the MONEY MARKET PORTFOLIO, the
NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO and the BALANCED PORTFOLIO may be deemed to have borrowed by
entrance into a reverse repurchase agreement or the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO and the
BALANCED PORTFOLIO may be deemed to have borrowed by entrance into a dollar
roll), except from banks for temporary or emergency purposes or to meet
redemption requests which might otherwise require the
42 - PROSPECTUS
<PAGE>
untimely disposition of securities, and, in the case of the Portfolios other
than the DEVELOPING GROWTH PORTFOLIO, not for investment or leveraging,
provided that borrowing in the aggregate (other than, in the case of the
DEVELOPING GROWTH PORTFOLIO, for investment or leveraging) may not exceed 5%
(taken at the lower of cost or current value) of the value of the
Portfolio's total assets (not including the amount borrowed).
The MONEY MARKET PORTFOLIO has also adopted the following restrictions as
fundamental policies:
1. With respect to 75% of its total assets, purchase any securities,
other than obligations of the U.S. Government, or its agencies or
instrumentalities, if, immediately after such purchase, more than 5% of the
value of the MONEY MARKET PORTFOLIO's total assets would be invested in
securities of any one issuer. However, as a non-fundamental policy, the
MONEY MARKET PORTFOLIO will not invest more than 10% of its total assets in
the securities of any one issuer. Furthermore, pursuant to current
regulatory requirements, the MONEY MARKET PORTFOLIO may only invest more
than 5% of its total assets in the securities of a single issuer (and only
with respect to one issuer at a time) for a period of not more than three
business days and only if the securities have received the highest quality
rating by at least two NRSROs.)
2. Purchase any securities, other than obligations of domestic banks or
of the U.S. Government, or its agencies or instrumentalities, if,
immediately after such purchase, more than 25% of the value of the MONEY
MARKET PORTFOLIO's total assets would be invested in the securities of
issuers in the same industry; however, there is no limitation as to
investments in domestic bank obligations or in obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
In addition, as a non-fundamental policy, each Portfolio of the Fund may not
invest more than 15% (10% in the case of the MONEY MARKET PORTFOLIO) of its
total assets in "illiquid securities" (securities for which market quotations
are not readily available) and repurchase agreements which have a maturity of
longer than seven days. For purposes of this policy, securities eligible for
sale pursuant to Rule 144A under the Securities Act are not considered illiquid
if they are determined to be liquid under procedures adopted by the Trustees of
the Fund. As another non-fundamental policy, each Portfolio of the Fund may not
purchase securities of other investment companies, except in connection with a
merger, consolidation, reorganization or acquisition of assets or, in the case
of the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO, in accordance
with the provisions of Section 12(d) of the Act and any Rules promulgated
thereunder (e.g., each of these Portfolios may not invest in more than 3% of the
outstanding voting securities of any investment company). For this purpose,
Mortgage-Backed Securities and Asset-Backed Securities are not deemed to be
investment companies.
All percentage limitations apply immediately after a purchase or initial
investment, and any subsequent change in any applicable percentage resulting
from market fluctuations or other changes in the amount of total assets does not
require elimination of any security from the Portfolio.
DETERMINATION OF NET ASSET VALUE
--------------------------------------------------------------------
The net asset value per share is calculated separately for each Portfolio. In
general, the net asset value per share is computed by taking the value of all
the assets of the Portfolio, subtracting all liabilities, dividing by the number
of shares outstanding and adjusting the result to the nearest cent. The Fund
will compute the net asset value per share of each Portfolio once daily at 4:00
p.m., New York time, on days the New York Stock Exchange is open for trading.
The net asset value per share will not be determined on Good Friday and on such
other Federal and non-Federal holidays as are observed by the New York Stock
Exchange.
The MONEY MARKET PORTFOLIO utilizes the amortized cost method in valuing its
portfolio securities, which method involves valuing a security at its cost
adjusted by a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. The purpose of this method of calculation is to facilitate the
maintenance of a constant net asset value per share of $1.00. However, there can
be no assurance that the $1.00 net asset value will be maintained.
In the calculation of the net asset value of the Portfolios other than the MONEY
MARKET PORTFOLIO: (1) an equity portfolio security listed or traded on the New
York or American Stock Exchange or other domestic or foreign stock exchange is
valued at its latest sale price on that exchange prior to the time when assets
are valued (if there were no sales that day, the security is valued at the
latest bid price) (in cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated as the primary
market by the Trustees); and (2) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest bid price prior to the time of valuation. In either (1) or (2) above,
when market quotations are not readily available, including circumstances under
which it is determined by the Investment Manager (or, in the case of the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the BALANCED PORTFOLIO, the CORE
EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO, by the Sub-Adviser) that
sale or bid prices are not reflective of a security's market value, portfolio
securities are valued at their fair value as determined in good faith under
procedures established by and under the general supervision of the Fund's Board
of Trustees. Valuation of securities for which market quotations are not readily
43 - PROSPECTUS
<PAGE>
available may also be based upon current market prices of securities which are
comparable in coupon, rating and maturity or an appropriate matrix utilizing
similar factors. For valuation purposes, quotations of foreign portfolio
securities, other assets and liabilities and forward contracts stated in foreign
currency are translated into U.S. dollar equivalents at the prevailing market
rates as of the morning of valuation. Dividends receivable are accrued as of the
ex-dividend date except for certain dividends from foreign securities which are
accrued as soon as the Fund is informed of such dividends after the ex-dividend
date.
Short-term debt securities with remaining maturities of sixty days or less at
the time of purchase are valued at amortized cost, unless the Trustees determine
such does not reflect the securities' market value, in which case these
securities will be valued at their fair value as determined by the Trustees.
Certain of the portfolio securities of each Portfolio other than the MONEY
MARKET PORTFOLIO may be valued by an outside pricing service approved by the
Fund's Trustees. The pricing service utilizes a matrix system incorporating
security quality, maturity and coupon as the evaluation model parameters, and/or
research evaluations by its staff, including review of broker-dealer market
price quotations, in determining what it believes is the fair valuation of the
portfolio securities valued by such pricing service.
PURCHASE OF FUND SHARES
--------------------------------------------------------------------
Investments in the Fund may be made only by (1) Hartford Life Insurance Company
for allocation to certain separate accounts it established and maintains for the
purpose of funding variable annuity contracts it issues, and by (2) ITT Hartford
Life and Annuity Insurance Company for allocation to certain separate accounts
it established and maintains for the purpose of funding variable annuity
contracts it issues. Persons desiring to purchase annuity contracts funded by
any Portfolio of the Fund should read this Prospectus in conjunction with the
Prospectus of the flexible premium deferred annuity contracts issued by Hartford
Life Insurance Company or ITT Hartford Life and Annuity Insurance Company (the
"Companies").
In the future, shares of the Portfolios of the Fund may be allocated to certain
other separate accounts or sold to affiliated and/ or non-affiliated entities of
the Companies in connection with variable annuity contracts or variable life
insurance contracts. It is conceivable that in the future it may become
disadvantageous for both variable life and variable annuity contract separate
accounts to invest in the same underlying fund. Although the Companies and the
Fund do not currently foresee any such disadvantage, if the shares of the Fund
are offered in connection with variable life insurance contracts, the Fund's
Board of Trustees intends to monitor events in order to identify any material
irreconcilable conflict between the interests of variable annuity contract
owners and variable life insurance contract owners and to determine what action,
if any, should be taken in response thereto.
Shares of each Portfolio of the Fund are offered to the Companies for allocation
to the Accounts without sales charge at the respective net asset values of the
Portfolios next determined after receipt by the Fund of the purchase payment in
the manner set forth above under "Determination of Net Asset Value." In the
interest of economy and convenience, certificates representing the Fund's shares
will not be physically issued.
REDEMPTION OF FUND SHARES
--------------------------------------------------------------------
Shares of any Portfolio of the Fund can be redeemed by the Companies at any time
for cash, without sales charge, at the net asset value next determined after
receipt of the redemption request. (For information regarding charges which may
be imposed upon the Contracts by the applicable Account, see the Prospectus for
the Variable Annuity Contracts.)
The Fund reserves the right to suspend the right of redemption or to postpone
the date of payment upon redemption of the shares of any Portfolio for any
period during which the New York Stock Exchange is closed (other than weekend
and holiday closings) or trading on that Exchange is restricted, or during which
an emergency exists (as determined by the Securities and Exchange Commission) as
a result of which disposal of the portfolio securities owned by the Portfolio is
not reasonably practicable or it is not reasonably practicable for the Portfolio
to determine the value of its net assets, or for such other period as the
Securities and Exchange Commission may by order permit for the protection of
shareholders.
44 - PROSPECTUS
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
--------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. The Fund intends to distribute substantially all of
the net investment income and net realized capital gains, if any, of each
Portfolio. Dividends from net investment income and any distributions of
realized capital gains will be paid in additional shares of the Portfolio paying
the dividend or making the distribution and credited to the shareholder's
account.
MONEY MARKET PORTFOLIO. Dividends from net income on the MONEY MARKET PORTFOLIO
will be declared, payable on each day the New York Stock Exchange is open for
business to shareholders of record as of the close of business the preceding
business day. Net income, for dividend purposes, includes accrued interest and
accretion of original issue and market discount, less the amortization of market
premium and the estimated expenses of the MONEY MARKET PORTFOLIO. The amount of
dividend may fluctuate from day to day and may be omitted on some days if
realized losses on portfolio securities exceed the MONEY MARKET PORTFOLIO's net
investment income. Dividends are automatically reinvested daily in additional
shares of the MONEY MARKET PORTFOLIO at the net asset value per share at the
close of business that day. Any net realized capital gains will be declared and
paid at least once per calendar year; net short-term gains may be paid more
frequently, with the distribution of dividends from net investment income.
OTHER PORTFOLIOS. Dividends from net investment income, if any, on the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the
BALANCED PORTFOLIO, the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the
VALUE-ADDED MARKET PORTFOLIO, the CORE EQUITY PORTFOLIO, the AMERICAN VALUE
PORTFOLIO, the GLOBAL EQUITY PORTFOLIO, the DEVELOPING GROWTH PORTFOLIO and the
EMERGING MARKETS PORTFOLIO will be declared and paid monthly, and any net
realized capital gains will be declared and paid at least once per calendar
year.
TAXES. Because the Fund intends to distribute substantially all of the net
investment income and capital gains of each Portfolio and otherwise qualify each
Portfolio as a regulated investment company under Subchapter M of the Internal
Revenue Code (the "Code"), it is not expected that any Portfolio of the Fund
will be required to pay any Federal income tax on such income and capital gains.
Gains or losses on a Portfolio's transactions in certain listed options and on
futures and options on futures generally are treated as 60% long-term and 40%
short-term. When a Portfolio engages in options and futures transactions,
various tax regulations applicable to the Portfolio may have the effect of
causing the Portfolio to recognize a gain or loss for tax purposes before that
gain or loss is realized, or to defer recognition of a realized loss for tax
purposes. Recognition, for tax purposes, of an unrealized loss may result in a
lesser amount of the realized net short-term gains of the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the UTILITIES
PORTFOLIO, the VALUE-ADDED MARKET PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the
GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO being available for
distribution. These Portfolios intend to make certain elections which may
minimize the impact of these rules but which could also result in a higher
portion of the Portfolio's gains being treated as short-term capital gains.
As a regulated investment company, the Fund is subject to the requirement that
less than 30% of a Portfolio's gross income be derived from the sale or other
disposition of securities held for less than three months. This requirement may
limit the ability of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the UTILITIES PORTFOLIO, the VALUE-ADDED MARKET
PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO to engage in options and futures transactions.
With respect to investments by the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the BALANCED PORTFOLIO, the
UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the AMERICAN VALUE
PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO in
zero coupon bonds and investment by the DIVERSIFIED INCOME PORTFOLIO and the
EMERGING MARKETS PORTFOLIO in payment-in-kind bonds, the Portfolios accrue
income prior to any actual cash payments by their issuers. In order to continue
to comply with Subchapter M of the Code and remain able to forego payment of
Federal income tax on their income and capital gains, each Portfolio must
distribute all of its net investment income, including income accrued from zero
coupon and payment-in-kind bonds. As such, these Portfolios may be required to
dispose of some of their portfolio securities under disadvantageous
circumstances to generate the cash required for distribution.
Dividends, interest and capital gains received by a Portfolio on investments in
foreign issuers or which are denominated in foreign currency may give rise to
withholding and other taxes imposed by foreign countries, which may or may not
be refunded to the Portfolio.
Since the Companies are the only shareholders of the Fund, no discussion is
stated herein as to the Federal income tax consequences at the shareholder
level. For information concerning the Federal income tax consequences to holders
of variable annuity contracts, see the Prospectus for the Variable Annuity
Contracts.
