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PROSPECTUS DATED DECEMBER 31, 1996
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
(212) 392-2550 OR (800) 869-NEWS
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 thirteen 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 MID-CAP GROWTH 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 and certain flexible premium variable life insurance policies
it issues, and to (2) ITT Hartford Life and Annuity Insurance Company to fund
the benefits under certain flexible premium deferred variable annuity contracts
and certain flexible premium variable life insurance policies 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." The variable life insurance
policies issued by the Companies are sometimes referred to as the "Variable Life
Policies," and the Variable Annuity Contracts and the Variable Life Policies are
sometimes referred to as 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 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 December 31, 1996,
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.
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DEAN WITTER INTERCAPITAL INC. -- Investment Manager
This Prospectus must be accompanied by a current Prospectus for the Variable
Annuity Contracts or Variable Life Policies issued by Hartford Life Insurance
Company or ITT Hartford Life and Annuity Insurance Company. Both Prospectuses
should be read and retained for future reference.
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Table of Contents
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Prospectus Summary 3
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Financial Highlights 8
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The Fund and its Management 10
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Investment Objectives and Policies 11
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The Money Market Portfolio 11
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The North American Government
Securities Portfolio 12
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The Diversified Income Portfolio 15
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The Balanced Portfolio 18
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The Utilities Portfolio 18
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The Dividend Growth Portfolio 20
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The Value-Added Market Portfolio 20
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The Core Equity Portfolio 22
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The American Value Portfolio 22
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The Mid-Cap Growth Portfolio 23
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The Global Equity Portfolio 25
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The Developing Growth Portfolio 25
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The Emerging Markets Portfolio 26
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General Portfolio Techniques 29
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Investment Restrictions 44
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Determination of Net Asset Value 45
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Purchase of Fund Shares 46
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Redemption of Fund Shares 46
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Dividends, Distributions and Taxes 46
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Performance Information 47
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Additional Information 48
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Appendix--Ratings of Investments 50
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2 - PROSPECTUS
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Prospectus Summary
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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
thirteen 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 MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO, the DEVELOPING GROWTH PORTFOLIO and the EMERGING MARKETS
PORTFOLIO (see pages 11 through 29). 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 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
46 and 48).
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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 15-18). 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 page 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 18-20). 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
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3 - PROSPECTUS
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primarily in common stocks and securities convertible into common stocks
issued by domestic and foreign companies (see page 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
attractively valued given their above average relative earnings growth
potential at that time (see pages 22-23). The MID-CAP GROWTH PORTFOLIO
seeks long-term capital growth by investing primarily in equity securities
of "mid-cap" companies (that is, companies whose equity market
capitalization falls within the range of $250 million to $5 billion) (see
pages 23-24). 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 page
25). 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 25-26). 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 26-29).
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 11-44 and
"Special Risk Considerations" below).
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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
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4 - PROSPECTUS
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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 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 attractive industries may run contrary to
general market assessments and may involve risks associated with departure
from typical S&P 500 industry weightings. It should be recognized that the
AMERICAN VALUE PORTFOLIO's investments in small and medium-capitalization
companies, and the MID-CAP GROWTH PORTFOLIO's investments in
medium-capitalization companies, involves greater risk than is customarily
associated with investing in larger, more established companies. 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.
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5 - PROSPECTUS
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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 MID-CAP GROWTH PORTFOLIO, the
GLOBAL EQUITY PORTFOLIO and the EMERGING 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 37), reverse repurchase agreements and dollar rolls (page 37),
mortgage-backed securities (page 29), asset-backed securities (page 32),
foreign securities (page 33), Canadian government securities (page 13),
Mexican government securities (page 14), leveraging (page 26), lower-rated
securities (page 36), "mid-cap" stocks (page 24), public utilities
securities (page 19), forward foreign currency exchange contracts (page
34), emerging market country securities (page 28), portfolio trading (page
42), options and futures transactions (page 40), warrants (page 39), zero
coupon securities (page 39), when-issued and delayed delivery securities
and forward commitments (page 38) and "when, as and if issued" securities
(page 38), concerning risks associated with such securities and management
techniques. The Fund is a single diversified investment company, consisting
of thirteen Portfolios, and each Portfolio itself is diversified.
Diversification does not eliminate investment risk.
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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 100 investment companies and other portfolios with assets of
approximately $91 billion at November 30, 1996 (see page 10).
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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%; MID-CAP GROWTH PORTFOLIO -- 0.75%;
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 MID-CAP GROWTH
PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO
are higher than those paid by most investment companies (see page 10).
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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 fourteen investment companies for
which Dean Witter Services Company Inc. serves as manager, and, at October
31, 1996, had approximately $53 billion under management or committed to
management in various fiduciary or advisory capacities, primarily from
institutional investors (see page 10).
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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).