45 - PROSPECTUS
<PAGE>
PERFORMANCE INFORMATION
--------------------------------------------------------------------
From time to time the Fund advertises the "yield" and "effective yield" of the
MONEY MARKET PORTFOLIO. Both yield figures are based on historical earnings and
are not intended to indicate future performance. The "yield" of the MONEY MARKET
PORTFOLIO refers to the income generated by an investment in the Portfolio over
a given period (which period will be stated in the advertisement). This income
is then annualized. The "effective yield" for a seven-day period is calculated
similarly but, when annualized, the income earned by an investment in the MONEY
MARKET PORTFOLIO is assumed to be reinvested each week within a 365-day period.
The "effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. The MONEY MARKET PORTFOLIO's
"yield" and "effective yield" do not reflect the deduction of any charges which
may be imposed on the Contracts by the Account and are therefore not equivalent
to total return under a Contract (for a description of such charges, see the
Prospectus for the Contracts).
From time to time the Fund may quote the "total return" of each Portfolio in
advertisements and sales literature. The total return of a Portfolio is based on
historical earnings and is not intended to indicate future performance. The
"average annual total return" of a Portfolio refers to a figure reflecting the
average annualized percentage increase (or decrease) in the value of an initial
investment in the Portfolio of $1,000 over the life of the Portfolio. Average
annual total return reflects all income earned by the Portfolio, any
appreciation or depreciation of the Portfolio's assets and all expenses incurred
by the Portfolio for the stated periods. It also assumes reinvestment of all
dividends and distributions paid by the Portfolio. However, average annual total
return does not reflect the deduction of any charges which may be imposed on the
Contracts by the Account which, if reflected, would reduce the performance
quoted.
In addition to the foregoing, the Fund may advertise the total return of the
Portfolios over different periods of time by means of aggregate, average,
year-by-year or other types of total return figures. Such calculations similarly
do not reflect the deduction of any charges which may be imposed on the
Contracts by the Account. The Fund may also advertise the growth of hypothetical
investments of $10,000, $50,000 and $100,000 in shares of a Portfolio. The Fund
from time to time may also advertise the performance of the Portfolios relative
to certain performance rankings and indexes compiled by independent
organizations, such as Lipper Analytical Services, Inc.
ADDITIONAL INFORMATION
--------------------------------------------------------------------
The shares of beneficial interest of the Fund, with $0.01 par value, are divided
into twelve separate Portfolios, and the shares of each Portfolio are equal as
to earnings, assets and voting privileges with all other shares of that
Portfolio. There are no conversion, pre-emptive or other subscription rights.
Upon liquidation of the Fund or any Portfolio, shareholders of a Portfolio are
entitled to share pro rata in the net assets of that Portfolio available for
distribution to shareholders after all debts and expenses have been paid. The
shares do not have cumulative voting rights.
The assets received by the Fund on the sale of shares of each Portfolio and all
income, earnings, profits and proceeds thereof, subject only to the rights of
creditors, are allocated to each Portfolio, and constitute the assets of such
Portfolio. The assets of each Portfolio are required to be segregated on the
Fund's books of account.
Additional Portfolios (the proceeds of which would be invested in separate,
independently managed portfolios with distinct investment objectives, policies
and restrictions) may be offered in the future, but such additional offerings
would not affect the interests of the current shareholders in the existing
Portfolios.
On any matters affecting only one Portfolio, only the shareholders of that
Portfolio are entitled to vote. On matters relating to all the Portfolios but
affecting the Portfolios differently, separate votes by Portfolio are required.
Approval of an Investment Management Agreement and a change in fundamental
policies would be regarded as matters requiring separate voting by each
Portfolio. To the extent required by law, Hartford Life Insurance Company and
ITT Hartford Life and Annuity Insurance Company, which are the only shareholders
of the Fund, will vote the shares of the Fund held in each Account in accordance
with instructions from Contract Owners, as more fully described under the
caption "Voting Rights" in the Prospectus for the Variable Annuity Contracts.
The Trustees of the Fund have been elected by Hartford Life Insurance Company.
The Fund is not required to hold Annual Meetings of Shareholders and in ordinary
circumstances the Fund does not intend to hold such meetings. The Trustees may
call Special Meetings of Shareholders for action by shareholder vote as may be
required by the Act or the Declaration of Trust.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that Fund
obligations include such disclaimer, and provides for indemnification and
reimbursement of expenses out of the Fund's property for any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability,
46 - PROSPECTUS
<PAGE>
and the nature of the Fund's assets and operations, in the opinion of
Massachusetts counsel to the Fund, the risk to shareholders of personal
liability is remote.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Dean Witter Trust Company, an
affiliate of the Investment Manager, whose address is Harborside Financial
Center, Plaza Two, Jersey City, NJ 07311, is the Transfer Agent of the Fund's
shares and Dividend Disbursing Agent for payments of dividends and distributions
on Fund shares.
CODE OF ETHICS. Directors, officers and employees of InterCapital and Dean
Witter Services Company Inc. are subject to a strict Code of Ethics adopted by
those companies. The Code of Ethics is intended to ensure that the interests of
shareholders and other clients are placed ahead of any personal interest, that
no undue personal benefit is obtained from a person's employment activities and
that actual and potential conflicts of interest are avoided. To achieve these
goals and comply with regulatory requirements, the Code of Ethics requires,
among other things, that personal securities transactions by employees of the
companies be subject to an advance clearance process to monitor that no
investment company managed or advised by InterCapital ("Dean Witter Fund") is
engaged at the same time in a purchase or sale of the same security. The Code of
Ethics bans the purchase of securities in an initial public offering, and also
prohibits engaging in futures and option transactions and profiting on
short-term trading (that is, a purchase within sixty days of a sale or a sale
within sixty days of a purchase) of a security. In addition, investment
personnel may not purchase or sell a security for their personal account within
thirty days before or after any transaction in any Dean Witter Fund managed by
them. Any violations of the Code of Ethics are subject to sanctions, including
reprimand, demotion or suspension or termination of employment. The Code of
Ethics comports with regulatory requirements and the recommendations in the
recent report by the Investment Company Institute Advisory Group on Personal
Investing.
SHAREHOLDER INQUIRIES. All inquiries regarding the Fund should be directed to
the Fund at the telephone numbers or address set forth on the front cover of
this Prospectus.
INVESTMENT BY HARTFORD LIFE INSURANCE COMPANY. Hartford Life Insurance Company
purchased 100,000 shares of the MONEY MARKET PORTFOLIO and 10,000 shares of each
of the other eleven Portfolios prior to the commencement of the Fund's
operations, for an aggregate purchase price of $1,200,000. Hartford Life
Insurance Company may redeem such shares at any time after the net assets of the
Portfolios have attained a sufficient level so that such redemption will not
cause disruption of the operations of the affected Portfolio.
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------
To the Shareholders and Trustees of Dean Witter Select Dimensions Investment
Series
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Money Market Portfolio, the
North American Government Securities Portfolio, the Diversified Income
Portfolio, the Balanced Portfolio, the Utilities Portfolio, the Dividend Growth
Portfolio, the Value-Added Market Portfolio, the Core Equity Portfolio, the
American Value Portfolio, the Global Equity Portfolio, the Developing Growth
Portfolio and the Emerging Markets Portfolio (constituting Dean Witter Select
Dimensions Investment Series, hereafter referred to as the "Fund") at December
31, 1994, and the results of each of their operations, the changes in each of
their net assets and the financial highlights for the period November 9, 1994
(commencement of operations) through December 31, 1994, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities owned at December 31, 1994 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 7, 1995
47 - PROSPECTUS
<PAGE>
MONEY MARKET
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT ON DATE OF MATURITY
(IN THOUSANDS) PURCHASE DATE VALUE
- --------------- -------------- ----------------- -----------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS (99.9%)
COMMERCIAL PAPER (11.3%)
AUTOMOTIVE FINANCE (2.0%)
$ 25 Ford Motor Credit Co......................... 6.03% 01/11/95 $ 24,954
-----------
BROKERAGE (4.5%)
55 Morgan Stanley Group, Inc.................... 6.21 01/06/95 54,943
-----------
FINANCE - DIVERSIFIED (4.8%)
25 General Electric Capital Corp................ 6.01 01/12/95 24,950
35 ITT Financial Corp........................... 6.13 01/10/95 34,941
-----------
59,891
-----------
TOTAL COMMERCIAL PAPER (AMORTIZED COST $139,788)................................ 139,788
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C> <C> <C>
U.S. GOVERNMENT AGENCIES (88.6%)
45 Federal Farm Credit Bank..................... 5.86 01/27/95 44,804
01/03/95 to
540 Federal Home Loan Banks...................... 5.75 to 5.92 01/04/95 539,724
01/13/95 to
100 Federal Home Loan Mortgage Corp.............. 5.67 to 5.98 01/19/95 99,714
01/04/95 to
145 Federal National Mortgage Association........ 5.65 to 5.97 01/20/95 144,575
145 Student Loan Marketing Association........... 5.81 01/04/95 144,907
120 Tennessee Valley Authority................... 5.80 01/24/95 119,537
-----------
TOTAL U.S. GOVERNMENT AGENCIES (AMORTIZED COST $1,093,261)...................... 1,093,261
-----------
TOTAL INVESTMENTS (AMORTIZED COST $1,233,049) (A)..................... 99.9% 1,233,049
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES........................ 0.1 898
---------- -----------
NET ASSETS............................................................ 100.0% $ 1,233,947
---------- -----------
---------- -----------
<FN>
- ----------------
(A) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS THE SAME.
</TABLE>
NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT ON DATE OF MATURITY
(IN THOUSANDS) PURCHASE DATE VALUE
- ----------------- --------------- ----------------- ----------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS (93.7%)
U.S. GOVERNMENT AGENCIES & OBLIGATION
$ 30 Federal Farm Credit Bank.................. 5.82% 01/17/95 $ 29,923
45 Federal Home Loan Mortgage Corp........... 5.77 01/06/95 44,963
25 Federal National Mortgage Association..... 5.86 01/06/95 24,980
15 U.S. Treasury Bill........................ 4.89 02/09/95 14,923
----------
TOTAL INVESTMENTS (AMORTIZED COST $114,789) (A)...................... 93.7% 114,789
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES....................... 6.3 7,704
---------- ----------
NET ASSETS........................................................... 100.0% $ 122,493
---------- ----------
---------- ----------
<FN>
- ----------------
(A) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS THE SAME.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
48 - PROSPECTUS
<PAGE>
DIVERSIF IED INCOME
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT ON DATE OF MATURITY
(IN THOUSANDS) PURCHASE DATE VALUE
- --------------- -------------- --------- ----------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS (98.3%)
COMMERCIAL PAPER (19.3%)
BROKERAGE (3.2%)
$ 13 Morgan Stanley Group, Inc............................. 5.79% 01/20/95 $ 12,957
----------
CHEMICALS (3.2%)
13 Dupont (E.I.) de Nemours.............................. 5.83 01/26/95 12,946
----------
OFFICE EQUIPMENT (3.2%)
13 Pitney-Bowes Credit Corp.............................. 5.93 01/26/95 12,945
----------
TELECOMMUNICATIONS (9.7%)
13 Ameritech Corp........................................ 5.83 01/18/95 12,962
13 AT&T Corp............................................. 5.85 01/25/95 12,947
13 U.S. West Communications.............................. 5.84 01/18/95 12,962
----------
38,871
----------
TOTAL COMMERCIAL PAPER (AMORTIZED COST $77,719).................................. 77,719
----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C> <C> <C>
U.S. GOVERNMENT AGENCIES (79.0%)
10 Federal Farm Credit Bank.............................. 5.75 02/02/95 9,946
25 Federal Farm Credit Bank.............................. 6.02 02/08/95 24,838
190 Federal Home Loan Banks............................... 5.75 01/03/95 189,965
58 Federal Home Loan Mortgage Corp....................... 5.77 01/05/95 57,954
25 Federal National Mortgage Association................. 5.94 01/09/95 24,963
10 Federal National Mortgage Association................. 5.91 01/10/95 9,984
----------
TOTAL U.S. GOVERNMENT AGENCIES (AMORTIZED COST $317,650)......................... 317,650
----------
TOTAL INVESTMENTS (AMORTIZED COST $395,369) (A)....................... 98.3% 395,369
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES........................ 1.7 6,931
--------- ----------
NET ASSETS............................................................ 100.0% $ 402,300
--------- ----------
--------- ----------
<FN>
- ----------------
(A) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS THE SAME.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
49 - PROSPECTUS
<PAGE>
BALANCED
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COUPON MATURITY
(IN THOUSANDS) RATE DATE VALUE
- --------------- ---------- ------------ ----------
<C> <S> <C> <C> <C>
CORPORATE BONDS (3.2%)
INDUSTRIALS (1.6%)
$ 15 Mead Corp...................................................... 7.125% 08/01/25 $ 12,426
----------
UTILTIES - ELECTRIC (1.6%)
15 Texas Utilities Electric Co.................................... 7.875 04/01/24 13,150
----------
TOTAL CORPORATE BONDS (IDENTIFIED COST $25,773)........................................... 25,576
----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (23.8%)
85 U.S. Treasury Note............................................. 4.25 07/31/95 83,765
105 U.S. Treasury Note............................................. 7.875 11/15/04 105,345
----------
TOTAL U.S. GOVERNMENT OBLIGATIONS (IDENTIFIED COST $189,340).............................. 189,110
----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS (A) (68.9%)
U.S. GOVERNMENT AGENCIES
100 Federal Farm Credit Bank....................................... 5.99 01/19/95 99,703
100 Federal Home Loan Banks........................................ 5.75 01/03/95 99,968
100 Federal Home Loan Banks........................................ 5.94 01/18/95 99,721
150 Federal Home Loan Mortgage Corp................................ 5.91 02/02/95 149,217
100 Federal National Mortgage Association.......................... 5.94 01/10/95 99,852
----------
TOTAL SHORT-TERM INVESTMENTS (AMORTIZED COST $548,461).................................... 548,461
----------
TOTAL INVESTMENTS (IDENTIFIED COST $763,574) (B)........................... 95.9 % 763,147
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................. 4.1 32,380
------ ----------
NET ASSETS................................................................. 100.0 % $ 795,527
------ ----------
------ ----------
<FN>
- ----------------
(A) U.S. GOVERNMENT AGENCIES WERE PURCHASED ON A DISCOUNT BASIS. THE INTEREST
RATES SHOWN HAVE BEEN ADJUSTED TO REFLECT A BOND EQUIVALENT YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $763,574; THE
AGGREGATE GROSS AND NET UNREALIZED DEPRECIATION IS $427.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
50 - PROSPECTUS
<PAGE>
UTILITIES
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------------- ----------
<C> <S> <C>
COMMON STOCKS (49.0%)
NATURAL GAS (7.5%)