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6 - PROSPECTUS
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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 and certain
flexible premium variable life insurance policies 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 and certain flexible premium variable
life insurance policies 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."
The variable life insurance policies issued by the Companies are sometimes
referred to as the "Variable Life Policies," and the Variable Annuity
Contracts and the Variable Life Policies are sometimes referred to as 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 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. It is conceivable that in the future it may
become disadvantageous for both variable life and variable annuity separate
accounts to invest in the same underlying fund (see pages 46 and 48).
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PURCHASES AND Shares of the Fund are sold and redeemed at net asset value, I.E., without
REDEMPTIONS sales charge (see page 46).
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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 OR THE VARIABLE LIFE POLICIES.
7 - PROSPECTUS
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Financial Highlights
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The following ratios and per share data for a share of beneficial interest
outstanding throughout each period for each of the periods through December 31,
1995 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 information for the period ended June 30, 1996 is unaudited. The financial
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NET ASSET NET REALIZED
VALUE NET AND TOTAL FROM LESS NET ASSET TOTAL
YEAR ENDED BEGINNING INVESTMENT UNREALIZED INVESTMENT DIVIDENDS TO VALUE END INVESTMENT
DECEMBER 31 OF PERIOD INCOME GAIN (LOSS) OPERATIONS SHAREHOLDERS OF PERIOD RETURN+
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Money Market
1994 (a) $ 1.00 $0.01 $ -- $ 0.01 $(0.01) $ 1.00 0.76%(1)
1995 1.00 0.06 -- 0.06 (0.06) 1.00 6.10
1996 (b) 1.00 0.02 -- 0.02 (0.02) 1.00 2.47(1)
North American Government Securities
1994 (a) 10.00 0.06 -- 0.06 (0.02) 10.04 0.61(1)
1995 10.04 0.53 0.11 0.64 (0.50) 10.18 6.40
1996 (b) 10.18 0.24 (0.19) 0.05 (0.24) 9.99 0.55(1)
Diversified Income
1994 (a) 10.00 0.08 -- 0.08 (0.03) 10.05 0.76(1)
1995 10.05 0.57 0.11 0.68 (0.51) 10.22 6.96
1996 (b) 10.22 0.40 0.10 0.50 (0.42) 10.30 4.88(1)
Balanced
1994 (a) 10.00 0.08 (0.02) 0.06 (0.02) 10.04 0.60(1)
1995 10.04 0.40 1.85 2.25 (0.40) 11.89 22.86
1996 (b) 11.89 0.16 0.54 0.70 (0.17) 12.42 5.91(1)
Utilities
1994 (a) 10.00 0.07 -- 0.07 (0.03) 10.04 0.65(1)
1995 10.04 0.45 2.30 2.75 (0.44) 12.35 28.05
1996 (b) 12.35 0.20 0.49 0.69 (0.21) 12.83 5.69(1)
Dividend Growth
1994 (a) 10.00 0.08 (0.09) (0.01) (0.02) 9.97 (0.05) (1)
1995 9.97 0.36 3.57 3.93 (0.36) 13.54 40.13
1996 (b) 13.54 0.15 1.57 1.72 (0.16) 15.10 12.75(1)
Value-Added Market
1994 (a) 10.00 0.06 (0.14) (0.08) (0.02) 9.90 (0.76) (1)
1995 9.90 0.31 2.34 2.65 (0.31) 12.24 27.14
1996 (b) 12.24 0.11 1.00 1.11 (0.12) 13.23 9.10(1)
Core Equity
1994 (a) 10.00 0.07 -- 0.07 (0.02) 10.05 0.67(1)
1995 10.05 0.26 1.05 1.31 (0.29) 11.07 13.29
1996 (b) 11.07 0.04 1.35 1.39 (0.04) 12.42 12.54(1)
American Value
1994 (a) 10.00 0.06 0.01 0.07 (0.02) 10.05 0.69(1)
1995 10.05 0.21 3.66 3.87 (0.21) 13.71 38.95
1996 (b) 13.71 0.05 0.92 0.97 (0.07) 14.61 7.10(1)
Global Equity
1994 (a) 10.00 0.07 (0.10) (0.03) (0.03) 9.94 (0.30) (1)
1995 9.94 0.29 1.05 1.34 (0.29) 10.99 13.76
1996 (b) 10.99 0.10 0.82 0.92 (0.11) 11.80 8.38(1)
Developing Growth
1994 (a) 10.00 0.08 0.08 0.16 (0.03) 10.13 1.58(1)
1995 10.13 0.24 4.88 5.12 (0.25) 15.00 51.26
1996 (b) 15.00 0.02 2.11 2.13 (0.04) 17.09 14.31(1)
Emerging Markets
1994 (a) 10.00 0.06 -- 0.06 (0.02) 10.04 0.57(1)
1995 10.04 0.29 (0.33) (0.04) (0.31) 9.69 (0.57)
1996 (b) 9.69 0.11 1.34 1.45 (0.11) 11.03 15.11(1)
</TABLE>
- ----------------------------------
(a) For the period November 9, 1994 (commencement of operations) through
December 31, 1994. The per share amounts reported are not necessarily
consistent with the corresponding amounts reported on the Statement of
Operations due to the fluctuations in capital stock activity during the
period.