300 Enron Corp............................. $ 9,150
400 Mitchell Energy/Development Corp.
(Class B)............................ 7,500
500 Panhandle Eastern Pipeline Corp........ 9,875
400 Questar Corp........................... 11,000
----------
37,525
----------
TELECOMMUNICATIONS (16.5%)
400 Alcatel Alsthom C.G.E. (ADR)........... 6,800
200 AT&T Corp.............................. 10,050
300 GTE Corp............................... 9,112
400 MCI Communications Corp................ 7,350
200 Motorola, Inc.......................... 11,575
300 Sprint Corp............................ 8,288
300 Tele Danmark AS (ADR)*................. 7,650
300 Telefonica Espana, S.A. (ADR).......... 10,537
300 U.S. West, Inc......................... 10,688
----------
82,050
----------
UTILITIES - ELECTRIC (21.7%)
300 American Electric Power, Inc........... 9,862
400 CINergy Corp........................... 9,350
300 Duke Power Company..................... 11,438
400 Eastern Utilities Associates........... 8,800
200 FPL Group, Inc......................... 7,025
200 Pacific Gas & Electric Co.............. 4,875
300 PacifiCorp............................. 5,438
400 Public Service Company, Colorado....... 11,750
200 SCANA Corp............................. 8,425
200 SCE Corp............................... 2,925
400 TECO Energy, Inc....................... 8,050
400 Unicom Corp............................ 9,600
400 Wisconsin Energy Corp.................. 10,350
----------
107,888
----------
<CAPTION>
NUMBER OF
SHARES VALUE
- --------------- ----------
<C> <S> <C>
UTILITIES - TELECOMMUNICATIONS (3.3%)
400 Rochester Telephone Corp.*............. $ 8,450
200 SBC Communications, Inc................ 8,075
----------
16,525
----------
TOTAL COMMON STOCKS (IDENTIFIED COST
$244,280)............................ 243,988
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(IN THOUSANDS)
- ---------------
<C> <S> <C>
SHORT-TERM INVESTMENTS (A) (67.2%)
U.S. GOVERNMENT AGENCIES
$ 235 Federal Home Loan Banks 5.75% due
01/03/95............................. 234,925
50 Federal Home Loan Mortgage Corp. 5.94%
due 01/04/95......................... 49,975
50 Federal National Mortgage Association
5.96% due 01/13/95................... 49,901
----------
TOTAL SHORT-TERM INVESTMENTS (AMORTIZED
COST $334,801)....................... 334,801
----------
TOTAL INVESTMENTS
(IDENTIFIED COST
$579,081) (B)............ 116.2 % 578,789
LIABILITIES IN
EXCESS OF CASH
AND OTHER ASSETS......... (16.2) (80,869)
---------- ----------
NET ASSETS................. 100.0 % $ 497,920
---------- ----------
---------- ----------
<FN>
- ----------------
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(A) U.S. GOVERNMENT AGENCIES WERE PURCHASED ON A DISCOUNT BASIS. THE INTEREST
RATES SHOWN HAVE BEEN ADJUSTED TO REFLECT A BOND EQUIVALENT YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $579,081; THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $3,530 AND THE AGGREGATE GROSS
UNREALIZED DEPRECIATION IS $3,822, RESULTING IN NET UNREALIZED
DEPRECIATION OF $292.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
51 - PROSPECTUS
<PAGE>
DIVIDEND GROWTH
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -----------
<C> <S> <C>
COMMON STOCKS (74.5%)
AEROSPACE (4.3%)
950 United Technologies Corp.... $ 59,731
-----------
AUTOMOTIVE (4.5%)
1,250 Chrysler Corp............... 61,250
-----------
BANKS (4.1%)
1,425 BankAmerica Corp............ 56,287
-----------
BEVERAGES (4.2%)
1,600 PepsiCo, Inc................ 58,000
-----------
CHEMICALS (4.4%)
850 Monsanto Co................. 59,925
-----------
CONGLOMERATES (4.2%)
1,375 Tenneco, Inc................ 58,438
-----------
DRUGS (4.1%)
1,750 Abbott Laboratories......... 57,094
-----------
FOODS (4.2%)
1,900 Quaker Oats Co.............. 58,425
-----------
MACHINERY - DIVERSIFIED (5.4%)
1,125 Deere & Co.................. 74,531
-----------
METALS & MINING (4.5%)
1,000 Phelps Dodge Corp........... 61,875
-----------
OFFICE EQUIPMENT (4.3%)
1,850 Pitney-Bowes, Inc........... 58,737
-----------
PHOTOGRAPHY (5.0%)
1,450 Eastman Kodak Co............ 69,237
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -----------
<C> <S> <C>
RETAIL (4.2%)
1,700 May Department Stores Co.... $ 57,375
-----------
TELEPHONES (4.2%)
2,100 Sprint Corp................. 58,013
-----------
TOBACCO (4.4%)
1,050 Philip Morris Cos., Inc..... 60,375
-----------
UTILITIES - ELECTRIC (4.2%)
2,375 Pacific Gas & Electric
Co........................ 57,892
-----------
UTILITIES - GAS (4.3%)
1,950 Enron Corp.................. 59,475
-----------
TOTAL COMMON STOCKS
(IDENTIFIED COST
$1,025,266)............... 1,026,660
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(IN THOUSANDS)
- ---------------
<C> <S> <C>
SHORT-TERM INVESTMENT (A) (24.7%)
U.S. GOVERNMENT AGENCY
$ 340 Federal Home Loan Banks
5.75% due 01/03/95
(Amortized Cost
$339,891).............. 339,891
-----------
TOTAL INVESTMENTS (IDENTIFIED
COST $1,365,157) (B)........ 99.2% 1,366,551
CASH AND OTHER ASSETS IN
EXCESS OF LIABILITIES....... 0.8 11,163
---------- ----------
NET ASSETS.................... 100.0% $1,377,714
---------- ----------
---------- ----------
<FN>
- ----------------
(A) U.S. GOVERNMENT AGENCY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST
RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A BOND EQUIVALENT YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $1,365,157; THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $17,829 AND THE AGGREGATE GROSS
UNREALIZED DEPRECIATION IS $16,435, RESULTING IN NET UNREALIZED
APPRECIATION OF $1,394.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
52 - PROSPECTUS
<PAGE>
VALUE-ADDED MARKET
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------- ----------
<C> <S> <C>
COMMON STOCKS (86.7%)
AEROSPACE & DEFENSE (2.4%)
50 General Dynamics Corp......... $ 2,175
30 Lockheed Corp................. 2,179
45 Martin Marietta Corp.......... 1,997
15 McDonnell Douglas Corp........ 2,130
----------
8,481
----------
AIRLINES (1.1%)
40 AMR Corp.*.................... 2,130
95 Southwest Airlines Co......... 1,591
----------
3,721
----------
ALUMINUM (0.6%)
40 Reynolds Metals Co............ 1,960
----------
AUTO PARTS - AFTER MARKET (1.2%)
60 Genuine Parts Co.............. 2,160
60 Goodyear Tire & Rubber Co..... 2,018
----------
4,178
----------
BANKS - MONEY CENTER (0.6%)
45 First Chicago Corp............ 2,149
----------
BANKS - REGIONAL (5.1%)
75 Bank of Boston Corp........... 1,941
55 Barnett Banks, Inc............ 2,111
65 Boatmens Bancshares, Inc. .... 1,762
80 CoreStates Financial Corp..... 2,080
45 First Fidelity Bancorp........ 2,019
80 National City Corp............ 2,070
70 NBD Bancorp, Inc.............. 1,915
120 Shawmut National Corp......... 1,965
90 U.S. Bancorp.................. 2,014
----------
17,877
----------
BROADCAST MEDIA (1.1%)
35 CBS, Inc...................... 1,938
115 Comcast Corp. (Class A
Special).................... 1,797
----------
3,735
----------
BUILDING MATERIALS (1.1%)
85 Masco Corp.................... 1,923
60 Sherwin - Williams Co......... 1,988
----------
3,911
----------
CHEMICALS (2.2%)
40 Eastman Chemical Co........... 2,020
15 Hercules, Inc................. 1,730
90 Praxair, Inc.................. 1,845
35 Rohm & Haas Co................ 1,999
----------
7,594
----------
CHEMICALS - DIVERSIFIED (0.6%)
90 Engelhard Corp................ 2,003
----------
CHEMICALS - SPECIALTY (1.7%)
50 Grace (W.R.) & Co. ........... 1,931
35 Great Lakes Chemical Corp..... 1,995
75 Morton International, Inc..... 2,138
----------
6,064
----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------- ----------
<C> <S> <C>
COMMUNICATIONS - EQUIPMENT/MANUFACTURERS
(0.7%)
70 DSC Communications Corp.*..... $ 2,520
----------
COMPUTERS - SYSTEMS (1.9%)
55 Apple Computer, Inc........... 2,131
65 Digital Equipment Corp.*...... 2,161
65 Sun Microsystems, Inc.*....... 2,299
----------
6,591
----------
CONGLOMERATES (0.6%)
40 Textron, Inc.................. 2,015
----------
CONTAINERS - METAL & GLASS (0.5%)
50 Crown Cork & Seal, Inc.*...... 1,887
----------
CONTAINERS - PAPER (0.6%)
45 Temple-Inland, Inc............ 2,031
----------
COSMETICS (1.2%)
35 Avon Products, Inc............ 2,091
45 International Flavors &
Fragrances, Inc............. 2,081
----------
4,172
----------
DISTRIBUTORS - CONSUMER PRODUCTS (0.5%)
75 Sysco Corp. .................. 1,931
----------
ELECTRICAL EQUIPMENT (1.8%)
35 Grainger (W.W.), Inc.......... 2,021
70 Honeywell, Inc................ 2,205
160 Westinghouse Electric Corp.... 1,960
----------
6,186
----------
ELECTRONIC - SEMICONDUCTORS (1.2%)
85 Advanced Micro Devices,
Inc.*....................... 2,114
50 Micron Technology, Inc........ 2,206
----------
4,320
----------
ELECTRONICS - DEFENSE (0.5%)
50 Loral Corp. .................. 1,894
----------
ENGINEERING & CONSTRUCTION (0.5%)
45 Fluor Corp.................... 1,941
----------
FINANCIAL - MISCELLANEOUS (1.7%)
80 MBNA Corp..................... 1,870
55 Salomon, Inc.................. 2,063
40 Transamerica Corp............. 1,990
----------
5,923
----------
FOODS (2.3%)