(b) For the six months ended June 30, 1996 (unaudited).
+ Calculated based on the net asset value as of the last business day of the
period.
* After application of the Fund's expense limitation.
(1) Not annualized.
(2) Annualized.
8 - PROSPECTUS
<PAGE>
Financial Highlights (CONTINUED)
- --------------------------------------------------------------------------------
highlights should be read in conjunction with the financial statements, notes
thereto and the unqualified report of independent accountants which are
contained in the Statement of Additional Information. Further information about
the performance of the Portfolios of the Fund is contained in the Fund's Annual
Report to Shareholders, which may be obtained without charge upon request to the
Fund. See the discussion under the caption "Charges Under the Contract" in the
prospectus for the 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. Inclusion of any such charges would reduce
the total return figures for all periods shown.
<TABLE>
<CAPTION>
RATIOS TO RATIOS TO
AVERAGE NET ASSETS AVERAGE NET ASSETS
(BEFORE EXPENSES WERE (AFTER EXPENSES WERE
ASSUMED)* ASSUMED)
----------------------- -----------------------
NET ASSETS END NET NET PORTFOLIO AVERAGE
OF PERIOD INVESTMENT INVESTMENT TURNOVER COMMISSION
(000'S) EXPENSES INCOME EXPENSES INCOME RATE RATE PAID
-------------- ----------- ---------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Money Market
1994 (a) $1,234 2.50%(2) 3.33 %(2 -- % 5.83%(2) N/A --
1995 42,089 0.81 5.11 -- 5.92 N/A --
1996 (b) 60,185 0.61(2) 4.85(2) 0.56(2) 4.90(2) N/A N/A
North American Government Securities
1994 (a) 122 2.50(2) 1.78(2) -- 4.28(2) -- %(1) --
1995 1,288 2.50 3.24 -- 5.74 18 --
1996 (b) 2,747 1.83(2) 3.97(2) 0.50(2) 5.29(2) 34(1) N/A
Diversified Income
1994 (a) 402 2.50(2) 3.08(2) -- 5.58(2) -- (1) --
1995 8,972 1.33 5.95 -- 7.28 33 --
1996 (b) 20,602 0.67(2) 8.43(2) 0.50(2) 8.60(2) 20(1) N/A
Balanced
1994 (a) 796 2.50(2) 2.90(2) -- 5.40(2) -- (1) --
1995 16,311 1.39 2.45 -- 3.84 99 --
1996 (b) 26,307 0.90(2) 2.34(2) 0.50(2) 2.74(2) 67(1) $ 0.0101
Utilities
1994 (a) 498 2.50(2) 2.79(2) -- 5.29(2) -- (1) --
1995 17,959 1.43 3.01 -- 4.44 3 --
1996 (b) 29,130 0.84(2) 3.07(2) 0.50(2) 3.41(2) 2(1) 0.0493
Dividend Growth
1994 (a) 1,378 2.50(2) 3.28(2) -- 5.78(2) -- (1) --
1995 78,694 0.83 2.80 -- 3.63 4 --
1996 (b) 158,351 0.66(2) 2.29(2) 0.66(2) 2.29(2) 25(1) 0.0500
Value-Added Market
1994 (a) 349 2.50(2) 1.25(2) -- 3.75(2) -- (1) --
1995 23,970 1.46 1.64 -- 3.10 4 --
1996 (b) 46,764 0.70(2) 1.67(2) 0.50(2) 1.87(2) 1(1) 0.0300
Core Equity
1994 (a) 316 2.50(2) 2.32(2) -- 4.82(2) -- (1) --
1995 3,956 2.50 (0.64) -- 1.86 39 --
1996 (b) 8,965 1.46(2) (0.25) (2) 0.50(2) 0.71(2) 30(1) 0.0560
American Value
1994 (a) 823 2.50(2) 1.60(2) -- 4.10(2) 10(1) --
1995 38,235 0.96 1.11 -- 2.07 174 --
1996 (b) 80,235 0.73(2) 0.58(2) 0.67(2) 0.64(2) 133(1) 0.0518
Global Equity
1994 (a) 1,194 2.50(2) 2.20(2) -- 4.70(2) -- (1) --
1995 17,074 1.69 1.09 -- 2.78 74 --
1996 (b) 40,237 1.32(2) 1.12(2) 0.50(2) 1.94(2) 37(1) 0.0501
Developing Growth
1994 (a) 380 2.50(2) 2.31(2) -- 4.81(2) 3(1) --
1995 17,412 1.24 0.86 -- 2.10 80 --
1996 (b) 42,163 0.67(2) 0.01(2) 0.50(2) 0.18(2) 87(1) 0.0526
Emerging Markets
1994 (a) 448 2.50(2) 2.22(2) -- 4.72(2) -- (1) --
1995 4,092 2.50 0.18 -- 2.68 36 --
1996 (b) 12,527 1.97(2) 0.81(2) 0.49(2) 2.29(2) 25(1) 0.0015
</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 100 investment companies, thirty of which are listed on the New
York Stock Exchange, with combined total assets of $87.9 at November 30, 1996.