40 Hershey Foods Corp. .......... 1,935
65 Quaker Oats Co. .............. 1,998
45 Ralston-Ralston Purina
Group....................... 2,008
40 Wrigley, (Wm.), Jr., Co.
(Class A)................... 1,975
----------
7,916
----------
</TABLE>
53 - PROSPECTUS
<PAGE>
VALUE-ADDED MARKET
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------- ----------
<C> <S> <C>
GOLD MINING (1.1%)
115 Homestake Mining Co........... $ 1,969
50 Newmont Mining Corp........... 1,800
----------
3,769
----------
HEALTH CARE DIVERSIFIED (0.6%)
70 Mallinckrodt Group, Inc....... 2,091
----------
HEAVY DUTY TRUCKS & PARTS (1.2%)
95 Dana Corp..................... 2,221
40 Eaton Corp.................... 1,980
----------
4,201
----------
HOSPITAL MANAGEMENT (0.6%)
160 National Medical Enterprises,
Inc.*....................... 2,260
----------
HOTELS/MOTELS (1.7%)
30 Hilton Hotels Corp............ 2,020
70 Marriott International,
Inc......................... 1,969
65 Promus Cos., Inc.*............ 2,015
----------
6,004
----------
HOUSEHOLD FURNISHINGS & APPLIANCES (0.6%)
40 Whirlpool Corp................ 2,010
----------
HOUSEHOLD PRODUCTS (1.2%)
35 Clorox Co..................... 2,061
30 Scott Paper Co................ 2,074
----------
4,135
----------
HOUSEWARES (1.7%)
90 Newell Co..................... 1,890
45 Premark International,
Inc. ....................... 1,969
70 Rubbermaid, Inc............... 2,013
----------
5,872
----------
LIFE INSURANCE (2.8%)
40 Jefferson-Pilot Corp.......... 2,075
55 Lincoln National Corp......... 1,925
65 Providian Corp................ 2,007
55 Torchmark Corp................ 1,917
50 UNUM Corp..................... 1,888
----------
9,812
----------
MACHINERY - DIVERSIFIED (1.1%)
60 Cooper Industries, Inc. ...... 2,048
60 Ingersoll Rand Co............. 1,890
----------
3,938
----------
MANUFACTURING - DIVERSIFIED INDUSTRIES
(1.1%)
35 Dover Corp.................... 1,807
45 Illinois Tool Works, Inc...... 1,969
----------
3,776
----------
MEDICAL PRODUCTS & SUPPLIES (0.5%)
40 Becton, Dickinson & Co........ 1,920
----------
METALS - MISCELLANEOUS (1.7%)
75 Cyprus Amax Minerals Co....... 1,959
70 Inco, Ltd..................... 2,004
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------- ----------
<C> <S> <C>
35 Phelps Dodge Corp. ........... $ 2,166
----------
6,129
----------
MISCELLANEOUS (1.8%)
55 Harcourt General, Inc......... 1,939
65 Pioneer Hi-Bred
International............... 2,210
30 TRW, Inc...................... 1,980
----------
6,129
----------
MULTI-LINE INSURANCE (0.5%)
30 CIGNA Corp.................... 1,909
----------
OFFICE EQUIPMENT & SUPPLIES (0.6%)
35 Alco Standard................. 2,196
----------
OIL - DOMESTIC INTEGRATED (2.4%)
45 Amerada Hess Corp............. 2,053
45 Kerr-McGee Corp. ............. 2,070
75 Sun Co., Inc.................. 2,156
120 USX-Marathon Group............ 1,965
----------
8,244
----------
OIL - EXPLORATION & PRODUCTION (0.6%)
55 Burlington Resources, Inc..... 1,925
----------
OIL WELL EQUIPMENT & SERVICE (1.6%)
110 Baker Hughes, Inc. ........... 2,008
95 Dresser Industries, Inc....... 1,793
55 Halliburton Co................ 1,822
----------
5,623
----------
PAPER & FOREST PRODUCTS (2.9%)
55 Champion International
Corp........................ 2,008
70 Louisiana-Pacific Corp. ...... 1,908
45 Mead Corp..................... 2,188
45 Union Camp Corp............... 2,121
50 Westvaco Corp. ............... 1,963
----------
10,188
----------
PERSONAL LOANS (0.6%)
55 Household International,
Inc......................... 2,042
----------
PROPERTY - CASUALTY INSURANCE (1.2%)
40 SAFECO Corp................... 2,080
45 St. Paul Cos., Inc. .......... 2,013
----------
4,093
----------
PUBLISHING (0.5%)
25 McGraw-Hill, Inc. ............ 1,672
----------
PUBLISHING - NEWSPAPER (2.4%)
70 Dow Jones & Co., Inc.......... 2,170
40 Knight-Ridder Newspapers,
Inc......................... 2,020
65 Times Mirror Co............... 2,039
40 Tribune Co.................... 2,190
----------
8,419
----------
</TABLE>
54 - PROSPECTUS
<PAGE>
VALUE-ADDED MARKET
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------- ----------
<C> <S> <C>
RAILROADS (1.1%)
40 Burlington Northern, Inc...... $ 1,925
35 Conrail, Inc.................. 1,768
----------
3,693
----------
RETAIL - DEPARTMENT STORES (1.1%)
75 Dillard Department Stores,
Inc. (Class A).............. 2,006
40 Nordstrom, Inc................ 1,680
----------
3,686
----------
RETAIL - DRUG STORES (0.6%)
45 Walgreen Co................... 1,968
----------
RETAIL - FOOD CHAINS (1.7%)
75 American Stores Co............ 2,016
90 Kroger Co.*................... 2,171
35 Winn-Dixie Stores, Inc........ 1,798
----------
5,985
----------
RETAIL - SPECIALTY (2.2%)
95 Circuit City Stores, Inc...... 2,114
60 Melville Corp. ............... 1,853
130 Price Enterprises, Inc.*...... 1,657
40 Tandy Corp.................... 2,005
----------
7,629
----------
RETAIL - SPECIALTY APPAREL (0.6%)
65 Gap (The), Inc................ 1,983
----------
SAVINGS & LOAN COMPANIES (1.7%)
125 Ahmanson (H.F.) & Co.......... 2,016
55 Golden West Financial Corp.... 1,939
120 Great Western Financial
Corp........................ 1,920
----------
5,875
----------
SHOES (1.3%)
30 Nike, Inc. (Class B).......... 2,239
55 Reebok International, Ltd..... 2,173
----------
4,412
----------
SPECIALIZED SERVICES (1.1%)
55 Block (H&R), Inc.............. 2,042
60 Interpublic Group of Cos.,
Inc......................... 1,928
----------
3,970
----------
SPECIALTY PRINTING (1.1%)
75 Deluxe Corp................... 1,988
65 Donnelley (R.R.) & Sons Co.... 1,918
----------
3,906
----------
STEEL (0.6%)
60 USX-U.S. Steel Group, Inc..... 2,130
----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------- ----------
<C> <S> <C>
TEXTILES (0.6%)
40 V.F. Corp..................... $ 1,945
----------
TOYS (1.2%)
70 Hasbro, Inc................... 2,048
80 Mattel, Inc................... 2,010
----------
4,058
----------
TRANSPORTATION - MISCELLANEOUS (0.6%)
35 Federal Express Corp.*........ 2,109
----------
UTILITIES - ELECTRIC (5.7%)
90 Baltimore Gas & Electric
Co.......................... 1,991
75 Carolina Power & Light Co. ... 1,996
85 Central & South West Corp..... 1,923
75 Detroit Edison Co............. 1,959
55 Houston Industries, Inc....... 1,958
45 Northern States Power Co...... 1,980
110 Ohio Edison Co................ 2,035
110 PacifiCorp.................... 1,994
85 Unicom Corp................... 2,040
55 Union Electric Co. ........... 1,946
----------
19,822
----------
UTILITIES - NATURAL GAS (2.8%)
75 Coastal Corp.................. 1,931
55 Consolidated Natural Gas
Co.......................... 1,953
100 Panhandle Eastern Corp. ...... 1,975
70 Sonat, Inc.................... 1,960
75 Williams Cos., Inc............ 1,884
----------
9,703
----------
TOTAL COMMON STOCKS
(IDENTIFIED COST
$300,095)................... 302,231
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS)
- ---------------
<C> <S> <C>
SHORT-TERM INVESTMENT (A) (37.2%)
U.S. GOVERNMENT AGENCY
$ 130 Federal Home Loan Banks
5.75% due 01/03/95
(Amortized Cost
$129,958)................ 129,958
----------
TOTAL INVESTMENTS (IDENTIFIED
COST $430,053) (B)............ 123.9% 432,189
LIABILITIES IN EXCESS OF CASH
AND OTHER ASSETS.............. (23.9) (83,494)
---------- ---------
NET ASSETS...................... 100.0% $ 348,695
---------- ---------
---------- ---------
<FN>
- ----------------
* NON-INCOME PRODUCING SECURITY.
(A) U.S. GOVERNMENT AGENCY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST
RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A BOND EQUIVALENT YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $430,053; THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $6,866 AND THE AGGREGATE GROSS
UNREALIZED DEPRECIATION IS $4,730, RESULTING IN NET UNREALIZED
APPRECIATION OF $2,136.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
55 - PROSPECTUS
<PAGE>
CORE EQUITY
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT ON DATE OF MATURITY
(IN THOUSANDS) PURCHASE DATE VALUE
- ----------------- ------------ --------- ----------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS (91.6%)
U.S. GOVERNMENT AGENCIES & OBLIGATION
$ 50 Federal Farm Credit Bank................................... 5.82% 01/06/95 $ 49,960
100 Federal Home Loan Banks.................................... 5.87 01/18/95 99,724
50 Federal Home Loan Mortgage Corp............................ 5.99 01/19/95 49,851
50 Federal National Mortgage Association...................... 5.85 01/06/95 49,959
40 U.S. Treasury Bill......................................... 4.79 02/09/95 39,794
----------
TOTAL INVESTMENTS (AMORTIZED COST $289,288) (A)............ 91.6% 289,288
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............. 8.4 26,666
---------- ---------
NET ASSETS................................................. 100.0% $ 315,954
---------- ---------
---------- ---------
<FN>
- ----------------
(A) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS THE SAME.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
56 - PROSPECTUS
<PAGE>
AMERICAN VALUE
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------- ----------
<C> <S> <C>
COMMON STOCKS (69.5%)
BASIC CYCLICAL COMMODITIES (4.3%)
100 Aluminum Co. of America...... $ 8,662
200 Georgia Gulf Corp.*.......... 7,775
100 International Paper Co....... 7,538
400 Union Carbide Corp........... 11,750
----------
35,725
----------
CABLE/CELLULAR (1.8%)
200 California Microwave,
Inc.*...................... 7,200
200 DSC Communications Corp.*.... 7,200
----------
14,400
----------
COMPUTER EQUIPMENT (0.8%)
300 EMC Corp. (Mass.)*........... 6,487
----------
COMPUTER SOFTWARE (4.7%)
300 Informix Corp.*.............. 9,600
150 Microsoft Corp.*............. 9,169
250 Oracle Systems Corp.*........ 11,031
200 Peoplesoft, Inc.*............ 7,450
100 Symantec Corp.*.............. 1,750
----------
39,000
----------
CONSUMER BUSINESS SERVICES (3.4%)
200 Computer Sciences Corp.*..... 10,200
120 First Financial Management
Corp....................... 7,395
200 Omnicom Group, Inc........... 10,350
----------
27,945
----------
COSMETICS (0.7%)
120 International Flavors &
Fragrances, Inc............ 5,550
----------
DRUGS (5.2%)
250 Merck & Co., Inc............. 9,531
100 Pfizer, Inc.................. 7,725
400 Scherer (R.P.)*.............. 18,150
100 Schering-Plough Corp......... 7,400
----------
42,806
----------
ELECTRONIC COMPONENTS (0.8%)
100 Emerson Electric Co.......... 6,250
----------
ELECTRONICS - SEMICONDUCTORS/ COMPONENTS
(2.9%)
100 Intel Corp................... 6,362
200 Micron Technology, Inc....... 8,825
150 Motorola, Inc................ 8,681
----------
23,868
----------
ELECTRONICS - SPECIALTY (2.5%)
200 Altera Corp.*................ 8,350
100 Maxim Integrated Products,
Inc.*...................... 3,500
150 Xilinx, Inc.................. 8,850
----------
20,700
----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------- ----------
<C> <S> <C>
ENERGY (2.1%)
120 Amoco Corp................... $ 7,095
120 Mobil Corp................... 10,110
----------
17,205
----------
ENTERTAINMENT (3.6%)
400 Broderbund Software, Inc.*... 18,700
300 Macromedia, Inc.*............ 7,650
100 Sierra On-Line, Inc.*........ 3,375
----------
29,725
----------
FINANCIAL - MISCELLANEOUS (5.2%)
100 American International Group,
Inc........................ 9,800
140 General Re Corp.............. 17,325
500 Green Tree Financial Corp.... 15,187
----------
42,312
----------
FOODS & BEVERAGES (3.2%)
400 Archer-Daniels-Midland Co.... 8,250
200 Coca Cola Co................. 10,300
150 CPC International, Inc....... 7,988
----------
26,538
----------
HEALTHCARE PRODUCTS & SERVICES (6.3%)
200 Columbia/HCA Healthcare
Corp....................... 7,300
300 Genesis Health Ventures,
Inc.*...................... 9,487
300 Horizon Healthcare Corp.*.... 8,400
400 Humana Corp.*................ 9,050
300 Shared Medical Systems
Corp....................... 9,825
300 Sun Healthcare Group, Inc.... 7,613
----------
51,675
----------
HOTELS/MOTELS (0.8%)
300 La Quinta Inns, Inc.......... 6,413
----------
HOUSEHOLD PRODUCTS (4.5%)
150 Clorox Co.................... 8,831
100 Gillette Co.................. 7,475
100 Procter & Gamble Co.......... 6,200
100 Scott Paper Co............... 6,913
300 Sunbeam-Oster, Inc........... 7,725
----------
37,144
----------
INDUSTRIALS (0.5%)
100 Fluor Corp................... 4,313
----------
MACHINERY (1.0%)
150 Caterpillar, Inc............. 8,269
----------
MEDIA GROUP (1.1%)
400 Tele-Communications, Inc.*... 8,700
----------
MEDICAL PRODUCTS & SUPPLIES (2.2%)
250 Allergan, Inc................ 7,063
200 Medtronic, Inc............... 11,125
----------
18,188
----------
</TABLE>
57 - PROSPECTUS
<PAGE>
AMERICAN VALUE
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------- ----------
<C> <S> <C>
POLLUTION CONTROL (1.0%)
300 Browning-Ferris Industries,
Inc........................ $ 8,512
----------
RETAIL (3.6%)
200 Home Depot, Inc.............. 9,200
200 Officemax, Inc.*............. 5,300
100 Outboard Marine Corp. ....... 1,963
400 Revco D.S., Inc.*............ 9,450
200 Vons Cos., Inc. ............. 3,600
----------
29,513
----------
TELECOMMUNICATIONS (5.4%)