The Investment Manager also manages portfolios of pension plans, other
institutions and individuals which aggregated approximately $3.1 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 fourteen 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. ("TCW"), 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
TCW, 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 TCW. 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 October 31, 1996, the Sub-Adviser and
its affiliates had approximately $53 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
each of the BALANCED PORTFOLIO and the MID-CAP GROWTH 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.
Until December 31, 1995, the Investment Manager assumed all operating expenses
of each Portfolio then in existence (except for any brokerage fees and a portion
of organizational expenses) and waived the compensation provided for each
Portfolio in its Management Agreement with the Fund. The Investment Manager had
undertaken, until the earlier of December 31, 1996 or the attainment by the
respective Portfolio of $50 million of net assets, to continue to assume such
expenses and waive such compensation for each Portfolio then in existence (other
than the DIVIDEND GROWTH PORTFOLIO, whose net assets exceeded $50 million on
December 31, 1995) to the extent that such expenses and compensation on an
annualized basis exceeded 0.50% of the average daily net assets of each
respective Portfolio. The AMERICAN VALUE PORTFOLIO, the MONEY MARKET PORTFOLIO,
10 - PROSPECTUS
<PAGE>
the VALUE-ADDED MARKET PORTFOLIO, the DEVELOPING GROWTH PORTFOLIO and the GLOBAL
EQUITY PORTFOLIO attained $50 million of net assets on February 26, 1996, March
20, 1996, August 13, 1996, September 14, 1996, and October 15, 1996,
respectively.
The MID-CAP GROWTH PORTFOLIO did not commence operations prior to the date of
this Prospectus. The Investment Manager has undertaken to assume all expenses of
the MID-CAP GROWTH PORTFOLIO and waive the compensation provided for that
Portfolio in its Management Agreement with the Fund until such time as the
Portfolio has $50 million of net assets or until six months from the date of the
Portfolio's commencement of operations, whichever occurs first.
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.
11 - PROSPECTUS
<PAGE>
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, and may lend its portfolio securities, in accordance with
the description of those investments (and subject to the risks) set 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).
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.
A portion of the fixed-income 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 expects that under normal
circumstances the market value dollar weighted average life (or period until the
next reset date) of the Portfolio's
12 - PROSPECTUS
<PAGE>
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 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, lend its portfolio securities, 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.
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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.
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
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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 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 (including the attainment by the
Portfolio of sufficient asset size), 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).
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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;
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; (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;
(iii) U.S. Treasury securities (bills, notes, bonds and zero coupon securities)
(without restrictions as to remaining maturity at time of purchase) and (iv)
U.S. Government agency securities (discount notes, medium-term notes, debentures
and zero coupon securities) (without restrictions as to remaining maturity at
time of purchase). 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.
During temporary defensive periods when market conditions warrant reduction of
some or all of the Portfolio's securities holdings or when temporarily holding
cash pending investment, this portion of the DIVERSIFIED INCOME PORTFOLIO may
invest in U.S. Treasury securities or other money market instruments. Under such
circumstances the money market instruments in which this portion of the
Portfolio may invest, in addition to U.S. Treasury
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securities (bills, notes, bonds and zero coupons securities), are American bank
obligations, such as certificates of deposit; Eurodollar certificates of
deposit; obligations of American savings institutions; and commercial paper of
American issuers rated within the two highest grades by Moody's or S&P or, if
not rated, are issued by a company having an outstanding debt issue rated at
least AA by S&P or Aa by Moody's.
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 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, lend its
portfolio securities, 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
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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.
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) no
single issuer's equity securities will represent at the time of purchase more
than 5% of the BALANCED PORTFOLIO's total assets; and (ii) at least 95% of the
companies represented will have minimum market capitalizations at the time of
purchase in excess of $1 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), invest
in real estate investment trusts, lend its portfolio securities, enter into
repurchase agreements, 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
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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.
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), 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, European Depository Receipts
or other similar securities convertible into securities of foreign issuers),
invest in zero coupon securities, invest in real estate investment trusts, lend
its
portfolio securities, 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
19 - PROSPECTUS
<PAGE>
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.
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), 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, invest in zero coupon securities, invest in real
estate investment trusts, lend its portfolio securities, 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
20 - PROSPECTUS
<PAGE>
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 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, may lend
its portfolio securities 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.