50 Ascend Communications,
Inc.*...................... 2,037
300 Bay Networks, Inc.*.......... 8,775
225 Cisco Systems, Inc.*......... 7,875
100 Ericsson (L.M.) Telephone Co.
(ADR)...................... 5,513
100 Shiva Corp.*................. 3,975
150 Tellabs, Inc.*............... 8,325
150 ThreeCom Corp.*.............. 7,725
----------
44,225
----------
UTILITIES (1.9%)
200 FPL Group, Inc............... 7,025
450 Southern Co.................. 9,000
----------
16,025
----------
TOTAL COMMON STOCKS
(IDENTIFIED COST
$557,211).................. 571,488
----------
CONVERTIBLE PREFERRED STOCK (0.9%)
COMMUNICATIONS - EQUIPMENT & SOFTWARE
(0.9%)
100 Nokia Corp. (ADR)
(Identified Cost
$7,492)*................... 7,500
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS) VALUE
- ------------- ----------
<C> <S> <C>
SHORT-TERM INVESTMENTS (A) (32.7%)
U.S. GOVERNMENT AGENCIES
$ 60 Federal Farm Credit Bank
6.06% due 02/08/95......... $ 59,620
60 Federal Home Loan Mortgage
Corp. 5.91% due 01/06/95... 59,951
60 Federal Home Loan Mortgage
Corp. 6.00% due 01/30/95... 59,712
90 Federal National Mortgage
Association 5.99% due
01/24/95................... 89,658
----------
TOTAL SHORT-TERM INVESTMENTS
(AMORTIZED COST
$268,941).................. 268,941
----------
TOTAL INVESTMENTS (IDENTIFIED
COST
$833,644) (B)............... 103.1% 847,929
LIABILITIES IN
EXCESS OF CASH
AND OTHER ASSETS............ (3.1) (25,226)
---------- --------
NET ASSETS.................... 100.0% $822,703
---------- --------
---------- --------
<FN>
- ----------------
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(A) U.S. GOVERNMENT AGENCIES WERE PURCHASED ON A DISCOUNT BASIS. THE INTEREST
RATES SHOWN HAVE BEEN ADJUSTED TO REFLECT A BOND EQUIVALENT YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $834,332; THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $21,446 AND THE AGGREGATE GROSS
UNREALIZED DEPRECIATION IS $7,849, RESULTING IN NET UNREALIZED
APPRECIATION OF $13,597.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
58 - PROSPECTUS
<PAGE>
GLOBAL EQUITY
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -----------
<C> <S> <C>
COMMON AND PREFERRED STOCKS (81.6%)
CANADA (2.1%)
OIL & GAS DRILLING
1,500 Talisman Energy, Inc.*..... $ 25,094
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
FINLAND (3.8%)
TELECOMMUNICATION & EQUIPMENT
600 Nokia Corp. (Pref.)
(ADR)*................... 45,000
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
FRANCE (3.3%)
FOODS & BEVERAGES
250 LVMH-Moet Hennessey Louis
Vuitton.................. 39,466
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
HONG KONG (4.0%)
TELECOMMUNICATIONS
2,500 Hong Kong
Telecommunications, Ltd.
(ADR).................... 47,813
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
JAPAN (36.3%)
ELECTRONIC & ELECTRICAL EQUIPMENT
5,000 NEC Corp. ................. 57,143
-----------
ELECTRONIC COMPONENTS
2,000 Rohm Co., Ltd. ............ 84,612
-----------
FINANCIAL SERVICES
2,000 Orix Corp. ................ 73,784
-----------
HEALTH & PERSONAL CARE
3,000 Santen Pharmaceutical
Co. ..................... 82,707
-----------
MACHINERY - DIVERSIFIED
10,000 Mitsubishi Heavy
Industries, Ltd.......... 76,190
-----------
WHOLESALE & INTERNATIONAL TRADE
7,000 Mitsui & Co. .............. 59,649
-----------
TOTAL JAPAN................ 434,085
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
SINGAPORE (4.6%)
MACHINERY - DIVERSIFIED
6,500 Keppel Corp., Ltd. ........ 55,357
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -----------
<C> <S> <C>
UNITED KINGDOM (3.7%)
BUSINESS SERVICES
6,000 Reuters Holding PLC........ $ 43,823
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
UNITED STATES (23.8%)
ELECTRONICS - SEMICONDUCTORS/ COMPONENTS
500 Motorola, Inc.............. 28,938
-----------
FOODS
1,000 Archer-Daniels-Midland
Co. ..................... 20,625
-----------
NATURAL GAS
2,000 Public Service Co. of
Colorado................. 58,750
-----------
OIL - INTEGRATED
1,000 Mobil Corp. ............... 84,250
-----------
RETAIL - SPECIALTY
2,000 Home Depot, Inc............ 92,000
-----------
TOTAL UNITED STATES........ 284,563
-----------
TOTAL COMMON AND PREFERRED
STOCKS (IDENTIFIED COST
$976,485)................ 975,201
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS)
- -----------
<C> <S> <C>
SHORT-TERM INVESTMENTS (A) (16.7%)
U.S. GOVERNMENT AGENCIES
$ 100 Federal Farm Credit Bank
5.91% due 01/12/95....... 99,820
100 Student Loan Market
Association 5.94% due
01/20/95................. 99,689
-----------
TOTAL SHORT-TERM
INVESTMENTS (AMORTIZED
COST $199,509)........... 199,509
-----------
TOTAL INVESTMENTS
(IDENTIFIED COST
$1,175,994) (B)........... 98.3% 1,174,710
CASH AND OTHER ASSETS IN
EXCESS OF LIABILITIES..... 1.7 19,708
---------- -----------
NET ASSETS.................. 100.0% $ 1,194,418
---------- -----------
---------- -----------
<FN>
- ----------------
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(A) U.S. GOVERNMENT AGENCIES WERE PURCHASED ON A DISCOUNT BASIS. THE INTEREST
RATES SHOWN HAVE BEEN ADJUSTED TO REFLECT A BOND EQUIVALENT YIELD.
(B) THE AGGREGATE COST OF INVESTMENTS FOR FEDERAL INCOME TAX PURPOSES IS
$1,175,994; THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $12,316 AND THE
AGGREGATE GROSS UNREALIZED DEPRECIATION IS $13,600, RESULTING IN NET
UNREALIZED DEPRECIATION OF $1,284.
</TABLE>
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT DECEMBER 31, 1994:
<TABLE>
<CAPTION>
IN GROSS
CONTRACTS EXCHANGE DELIVERY UNREALIZED
TO RECEIVE FOR DATE APPRECIATION
- ---------- ---------- -------- ------------
<S> <C> <C> <C>
L 28,399 US$ 44,334 01/05/95 $82
---
---
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
59 - PROSPECTUS
<PAGE>
GLOBAL EQUITY
SUMMARY OF INVESTMENTS BY INDUSTRY CLASSIFICATION
DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- -------------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Business Services............................................................... $ 43,823 3.7%
Electronic Components........................................................... 84,612 7.0
Electronics & Electrical Equipment.............................................. 57,143 4.8
Electronics - Semiconductors/Components......................................... 28,938 2.4
Financial Services.............................................................. 73,784 6.2
Foods........................................................................... 20,625 1.7
Foods & Beverages............................................................... 39,466 3.3
Health & Personal Care.......................................................... 82,707 6.9
Machinery - Diversified......................................................... 131,547 11.0
Natural Gas..................................................................... 58,750 4.9
Oil & Gas Drilling.............................................................. 25,094 2.1
Oil - Integrated................................................................ 84,250 7.1
Retail - Specialty.............................................................. 92,000 7.7
Telecommunications.............................................................. 47,813 4.0
Telecommunication & Equipment................................................... 45,000 3.8
U.S. Government Agencies........................................................ 199,509 16.7
Wholesale & International Trade................................................. 59,649 5.0
--------- ---
$1,174,710 98.3%
--------- ---
--------- ---
</TABLE>
SUMMARY OF INVESTMENTS BY TYPE
- ------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
TYPE OF INVESTMENT VALUE NET ASSETS
- -------------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Common Stocks................................................................... $ 930,201 77.8%
Preferred Stock................................................................. 45,000 3.8
Short-Term Investments.......................................................... 199,509 16.7
--------- ---
$1,174,710 98.3%
--------- ---
--------- ---
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
60 - PROSPECTUS
<PAGE>
DEVELOPING GROWTH
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------- ----------
<C> <S> <C>
COMMON STOCKS (24.2%)
AUTO PARTS (1.1%)
75 Exide Corp.................... $ 4,219
----------
BROADCAST MEDIA (1.0%)
180 Heftel Broadcasting Corp. (A
Shares)*.................... 1,755
200 Westwood One, Inc.*........... 1,950
----------
3,705
----------
BUSINESS SYSTEMS (0.7%)
150 American Management Systems,
Inc.*....................... 2,850
----------
CHEMICALS - SPECIALTY (0.9%)
200 Crompton & Knowles Corp....... 3,300
----------
COMPUTER SOFTWARE (1.0%)
150 Kronos, Inc.*................. 3,900
----------
CONSUMER PRODUCTS (1.3%)
300 Bolle America, Inc.*.......... 2,700
150 Day Runner, Inc.*............. 2,325
----------
5,025
----------
ELECTRICAL EQUIPMENT (0.8%)
93 Molex, Inc.................... 3,208
----------
ELECTRONICS - SEMICONDUCTORS/ COMPONENTS
(2.2%)
100 Cypress Semiconductor
Corp.*...................... 2,313
100 Electroglas, Inc.*............ 3,325
65 Micron Technology, Inc........ 2,868
----------
8,506
----------
ENTERTAINMENT & LEISURE TIME (1.2%)
100 Broderbund Software, Inc.*.... 4,675
----------
ENTERTAINMENT/GAMING (0.9%)
150 Primadonna Resorts, Inc.*..... 3,562
----------
FINANCIAL SERVICES (0.6%)
100 World Acceptance Corp.*....... 2,300
----------
HOSPITAL MANAGEMENT (0.8%)
150 Theratx, Inc.*................ 2,888
----------
HOTELS/MOTELS (0.8%)
150 La Quinta Inns, Inc........... 3,206
----------
MEDICAL EQUIPMENT (1.0%)
200 Pyxis Corp.*.................. 3,800
----------
MEDICAL PRODUCTS & SUPPLIES (1.2%)
100 Omnicare, Inc. ............... 4,387
----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------- ----------
<C> <S> <C>
OFFICE EQUIPMENT & SUPPLIES (1.6%)
150 Corporate Express, Inc.*...... $ 2,888
100 Viking Office Products,
Inc.*....................... 3,050
----------
5,938
----------
OIL & GAS (0.6%)
200 Box Energy Corp.*............. 2,125
----------
OIL & GAS PRODUCTS (1.1%)
100 Seitel, Inc.*................. 2,150
150 Tatham Offshore, Inc.*........ 1,913
----------
4,063
----------
RETAIL - DEPARTMENT STORES (0.8%)
100 Dollar General Corp.*......... 2,950
----------
RETAIL - DRUG STORES (0.8%)
100 Eckerd Corp.*................. 2,987
----------
RETAIL - SPECIALTY (0.8%)
100 Gymboree Corp.*............... 2,875
----------
TELECOMMUNICATION EQUIPMENT (2.1%)
200 Bay Networks, Inc.*........... 5,850
150 Boston Technology, Inc.*...... 2,138
----------
7,988
----------
TRANSPORTATION (0.9%)
75 Fritz Companies, Inc.*........ 3,487
----------
TOTAL COMMON STOCKS
(IDENTIFIED COST $89,039)... 91,944
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS)
- -------------
<C> <S> <C>
SHORT-TERM INVESTMENTS (A) (70.3%)
COMMERCIAL PAPER (12.6%)
CHEMICALS (4.2%)
$ 16 Dupont (E.I.) de Nemours &
Co. 5.86% due 01/26/95..... 15,936
----------
TELECOMMUNICATIONS (8.4%)
16 Ameritech Corp. 5.83% due
01/18/95................... 15,956
16 AT&T Corp. 5.86% due
01/25/95................... 15,938
----------
31,894
----------
TOTAL COMMERCIAL PAPER
(AMORTIZED COST $47,830)... 47,830
----------
</TABLE>
61 - PROSPECTUS
<PAGE>
DEVELOPING GROWTH
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS) VALUE
- ------------- ----------
U.S. GOVERNMENT AGENCIES (57.7%)
<C> <S> <C>
$ 30 Federal Farm Credit Bank
6.06% due 02/08/95......... $ 29,810
30 Federal Home Loan Mortgage
Corp. 6.00% due 01/30/95... 29,856
45 Federal National Mortgage
Assoc. 6.00% due
01/24/95................... 44,829
115 Tennessee Valley Authority
5.81% due 01/09/95......... 114,852
----------
TOTAL U.S. GOVERNMENT
AGENCIES (AMORTIZED COST
$219,347).................. 219,347
----------
TOTAL SHORT-TERM INVESTMENTS
(AMORTIZED COST
$267,177).................. 267,177
----------
TOTAL INVESTMENTS (IDENTIFIED
COST $356,216) (B).......... 94.5% 359,121
CASH AND OTHER ASSETS IN
EXCESS OF LIABILITIES....... 5.5 21,056
---------- ----------
NET ASSETS.................... 100.0% $ 380,177
---------- ----------
---------- ----------
<FN>
- ----------------
* NON-INCOME PRODUCING SECURITY.