21 - PROSPECTUS
<PAGE>
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 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, European Depository
Receipts or other similar securities convertible into securities of foreign
issuers), invest in real estate investment trusts, lend its portfolio
securities, 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. The Investment
Manager seeks to invest the assets of the Portfolio in those industries that, at
the time of investment, are attractively valued given their above average
relative earnings growth potential at that time. Therefore, the Portfolio is
typically overweighted in
22 - PROSPECTUS
<PAGE>
those sectors deemed to be attractive given their potential for above average
relative earnings growth.
The Investment Manager seeks to identify what stage of the business cycle the
economy is in and which industry groups have historically outperformed the
overall market during that stage of the cycle, i.e., typically, groups that tend
to have the highest relative earnings growth at that point in the cycle. The
Investment Manager also analyzes secular trends such as demographics,
international trade, etc., that could cause the current cycle to differ from
prior cycles and attempts to weight the portfolio appropriately, given those
factors.
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 attractively valued or moderately attractively valued 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) (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
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 is intended for long-term investors
who can accept the risks involved in seeking long-term growth of capital through
investment in the securities of large, medium and small-capitalization
companies. Emphasis on attractive industries may run contrary to general market
assessments and may involve risks associated with departure from typical S&P 500
industry weightings. It should be recognized that investing in small and
medium-capitalization companies involves greater risk than is customarily
associated with investing in more established companies.
Under normal circumstances, at least 65% of the AMERICAN VALUE PORTFOLIO's total
assets will be invested in common stocks of U.S. companies in industries which,
at the time of purchase, were determined to be attractively valued or moderately
attractively valued given their above average relative earnings growth potential
at that time.
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 industries that
have the most promising potential for relative earnings growth, 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, invest in
zero coupon securities, invest in real estate investment trusts, lend its
portfolio securities, 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 MID-CAP GROWTH PORTFOLIO
The investment objective of the MID-CAP GROWTH PORTFOLIO is long-term capital
growth. The objective cannot be changed without the approval of the shareholders
of the MID-CAP GROWTH PORTFOLIO. There is no assurance that the objective will
be achieved. The investment policies discussed below may be changed by the
Trustees without shareholder approval:
The MID-CAP GROWTH PORTFOLIO seeks to achieve its investment objective by
investing, under normal circumstances, at least 65% of its total assets in a
diversified portfolio of domestic and foreign equity securities of "mid-cap"
companies. A mid-cap
23 - PROSPECTUS
<PAGE>
company is a company whose market capitalization falls within the range of $250
million to $5 billion. The MID-CAP GROWTH PORTFOLIO may invest up to 35% of its
total assets in (i) U.S. Government Securities and investment grade corporate
debt securities (see "General Portfolio Techniques" below); or (ii) equity
securities of companies with market capitalizations which fall outside of the
range of $250 million to $5 billion at the time of purchase as long as such
investments are consistent with the Portfolio's investment objective. The
MID-CAP GROWTH PORTFOLIO may invest up to 35% of its total assets in the equity
securities of non-U.S. companies, including American or other Depository
Receipts, rights, warrants, and the direct purchase of foreign securities (see
"General Portfolio Techniques" below). Equity securities in which the MID-CAP
GROWTH PORTFOLIO may invest include common stocks and securities convertible
into common stocks (see "General Portfolio Techniques" below). The MID-CAP
GROWTH 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 Portfolio in industries it considers to be attractive at the time
of purchase and to sell those it considers overvalued. The Investment Manager
will invest principally in those mid-cap companies that in the opinion of the
Investment Manager have above-average relative growth potential. Mid-cap
companies typically have a better growth potential than their large-cap
counterparts because they are still in the early and more dynamic period of
their corporate existences. Often mid-size companies and the industries in which
they are focused are still evolving as opposed to the more mature industries
served by large-cap companies. Moreover, mid-cap companies are not considered
"emerging" stocks, nor are they as volatile as small-cap firms. This is due to
the fact that mid-cap companies have increased liquidity, attributable to their
larger market capitalization as well as longer and more established track
records, and a stronger market presence and dominance than small-cap firms.
Consequently, because of the better growth inherent in these companies and their
industries, mid-cap companies offer superior return potential to large-cap
companies; yet, owing to their relatively larger size and better recognition in
the investment community, they have a reduced risk profile compared to smaller,
emerging or micro-cap companies.
In selecting stocks within the mid-cap universe, the Investment Manager will use
an industry approach that seeks to diversify the assets of the MID-CAP GROWTH
PORTFOLIO in approximately 18 to 35 industries. The Portfolio will hold less
than 5% of its net assets in any one security and will hold less than 10% of its
net assets in any one industry. Companies will be selected based on at least
three-year track records, and purchases will be primarily focused on companies
that: (1) have the potential for above-average relative earnings growth; (2) are
focused in industries that are rapidly expanding or have the potential to see
increasing sales or earnings; (3) historically have had well-defined and
recurring revenues; or (4) are attractive based on an assessment of private
market or franchise values.
After selection of the MID-CAP GROWTH 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. From the
total of all companies included in the industry valuation process, the
Investment Manager selects a limited number from each industry as representative
of that industry. Such selections are made on the basis of various criteria,
including size and quality of a company, the visibility of its earnings and
various valuation parameters. Valuation screens may include dividend discount
model values, price-to-book ratios, price-to-cash flow values, relative and
absolute price-to-earnings ratios and ratios of price-earnings multiples to
earnings growth. Price and earnings momentum ratings derived from external
sources are also factored into the stock selection decision. Those companies
which the Investment Manager believes to be attractive investments are finally
selected for inclusion in the Portfolio. See below for a discussion of the risks
of mid-cap stocks.
ASSET ALLOCATION. Common stocks, particularly those sought for possible capital
appreciation, have historically experienced a great amount of price fluctuation.
The Investment Manager believes it is desirable to attempt to reduce the risks
of extreme price fluctuations even if such an attempt results, as it likely will
at times, in reducing the probabilities of obtaining greater capital
appreciation. Accordingly, the Investment Manager's investment process
incorporates elements which may reduce, although certainly not eliminate, the
volatility of a portfolio. The MID-CAP GROWTH PORTFOLIO may hold a portion of
its portfolio in investment grade fixed-income securities, including convertible
securities, in an effort to moderate extremes of price fluctuation. The
determination of the appropriate asset allocation as between equity and
fixed-income investments will be made by the Investment Manager in its
discretion, based upon its evaluation of economic and market conditions. The
MID-CAP GROWTH PORTFOLIO may, for defensive purposes, invest without limitation
in money market instruments (see "General Portfolio Techniques" below).
MID-CAP STOCKS. Investing in medium-sized market capitalization companies
involves greater risk than is customarily associated with investing in larger,
more established companies. Often mid-size companies and the industries in which
they are focused are still evolving and while this may offer better growth
potential than larger, established companies, it also may make them more
sensitive to changing market conditions. Because prices of stocks, including
mid-cap stocks, fluctuate from day to day, the value of an investment in the
MID-CAP GROWTH PORTFOLIO will vary based upon the Portfolio's investment
performance.
The MID-CAP GROWTH PORTFOLIO may enter into repurchase agreements, invest in
zero coupon securities, invest in real estate investment trusts, engage in
futures contracts and options transactions, lend its portfolio securities,
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
24 - PROSPECTUS
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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, including zero coupon securities. 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 investments in zero
coupon securities, 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, European Depository Receipts 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 the United States Government, its agencies
or instrumentalities) (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, invest in real estate investment trusts, lend its portfolio
securities, 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.
25 - PROSPECTUS
<PAGE>
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, including zero coupon securities (see "General Portfolio
Techniques" below for a discussion of the characteristics and risks of
investments in fixed-income securities rated Baa or BBB and investments in zero
coupon securities, 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, European
Depository Receipts or similar securities convertible into securities of foreign
issuers, invest in real estate investment trusts, lend its portfolio securities,
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 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,
26 - PROSPECTUS
<PAGE>
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 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,
27 - PROSPECTUS
<PAGE>
engage in various futures and options transactions, purchase securities which
are issued in private placements or are otherwise not readily marketable, invest
in real estate investment trusts, lend its portfolio securities, 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 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
28 - PROSPECTUS
<PAGE>
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 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"
29 - PROSPECTUS
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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 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
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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 a CMO, 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. 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
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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 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.
32 - PROSPECTUS
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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 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
33 - PROSPECTUS
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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.
Each of the AMERICAN VALUE PORTFOLIO and the MID-CAP GROWTH PORTFOLIO may invest
up to 35% of the value of its total assets, at the time of purchase, in foreign
securities. The UTILITIES PORTFOLIO may invest up to 20% of the value of its
total assets, at the time of purchase, in foreign securities, with a maximum of
10% of the value of its total assets, at the time of purchase, invested in such
securities that are not ADRs. 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 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
34 - PROSPECTUS
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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 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 MID-CAP GROWTH 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
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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
MID-CAP GROWTH 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.
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
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PORTFOLIO, the CORE EQUITY PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP
GROWTH 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 these Portfolios
in lower rated convertible securities, the Investment Manager or, in the case of
the BALANCED PORTFOLIO, 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 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,
37 - PROSPECTUS
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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
portfolio securities 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
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 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 MID-CAP GROWTH 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
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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 fixed-income securities purchased by
each 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.
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.
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. In
addition, 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. Current federal tax
law requires that a holder (such as a Portfolio) of a zero coupon security
accrue a portion of the discount at which the security was purchased as income
each year even though the Portfolio receives no interest payments in cash on the
security during the year.
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.