(A) SECURITIES WERE PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATES SHOWN
HAVE BEEN ADJUSTED TO REFLECT A BOND EQUIVALENT YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $356,216; THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $5,361 AND THE AGGREGATE GROSS
UNREALIZED DEPRECIATION IS $2,456, RESULTING IN NET UNREALIZED
APPRECIATION OF $2,905.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
62 - PROSPECTUS
<PAGE>
EMERGING MARKETS
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT ON DATE OF MATURITY
(IN THOUSANDS) PURCHASE DATE VALUE
- --------------- -------------- --------- ----------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS (91.4%)
U.S. GOVERNMENT AGENCIES & OBLIGATION
$ 85 Federal Farm Credit Bank................................ 5.89% 01/25/95 $ 84,668
100 Federal Home Loan Banks................................. 5.82 01/09/95 99,870
100 Federal Home Loan Mortgage Corp. ....................... 5.77 01/06/95 99,920
75 Federal National Mortgage Association................... 5.83 01/03/95 74,976
50 U.S. Treasury Bill...................................... 4.61 01/19/95 49,885
----------
TOTAL INVESTMENTS (AMORTIZED COST $409,319) (A)............ 91.4% 409,319
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............. 8.6 38,397
---------- ---------
NET ASSETS................................................. 100.0% $ 447,716
---------- ---------
---------- ---------
<FN>
- ----------------
(A) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS THE SAME.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
63 - PROSPECTUS
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH
AMERICAN
GOVERNMENT DIVERSIFIED
MONEY MARKET SECURITIES INCOME BALANCED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities, at value *... $ 1,233,049 $ 114,789 $ 395,369 $ 763,147
Cash.................................... 980 17,746 1,835 17,740
Receivable for:
Investments sold...................... -- -- -- --
Shares of beneficial interest sold.... -- -- 5,096 11,310
Dividends............................. -- -- -- --
Interest.............................. -- -- -- 3,330
Deferred organizational expenses........ 8,095 8,091 8,091 8,091
Net receivable from investment
manager............................... 238 242 242 242
------------ ------------ ------------ ------------
TOTAL ASSETS.................... 1,242,362 140,868 410,633 803,860
------------ ------------ ------------ ------------
LIABILITIES:
Payable for:
Investments purchased................. -- -- -- --
Shares of beneficial interest
repurchased......................... 82 10,042 -- --
Organizational expenses payable......... 8,333 8,333 8,333 8,333
------------ ------------ ------------ ------------
TOTAL LIABILITIES............... 8,415 18,375 8,333 8,333
------------ ------------ ------------ ------------
NET ASSETS:
Paid-in-capital......................... 1,233,947 121,998 401,124 792,955
Undistributed net investment income..... -- 495 1,176 2,999
Net realized loss....................... -- -- -- --
Net unrealized appreciation
(depreciation)........................ -- -- -- (427)
------------ ------------ ------------ ------------
NET ASSETS...................... $ 1,233,947 $ 122,493 $ 402,300 $ 795,527
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
*IDENTIFIED COST........................ $ 1,233,049 $ 114,789 $ 395,369 $ 763,574
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SHARES OF BENEFICIAL INTEREST
OUTSTANDING........................... 1,233,947 12,201 40,034 79,245
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET ASSET VALUE PER SHARE (unlimited
authorized shares of $.01 par
value)................................ $1.00 $10.04 $10.05 $10.04
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
64 - PROSPECTUS
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DIVIDEND VALUE-ADDED AMERICAN GLOBAL
UTILITIES GROWTH MARKET CORE EQUITY VALUE EQUITY
------------ ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in securities, at value
*.................................... $ 578,789 $ 1,366,551 $ 432,189 $ 289,288 $ 847,929 $ 1,174,710
Cash................................... 4,275 1,161 1,385 20,197 10,339 28,360
Receivable for:
Investments sold..................... -- -- -- -- 13,661 --
Shares of beneficial interest sold... 2,558 7,474 3,072 6,469 27,244 35,110
Dividends............................ 346 2,528 370 -- 152 572
Interest............................. -- -- -- -- -- --
Deferred organizational expenses....... 8,091 8,091 8,091 8,091 8,091 8,091
Net receivable from investment
manager.............................. 242 242 242 242 242 242
------------ ----------- ------------ ------------ ------------ -----------
TOTAL ASSETS................... 594,301 1,386,047 445,349 324,287 907,658 1,247,085
------------ ----------- ------------ ------------ ------------ -----------
LIABILITIES:
Payable for:
Investments purchased................ 88,048 -- 88,321 -- 76,622 44,334
Shares of beneficial interest
repurchased........................ -- -- -- -- -- --
Organizational expenses payable........ 8,333 8,333 8,333 8,333 8,333 8,333
------------ ----------- ------------ ------------ ------------ -----------
TOTAL LIABILITIES.............. 96,381 8,333 96,654 8,333 84,955 52,667
------------ ----------- ------------ ------------ ------------ -----------
NET ASSETS:
Paid-in-capital........................ 496,552 1,371,303 345,767 314,853 809,708 1,192,704
Undistributed net investment income.... 1,660 5,017 792 1,101 2,153 2,998
Net realized loss...................... -- -- -- -- (3,443) --
Net unrealized appreciation
(depreciation)....................... (292) 1,394 2,136 -- 14,285 (1,284)
------------ ----------- ------------ ------------ ------------ -----------
NET ASSETS..................... $ 497,920 $ 1,377,714 $ 348,695 $ 315,954 $ 822,703 $ 1,194,418
------------ ----------- ------------ ------------ ------------ -----------
------------ ----------- ------------ ------------ ------------ -----------
*IDENTIFIED COST....................... $ 579,081 $ 1,365,157 $ 430,053 $ 289,288 $ 833,644 $ 1,175,994
------------ ----------- ------------ ------------ ------------ -----------
------------ ----------- ------------ ------------ ------------ -----------
SHARES OF BENEFICIAL INTEREST
OUTSTANDING.......................... 49,584 138,136 35,237 31,445 81,830 120,161
------------ ----------- ------------ ------------ ------------ -----------
------------ ----------- ------------ ------------ ------------ -----------
NET ASSET VALUE PER SHARE (unlimited
authorized shares of $.01 par
value)............................... $10.04 $9.97 $9.90 $10.05 $10.05 $9.94
------------ ----------- ------------ ------------ ------------ -----------
------------ ----------- ------------ ------------ ------------ -----------
<CAPTION>
DEVELOPING EMERGING
GROWTH MARKETS
----------- -----------
<S> <C> <C>
ASSETS:
Investments in securities, at value
*.................................... $ 359,121 $ 409,319
Cash................................... 24,290 9,551
Receivable for:
Investments sold..................... -- --
Shares of beneficial interest sold... -- 27,250
Dividends............................ -- --
Interest............................. -- 1,596
Deferred organizational expenses....... 8,091 8,091
Net receivable from investment
manager.............................. 242 242
----------- -----------
TOTAL ASSETS................... 391,744 456,049
----------- -----------
LIABILITIES:
Payable for:
Investments purchased................ 3,225 --
Shares of beneficial interest
repurchased........................ 9 --
Organizational expenses payable........ 8,333 8,333
----------- -----------
TOTAL LIABILITIES.............. 11,567 8,333
----------- -----------
NET ASSETS:
Paid-in-capital........................ 376,149 446,280
Undistributed net investment income.... 1,172 1,436
Net realized loss...................... (49) --
Net unrealized appreciation
(depreciation)....................... 2,905 --
----------- -----------
NET ASSETS..................... $ 380,177 $ 447,716
----------- -----------
----------- -----------
*IDENTIFIED COST....................... $ 356,216 $ 409,319
----------- -----------
----------- -----------
SHARES OF BENEFICIAL INTEREST
OUTSTANDING.......................... 37,522 44,578
----------- -----------
----------- -----------
NET ASSET VALUE PER SHARE (unlimited
authorized shares of $.01 par
value)............................... $10.13 $10.04
----------- -----------
----------- -----------
</TABLE>
65 - PROSPECTUS
<PAGE>
STATEMENTS OF OPERATIONS
- ------------------------------------------------------------
FOR THE PERIOD NOVEMBER 9, 1994* THROUGH DECEMBER 31,1994
<TABLE>
<CAPTION>
NORTH
AMERICAN
MONEY GOVERNMENT DIVERSIFIED
MARKET SECURITIES INCOME BALANCED
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME:
INCOME
Interest............................ $ 4,610 $ 744 $ 1,572 $ 3,850
Dividends........................... -- -- -- --
--------- -------- ------------- ------------
TOTAL INCOME.................... 4,610 744 1,572 3,850
--------- -------- ------------- ------------
EXPENSES
Investment management fee........... 395 158 113 534
Transfer agent fees and expenses.... 71 73 73 73
Professional fees................... 15,542 2,124 5,067 10,020
Trustees' fees and expenses......... 214 218 312 218
Registration fees................... 424 42 102 269
Custodian fees...................... 773 15 629 32
Organizational expenses............. 238 242 242 242
--------- -------- ------------- ------------
Total Expenses before Amounts
Waived/Assumed................ 17,657 2,872 6,538 11,388
Less: Amounts Waived/Assumed........ (17,657) (2,872) (6,538) (11,388)
--------- -------- ------------- ------------
Total Expenses after Amounts
Waived/Assumed................ -- -- -- --
--------- -------- ------------- ------------
NET INVESTMENT INCOME....... 4,610 744 1,572 3,850
--------- -------- ------------- ------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss....................... -- -- -- --
Net unrealized appreciation
(depreciation)........................ -- -- -- (427)
--------- -------- ------------- ------------
NET GAIN (LOSS)................. -- -- -- (427)
--------- -------- ------------- ------------
NET INCREASE................ $ 4,610 $ 744 $ 1,572 $ 3,423
--------- -------- ------------- ------------
--------- -------- ------------- ------------
<FN>
- ----------------
* Commencement of operations.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
66 - PROSPECTUS
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DIVIDEND VALUE-ADDED AMERICAN GLOBAL
UTILITIES GROWTH MARKET CORE EQUITY VALUE EQUITY
---------- ------------ -------------- -------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME:
INCOME
Interest........................... $ 1,877 $ 3,816 $ 584 $ 1,442 $ 2,696 4$,095
Dividends.......................... 385 3,056 554 -- 251 572
---------- ------------ -------------- -------------- --------- ---------
TOTAL INCOME................... 2,262 6,872 1,138 1,442 2,947 4,667
---------- ------------ -------------- -------------- --------- ---------
EXPENSES
Investment management fee.......... 278 743 152 254 449 993
Transfer agent fees and expenses... 73 73 73 73 73 73
Professional fees.................. 6,271 17,514 4,420 3,950 10,167 14,818
Trustees' fees and expenses........ 260 363 363 363 363 218
Registration fees.................. 136 470 118 106 269 399
Custodian fees..................... 935 1,811 943 25 1,201 612
Organizational expenses............ 242 242 242 242 242 242
---------- ------------ -------------- -------------- --------- ---------
Total Expenses before Amounts
Waived/Assumed............... 8,195 21,216 6,311 5,013 12,764 17,355
Less: Amounts Waived/Assumed....... (8,195) (21,216) (6,311) (5,013) (12,764) (17,355)
---------- ------------ -------------- -------------- --------- ---------
Total Expenses after Amounts
Waived/Assumed............... -- -- -- -- -- --
---------- ------------ -------------- -------------- --------- ---------
NET INVESTMENT INCOME...... 2,262 6,872 1,138 1,442 2,947 4,667