REAL ESTATE INVESTMENT TRUSTS. Each of the BALANCED PORTFOLIO, the UTILITIES
PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the CORE EQUITY PORTFOLIO, the
AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO, the DEVELOPING GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO
may invest in real estate investment trusts, which pool investors' funds for
investments primarily in commercial real estate properties. Investment in real
estate investment trusts may be the most practical available means for the
Portfolios to invest in the real estate industry (the Portfolios are prohibited
from investing in real estate directly). As a shareholder in a real estate
investmenttrust, the Portfolio would bear its ratable share of the real estate
investment trust's expenses, including its advisory and administration fees. At
the same time the Portfolio would continue to pay its own investment management
fees and other expenses, as a result of which the Portfolio and its shareholders
in effect will be absorbing duplicate levels of fees with respect to investments
in real estate investment trusts. Real estate investment trusts are not
diversified and are subject to the risk of financing projects. They are also
subject to heavy cash flow dependency, defaults by borrowers or tenants,
self-liquidation, and the possibility of failing to qualify for tax-free status
under the Internal Revenue Code and failing to maintain exemption from the
Investment Company Act of 1940, as amended.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, each Portfolio of the Fund may lend its portfolio securities to
brokers, dealers and other financial institutions, provided that such loans are
callable at any time by the Portfolio (subject to certain notice provisions
described in the Statement of Additional Information), and are at all times
secured by cash or money market instruments, which are maintained in a
segregated account pursuant to applicable regulations and that are equal to at
least the market value,
39 - PROSPECTUS
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determined daily, of the loaned securities. As with any extensions of credit,
there are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially. However,
loans of portfolio securities will only be made to firms deemed 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 to be creditworthy and when the income which
can be earned from such loans justifies the attendant risks.
OPTIONS AND FUTURES TRANSACTIONS
Each of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
INCOME PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the
MID-CAP GROWTH 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, the MID-CAP GROWTH 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 MID-CAP GROWTH 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 MID-CAP GROWTH 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 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 MID-CAP GROWTH 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
40 - PROSPECTUS
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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 MID-CAP GROWTH 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, the MID-CAP GROWTH 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, the
MID-CAP GROWTH 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 MID-CAP EQUITY 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 MID-CAP GROWTH 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 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 MID-CAP
GROWTH 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 MID-CAP GROWTH 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
41 - PROSPECTUS
<PAGE>
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 MID-CAP GROWTH 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 MID-CAP GROWTH 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 MID-CAP
GROWTH 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 MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO may invest in any such options,
futures and products as 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
42 - PROSPECTUS
<PAGE>
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%; MID-CAP GROWTH PORTFOLIO: 350%;
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 and Jeffrey E.
Gundlach, 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. 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 and 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 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. for over five years. 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
43 - PROSPECTUS
<PAGE>
years. Kirk Balzer, Vice President of InterCapital, is the primary portfolio
manager of the MID-CAP GROWTH PORTFOLIO. Prior to joining InterCapital in April
1996, Mr. Balzer was a portfolio manager at Chancellor Capital Management (July
1994-March 1996) and GT Capital Management (June 1992-July 1994) and prior
thereto was a graduate student at the University of Chicago. Mark Bavoso, Senior
Vice President of InterCapital, has been the primary portfolio manager of the
GLOBAL EQUITY PORTFOLIO since August, 1995 and has been a portfolio manager with
InterCapital for over five years. Jayne Stevlingson, Vice President of
InterCapital, is the primary portfolio manager of the DEVELOPING GROWTH
PORTFOLIO. Ms. Stevlingson has been a portfolio manager of the DEVELOPING GROWTH
PORTFOLIO since the inception of the Fund and has been the sole portfolio
manager of the Portfolio since May, 1996. Ms. Stevlingson 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). Shaun C.K. Chan, Managing Director of TCW Asia Ltd., Terence F. Mahony,
Managing Director of the Sub-Adviser, and Michael P. Reilly, a 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. Mahony has been a primary portfolio
manager of the EMERGING MARKETS PORTFOLIO since July, 1996 and has been a
portfolio manager with the Sub-Adviser since April, 1996, prior to which time he
was Chief Investment Officer for Global Emerging Markets at HSBC Asset
Management (September 1993-April 1996) and prior thereto was a Director at
Baring Asset Management. Mr. Reilly has been a primary portfolio manager of the
EMERGING MARKETS PORTFOLIO since December, 1994 and 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.
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 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
44 - PROSPECTUS
<PAGE>
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 (or, on days when the New York Stock Exchange closes prior
to 4:00 p.m., at such earlier 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 pursuant to procedures adopted 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.
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
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 prior to the close of the New York Stock Exchange. 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
45 - PROSPECTUS
<PAGE>
may utilize 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 and variable life insurance
policies 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 and variable life insurance
policies it issues. Persons desiring to purchase annuity contracts or life
insurance policies funded by any Portfolio of the Fund should read this
Prospectus in conjunction with the Prospectus of the flexible premium deferred
annuity contracts or the flexible premium variable life insurance policies
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, 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 policy 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 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.