---------- ------------ -------------- -------------- --------- ---------
NET REALIZED AND UNREALIZED GAIN
(LOSS):
Net realized loss...................... -- -- -- -- (3,443) --
Net unrealized appreciation
(depreciation)....................... (292) 1,394 2,136 -- 14,285 (1,284)
---------- ------------ -------------- -------------- --------- ---------
NET GAIN (LOSS)................ (292) 1,394 2,136 -- 10,842 (1,284)
---------- ------------ -------------- -------------- --------- ---------
NET INCREASE............... $ 1,970 $ 8,266 $ 3,274 $ 1,442 $ 13,789 3$,383
---------- ------------ -------------- -------------- --------- ---------
---------- ------------ -------------- -------------- --------- ---------
<CAPTION>
DEVELOPING EMERGING
GROWTH MARKETS
--------- -----------
<S> <C> <C>
NET INVESTMENT INCOME:
INCOME
Interest........................... $ 1,564 $ 1,790
Dividends.......................... -- --
--------- -----------
TOTAL INCOME................... 1,564 1,790
--------- -----------
EXPENSES
Investment management fee.......... 162 474
Transfer agent fees and expenses... 73 73
Professional fees.................. 4,860 5,370
Trustees' fees and expenses........ 218 218
Registration fees.................. 130 144
Custodian fees..................... 919 25
Organizational expenses............ 242 242
--------- -----------
Total Expenses before Amounts
Waived/Assumed............... 6,604 6,546
Less: Amounts Waived/Assumed....... (6,604) (6,546)
--------- -----------
Total Expenses after Amounts
Waived/Assumed............... -- --
--------- -----------
NET INVESTMENT INCOME...... 1,564 1,790
--------- -----------
NET REALIZED AND UNREALIZED GAIN
(LOSS):
Net realized loss...................... (49) --
Net unrealized appreciation
(depreciation)....................... 2,905 --
--------- -----------
NET GAIN (LOSS)................ 2,856 --
--------- -----------
NET INCREASE............... $ 4,420 $ 1,790
--------- -----------
--------- -----------
</TABLE>
67 - PROSPECTUS
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------
FOR THE PERIOD NOVEMBER 9, 1994* THROUGH DECEMBER 31,1994
<TABLE>
<CAPTION>
NORTH
AMERICAN
MONEY GOVERNMENT DIVERSIFIED
MARKET SECURITIES INCOME BALANCED
--------- -------- -------- --------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income............... $ 4,610 $ 744 $ 1,572 $ 3,850
Net realized loss................... -- -- -- --
Net unrealized appreciation
(depreciation).................... -- -- -- (427)
--------- -------- -------- --------
Net increase.................... 4,610 744 1,572 3,423
--------- -------- -------- --------
Dividends to shareholders from net
investment income................... (4,610) (249) (396) (851)
--------- -------- -------- --------
Transactions in shares of beneficial
interest:
Net proceeds from sales............. 1,239,489 135,795 400,638 806,042
Reinvestment of dividends........... 4,610 249 396 851
Cost of shares repurchased.......... (10,252) (14,146) (10) (14,038)
--------- -------- -------- --------
Net increase.................... 1,233,847 121,898 401,024 792,855
--------- -------- -------- --------
Total increase.................. 1,233,847 122,393 402,200 795,427
NET ASSETS:
Beginning of period..................... 100 100 100 100
--------- -------- -------- --------
END OF PERIOD........................... $1,233,947 $122,493 $402,300 $795,527
--------- -------- -------- --------
--------- -------- -------- --------
Undistributed Net Investment Income..... $ -- $ 495 $ 1,176 $ 2,999
--------- -------- -------- --------
--------- -------- -------- --------
SHARES ISSUED AND REPURCHASED:
Sold.................................... 1,239,489 13,576 39,986 80,553
Issued in reinvestment of dividends..... 4,610 25 39 85
Repurchased............................. (10,252) (1,410) (1) (1,403)
--------- -------- -------- --------
Net increase.......................... 1,233,847 12,191 40,024 79,235
--------- -------- -------- --------
--------- -------- -------- --------
<FN>
- ----------------
* Commencement of operations.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
68 - PROSPECTUS
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DIVIDEND VALUE-ADDED CORE AMERICAN GLOBAL DEVELOPING EMERGING
UTILITIES GROWTH MARKET EQUITY VALUE EQUITY GROWTH MARKETS
-------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income.............. $ 2,262 $ 6,872 $ 1,138 $ 1,441 $ 2,947 $ 4,667 $ 1,564 $ 1,790
Net realized loss.................. -- -- -- -- (3,443) -- (49) --
Net unrealized appreciation
(depreciation)................... (292) 1,394 2,136 -- 14,285 (1,284) 2,905 --
-------- --------- -------- -------- -------- --------- -------- --------
Net increase................... 1,970 8,266 3,274 1,441 13,789 3,383 4,420 1,790
-------- --------- -------- -------- -------- --------- -------- --------
Dividends to shareholders from net
investment income.................. (602) (1,855) (346) (340) (794) (1,669) (392) (354)
-------- --------- -------- -------- -------- --------- -------- --------
Transactions in shares of beneficial
interest:
Net proceeds from sales............ 518,226 1,393,837 349,428 324,157 818,828 1,235,431 385,711 498,374
Reinvestment of dividends.......... 602 1,855 346 340 794 1,669 392 354
Cost of shares repurchased......... (22,376) (24,489) (4,107) (9,744) (10,014) (44,496) (10,054) (52,548)
-------- --------- -------- -------- -------- --------- -------- --------
Net increase................... 496,452 1,371,203 345,667 314,753 809,608 1,192,604 376,049 446,180
-------- --------- -------- -------- -------- --------- -------- --------
Total increase................. 497,820 1,377,614 348,595 315,854 822,603 1,194,318 380,077 447,616
NET ASSETS:
Beginning of period.................... 100 100 100 100 100 100 100 100
-------- --------- -------- -------- -------- --------- -------- --------
END OF PERIOD.......................... $497,920 $1,377,714 $348,695 $315,954 $822,703 $1,194,418 $380,177 $447,716
-------- --------- -------- -------- -------- --------- -------- --------
-------- --------- -------- -------- -------- --------- -------- --------
Undistributed Net Investment Income.... $ 1,660 $ 5,017 $ 792 $ 1,101 $ 2,153 $ 2,998 $ 1,172 $ 1,436
-------- --------- -------- -------- -------- --------- -------- --------
-------- --------- -------- -------- -------- --------- -------- --------
SHARES ISSUED AND REPURCHASED:
Sold................................... 51,746 140,397 35,603 32,374 82,738 124,455 38,471 49,777
Issued in reinvestment of dividends.... 60 189 36 34 82 169 39 35
Repurchased............................ (2,232) (2,460) (412) (973) (1,000) (4,473) (998) (5,244)
-------- --------- -------- -------- -------- --------- -------- --------
Net increase......................... 49,574 138,126 35,227 31,435 81,820 120,151 37,512 44,568
-------- --------- -------- -------- -------- --------- -------- --------
-------- --------- -------- -------- -------- --------- -------- --------
</TABLE>
69 - PROSPECTUS
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------
1. ORGANIZATION AND ACCOUNTING POLICIES--Dean Witter Select Dimensions
Investment Series (the "Fund") is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company. The
shares of the Fund will only be sold to Hartford Life Insurance Company and ITT
Hartford Life and Annuity Insurance Company for allocation to certain of its
separate accounts to fund the benefits under certain flexible premium deferred
variable annuity contracts.
The Fund, which consists of 12 separate portfolios ("Portfolios"), was
organized on June 2, 1994 as a Massachusetts business trust and commenced
operations on November 9, 1994.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS--Money Market: Securities are valued at
amortized cost which approximates market value. All remaining Portfolios:
(1) equity securities listed or traded on the New York or American Stock
Exchange or other domestic or foreign stock exchange are valued at their
latest sale price on that exchange prior to the time when assets are valued
(if there were no sales that day, the security is valued at the latest bid
price; in cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated as the primary market by
the Trustees); (2) all other portfolio securities for which over-the-counter
market quotations are readily available are valued at the latest available
bid price prior to the time of valuation; (3) when market quotations are not
readily available, including circumstances under which it is determined by
the Investment Manager (or by the Sub-Advisor) that sale or bid prices are
not reflective of a security's market value, portfolio securities are valued
at their fair value as determined in good faith under procedures established
by and under the general supervision of the Trustees; (4) certain of the
Fund's portfolio securities may be valued by an outside pricing service
approved by the Trustees. The pricing service utilizes a matrix system
incorporating security quality, maturity and coupon as the evaluation model
parameters and/or research and evaluations by its staff, including review of
broker-dealer market price quotations, in determining what it believes is
the fair valuation of the securities valued by such pricing service; and (5)
short-term debt securities having a maturity date of more than sixty days at
time of purchase are valued on a mark-to-market basis until sixty days prior
to maturity and thereafter at amortized cost based on their value on the
61st day. Short-term debt securities having a maturity date of sixty days or
less at the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS--Security transactions are accounted for on
the trade date (date the order to buy or sell is executed). Realized gains
and losses on security transactions are determined by the identified cost
method. Dividend income is recorded on the ex-dividend date, except for
certain dividends on foreign securities which are recorded as soon as the
Fund is informed after the ex-dividend date. Interest income is accrued
daily except where collection is not expected. The Money Market Portfolio
amortizes premiums and discounts on securities owned; gains and losses
realized upon the sale of securities are based on amortized cost. Discounts
on securities purchased for all other Portfolios are amortized over the life
of the respective securities. All other Portfolios do not amortize premiums
on securities purchased.
C. FOREIGN CURRENCY TRANSLATION--The books and records of the Portfolios
investing in foreign currency denominated transactions are translated into
U.S. dollars as follows: (1) the foreign currency market value of investment
securities, other assets and liabilities and forward contracts are
translated at the exchange rates prevailing at the end of the period; and
(2) purchases, sales, income and expenses are translated at the exchange
rates prevailing on the respective dates of such transactions. The resultant
exchange gains and losses are included in the Statement of Operations as
realized and unrealized gain/loss on foreign currency transactions. Pursuant
to U.S. Federal income tax regulations, certain exchange gains/losses
included in realized and unrealized gain/loss are included in or are a
reduction of ordinary income for federal income tax purposes. The Portfolios
do not isolate that portion of the results of operations arising as a result
of changes in the foreign exchange rates from the changes in the market
prices of the securities.
D. FORWARD FOREIGN CURRENCY CONTRACTS--Some of the Portfolios may enter into
forward foreign currency contracts which are valued daily at the appropriate
exchange rates. The resultant unrealized exchange gains and losses are
included in the Statements of Operations as unrealized foreign currency gain
or loss and in the Statements of
70 - PROSPECTUS
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Assets and Liabilities as receivables and payables, respectively, on open
forward foreign currency contracts. The Portfolios record realized gains or
losses on delivery of the currency or at the time that the contract is
extinguished (compensated) by entering into a closing transaction prior to
delivery.
E. FEDERAL INCOME TAX STATUS--It is the Fund's policy to comply individually
for each Portfolio with the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
taxable income to its shareholders. Accordingly, no federal income tax
provision is required.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS--The Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized
capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such
amounts are reclassified within the capital accounts based on their federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions which exceed net investment income and net
realized capital gains for financial reporting purposes but not for tax
purposes are reported as dividends in excess of net investment income or
distributions in excess of net realized capital gains. To the extent they
exceed net investment income and net realized capital gains for tax
purposes, they are reported as distributions of paid-in-capital.
G. ORGANIZATIONAL EXPENSES--Dean Witter InterCapital Inc. (the "Investment
Manager") paid the organizational expenses of approximately $100,000 ($8,333
for each respective Portfolio). The Fund has agreed to reimburse the
Investment Manager for such expenses, exclusive of amounts assumed. Such
expenses have been deferred and are being amortized by the straight-line
method over a period not to exceed five years from the commencement of
operations.
H. EXPENSES--Direct expenses are charged to the respective Portfolio and
general corporate expenses are allocated on the basis of relative net
assets.
2. INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS--Pursuant to an Investment
Management Agreement, the Fund pays its Investment Manager a management fee,
accrued daily and payable monthly, by applying the following annual rates to
each Portfolio's net assets determined at the close of each business day:
<TABLE>
<CAPTION>
PORTFOLIO ANNUAL RATE
- ------------------------------------ -------------
<S> <C>
Money Market........................ 0.50 %
North American Government
Securities......................... 0.65
Diversified Income.................. 0.40
Balanced............................ 0.75
Utilities........................... 0.65
Dividend Growth..................... 0.625
<CAPTION>
PORTFOLIO ANNUAL RATE
- ------------------------------------ -------------
<S> <C>
Value-Added Market.................. 0.50 %
Core Equity......................... 0.85
American Value...................... 0.625
Global Equity....................... 1.00
Developing Growth................... 0.50
Emerging Markets.................... 1.25
</TABLE>
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
Under a Sub-Advisory Agreement between TCW Funds Management, Inc. (the
"Sub-Advisor") and the Investment Manager, the Sub-Advisor provides the North
American Government Securities, Balanced, Core Equity and Emerging Markets
Portfolios with investment advice and portfolio management relating to the
Portfolios' investments in securities, subject to the overall supervision of the
Investment Manager. As compensation for its services provided pursuant to the
Sub-Advisory Agreement, the Investment Manager pays the Sub-Advisor monthly
compensation equal to 40% of its monthly compensation.
71 - PROSPECTUS
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The Investment Manager has undertaken to assume all expenses (except for any
brokerage fees and a portion of organizational expenses) and waive the
compensation provided for in the Agreement until such time as the pertinent
Portfolio has $50 million of net assets or until May 9, 1995, whichever occurs
first.
3. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES--Purchases and
sales/maturities of portfolio securities, excluding short-term investments
(except for the Money Market Portfolio), for the period ended December 31, 1994
were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES OTHER
--------------------------- -------------------------
PURCHASES SALES/MATURITIES PURCHASES SALES/MATURITIES
------------ ------------- ---------- -------------
<S> <C> <C> <C> <C>
Money Market......................... $ 12,238,438 $11,010,000 $ -- $ --
North American Government
Securities.......................... -- -- -- --
Diversified Income................... -- -- -- --
Balanced............................. 189,340 -- 25,773 --
Utilities............................ -- -- 244,280 --
Dividend Growth...................... -- -- 1,025,266 --
Value-Added Market................... -- -- 300,095 --
Core Equity.......................... -- -- -- --
American Value....................... -- -- 606,680 38,534
Global Equity........................ -- -- 976,485 --
Developing Growth.................... -- -- 91,119 2,032
Emerging Markets..................... -- -- -- --
</TABLE>
For the period ended December 31, 1994, the following Portfolios incurred
brokerage commissions with Dean Witter Reynolds Inc., an affiliate of the
Investment Manager, for portfolio transactions executed on behalf of the
following Portfolios:
<TABLE>
<CAPTION>
DIVIDEND AMERICAN GLOBAL DEVELOPING
UTILITIES GROWTH VALUE EQUITY GROWTH
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Commissions................................... $ 420 $ 1,263 $ 469 $ 380 $ 55
</TABLE>
Included in the Utilities and American Value Portfolios payable for
investments purchased are $88,048 and $8,606, respectively, for unsettled trades
with Dean Witter Reynolds Inc. at December 31, 1994.
Dean Witter Trust Company, an affiliate of the Investment Manager, is the
Fund's transfer agent.
4. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INVESTMENTS--The Global
Equity Portfolio has entered into forward foreign currency contracts ("forward
contracts") to facilitate settlement of foreign currency denominated portfolio
transactions or to manage foreign currency exposure associated with foreign
currency denominated securities. At December 31, 1994, there were no outstanding
forward contracts other than those used to facilitate settlement of outstanding
foreign currency denominated portfolio transactions.
Forward contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Portfolio bears the
risk of an unfavorable change in the foreign exchange rates underlying the
forward contracts. Risks may also arise upon entering into these contracts from
the potential inability of the counterparties to meet the terms of their
contracts.
5. SELECTED PER SHARE DATA AND RATIOS--See the "Financial Highlights" table on
pages 8 and 9 of this Prospectus.
72 - PROSPECTUS
<PAGE>
APPENDIX -- RATINGS OF INVESTMENTS
------------------------------------------------------------
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")
BOND RATINGS
<TABLE>
<S> <C>
Aaa Bonds which are rated Aaa are judged
to be of the best quality. They carry
the smallest degree of investment
risk and are generally referred to as
"gilt edge." Interest payments are
protected by a large or by an
exceptionally stable margin and
principal is secure. While the
various protective elements are
likely to change, such changes as can
be visualized are most unlikely to
impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged
to be of high quality by all
standards. Together with the Aaa
group they comprise what are
generally known as high grade bonds.
They are rated lower than the best
bonds because margins of protection
may not be as large as in Aaa
securities or fluctuation of
protective elements may be of greater
amplitude or there may be other
elements present which make the long-
term risks appear somewhat larger
than in Aaa securities.
A Bonds which are rated A possess many
favorable investment attributes and
are to be considered as upper medium
grade obligations. Factors giving
security to principal and interest
are considered adequate, but elements
may be present which suggest a
susceptibility to impairment sometime
in the future.
Baa Bonds which are rated Baa are
considered as medium grade
obligations; i.e., they are neither
highly protected nor poorly secured.
Interest payments and principal
security appear adequate for the
present but certain protective
elements may be lacking or may be
characteristically unreliable over
any great length of time. Such bonds
lack outstanding investment
characteristics and in fact have
speculative characteristics as well.
Bonds rated Aaa, Aa, A and Baa are
considered investment grade bonds.
Ba Bonds which are rated Ba are judged
to have speculative elements; their
future cannot be considered as well
assured. Often the protection of
interest and principal payments may
be very moderate, and therefore not
well safeguarded during both good and
bad times over the future.
Uncertainty of position characterizes
bonds in this class.
B Bonds which are rated B generally
lack characteristics of desirable
investments. Assurance of interest
and principal payments or of
maintenance of other terms of the
contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor
standing. Such issues may be in
default or there may be present
elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca present
obligations which are speculative in
a high degree. Such issues are often
in default or have other marked
shortcomings.
C Bonds which are rated C are the
lowest rated class of bonds, and
issues so rated can be regarded as
having extremely poor prospects of
ever attaining any real investment
standing.
</TABLE>
CONDITIONAL RATING: Municipal bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its corporate and municipal
bond rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and a modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay punctually
promissory obligations not having an original maturity in excess of nine months.
73 - PROSPECTUS
<PAGE>
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment capacity of rated issuers: Prime-1,
Prime-2, Prime-3.
Issuers rated Prime-1 have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 have a strong capacity for
repayment of short-term promissory obligations; and Issuers rated Prime-3 have
an acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S")
BOND RATINGS
A Standard & Poor's bond rating is a current assessment of the creditworthiness
of an obligor with respect to a specific obligation. This assessment may take
into consideration obligors such as guarantors, insurers, or lessees.
The ratings are based on current information furnished by the issuer or obtained
by Standard & Poor's from other sources it considers reliable. The ratings are
based, in varying degrees, on the following considerations: (1) likelihood of
default-capacity and willingness of the obligor as to the timely payment of
interest and repayment of principal in accordance with the terms of the
obligation; (2) nature of and provisions of the obligation; and (3) protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information, or for other reasons.
<TABLE>
<S> <C>
AAA Debt rated AAA has the highest rating
assigned by Standard & Poor's.
Capacity to pay interest and repay
principal is extremely strong.
AA Debt rated AA has a very strong
capacity to pay interest and repay
principal and differs from the
highest-rated issues only in small
degree.
A Debt rated A has a strong capacity to
pay interest and repay principal
although they are somewhat more
susceptible to the adverse effects of
changes in circumstances and economic
conditions than debt in higher-rated
categories.
BBB Debt rated BBB is regarded as having
an adequate capacity to pay interest
and repay principal. Whereas it
normally exhibits adequate pro-
tection 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 for debt in higher-rated
categories.
Bonds rated AAA, AA, A and BBB are
considered investment grade bonds.
BB Debt rated BB has less near-term
vulnerability to default than other
speculative grade debt. However, it
faces major ongoing uncertainties or
exposure to adverse business,
financial or economic conditions
which could lead to inadequate
capacity to meet timely interest and
principal payment.
B Debt rated B has a greater
vulnerability to default but
presently has the capacity to meet
interest payments and principal
repayments. Adverse business,
financial or economic conditions
would likely impair capacity or
willingness to pay interest and repay
principal.
CCC Debt rated CCC has a current
identifiable vulnerability to
default, and is dependent upon
favorable business, financial and
economic conditions to meet timely
payments of interest and repayments
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.
CC The rating CC is typically applied to
debt subordinated to senior debt
which is assigned an actual or
implied CCC rating.
C The rating C is typically applied to
debt subordinated to senior debt
which is assigned an actual or
implied CCC- debt rating.
CI The rating CI is reserved for income
bonds on which no interest is being
paid.
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 Standard &
Poor's 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.
</TABLE>
74 - PROSPECTUS
<PAGE>
<TABLE>
<S> <C>
NR Indicates that no rating has been
requested, that there is insufficient
information on which to base a rating
or that Standard & Poor's does not
rate a particular type of obligation
as a matter of policy.
Bonds rated BB, B, CCC, CC and C are
regarded as having predominantly
speculative characteristics with
respect to capacity to pay interest
and repay principal. BB indicates the
least degree of speculation and C the
highest degree of speculation. While
such debt will likely have some
quality and protective
characteristics, these are outweighed
by large uncertainties or major risk
exposures to adverse conditions.
Plus (+) or minus (-): The ratings
from AA to CCC may be modified by the
addition of a plus or minus sign to
show relative standing within the
major ratings categories.
The foregoing ratings are sometimes
followed by a "p" which indicates
that the rating is provisional. A
provisional rating assumes the suc-
cessful completion of the project
being financed by the bonds being
rated and indicates that payment of
debt service requirements is largely
or entirely dependent upon the
successful and timely completion of
the project. This rating, however,
while addressing credit quality
subsequent to completion of the
project, makes no comment on the
likelihood or risk of default upon
failure of such completion.
</TABLE>
COMMERCIAL PAPER RATINGS
Standard and Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The commercial paper rating is not a recommendation to purchase or
sell a security. The ratings are based upon current information furnished by the
issuer or obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in or unavailability of such information. Ratings are graded into group
categories, ranging from "A" for the highest quality obligations to "D" for the
lowest. Ratings are applicable to both taxable and tax-exempt commercial paper.
The categories are as follows:
Issues assigned A ratings are regarded as having the greatest capacity for
timely payment. Issues in this category are further refined with the designation
1, 2 and 3 to indicate the relative degree of safety.
<TABLE>
<S> <C>
A-1 indicates that the degree of safety
regarding timely payment is very strong.
A-2 indicates capacity for timely payment on
issues with this designation is strong.
However, the relative degree of safety
is not as overwhelming as for issues
designated "A-1".
A-3 indicates a satisfactory capacity for
timely payment. Obligations carrying
this designation are, however, somewhat
more vulnerable to the adverse effects
of changes in circumstances than
obligations carrying the higher
designations.
</TABLE>
75 - PROSPECTUS