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 MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO, the
46 - PROSPECTUS
<PAGE>
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 capital gains or losses. 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 MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO being available for distribution.
These Portfolios may 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 MID-CAP GROWTH PORTFOLIO, the
GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO to engage in options
and futures transactions.
With respect to investments by the Portfolios 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 Contracts.
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 applicable 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 advertises the "yield" of each of the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO and the
BALANCED PORTFOLIO. The yield of a Portfolio is based on historical earnings and
is not intended to indicate future performance. The yield of a Portfolio is
computed by dividing the Portfolio's net investment income over a 30-day period
by an average value (using the average number of shares entitled to receive
dividends and the net asset value per share at the end of the period), all in
accordance with applicable regulatory requirements. Such amount is compounded
for six months and then annualized for a twelve-month period to derive the
Portfolio's yield. The "yield" of a Portfolio does not reflect deduction of any
charges which may be imposed on the Contracts by the applicable Account and is
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
47 - PROSPECTUS
<PAGE>
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 applicable 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 applicable 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 thirteen 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 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, 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 options 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,
48 - PROSPECTUS
<PAGE>
demotion or suspension or termination of employment. The Code of Ethics comports
with regulatory requirements and the recommendations in the 1994 report by the
Investment Company Institute Advisory Group on Personal Investing.
The Sub-Adviser of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
BALANCED PORTFOLIO, the CORE EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO
also has a Code of Ethics which complies with regulatory requirements and,
insofar as it relates to persons associated with investment companies, the 1994
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
has purchased 10 shares of the MID-CAP GROWTH PORTFOLIO and has undertaken to
purchase 9,990 additional shares of that Portfolio prior to the commencement of
the Portfolio's operations, for an aggregate price of $100,000. Hartford Life
Insurance Company may redeem any of such shares at any time after the net assets
of the MID-CAP GROWTH PORTFOLIO have attained a sufficient level so that such
redemption will not cause disruption of the operations of the Portfolio.
49 - 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.
50 - 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
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than 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 con-
ditions 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>
51 - 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>
52 - PROSPECTUS
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DEAN WITTER
DECEMBER 31,
1996
SELECT DIMENSIONS
INVESTMENT SERIES
- ----------------------------------------------------------------------
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES (the "Fund") is an open-end
diversified management investment company which is intended to provide a broad
range of investment alternatives with its thirteen 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 MID-CAP GROWTH 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 "Investment Practices and Policies."
A Prospectus for the Fund dated December 31, 1996, which provides the basic
information you should know before allocating your investment under your
Contract to the Fund, may be obtained without charge from the Fund at its
address or telephone numbers listed below or from Dean Witter Reynolds Inc. at
any of its branch offices. This Statement of Additional Information is not a
Prospectus. It contains information in addition to and more detailed than that
set forth in the Prospectus for the Fund. It is intended to provide you
additional information regarding the activities and operations of the Fund, and
should be read in conjunction with the Prospectuses for the Fund and for the
flexible premium deferred variable annuity contracts or the flexible premium
variable life insurance policies issued by Hartford Life Insurance Company or
ITT Hartford Life and Annuity Insurance Company.
Dean Witter
Select Dimensions Investment Series
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The Fund and its Management........................................................... 3
Trustees and Officers................................................................. 8
Investment Practices and Policies..................................................... 16
Investment Restrictions............................................................... 48
Portfolio Transactions and Brokerage.................................................. 49
Purchase and Redemption of Fund Shares................................................ 52
Dividends, Distributions and Taxes.................................................... 55
Performance Information............................................................... 57
Description of Shares of the Fund..................................................... 59
Custodians and Transfer Agent......................................................... 61
Independent Accountants............................................................... 61
Reports to Shareholders............................................................... 61
Legal Counsel......................................................................... 61
Experts............................................................................... 61
Registration Statement................................................................ 61
Financial Statements -- December 31, 1995............................................. 62
Report of Independent Accountants..................................................... 120
Financial Statements -- June 30, 1996 (Unaudited)..................................... 121
Appendix -- Ratings................................................................... 186
</TABLE>
------------------------
Currently, the shares of the Fund 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 and
certain flexible premium variable life insurance policies 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 and certain flexible premium variable life insurance
policies 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 sometimes referred to
as the "Variable Annuity Contracts." The variable life insurance policies issued
by the Companies are sometimes referred to as the "Variable Life Policies," and
the Variable Annuity Contracts and the Variable Life Policies are sometimes
referred to as the "Contracts." ITT Hartford Life and Annuity Insurance Company
is a wholly-owned subsidiary of Hartford Life Insurance Company. In the future,
shares 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 policies. 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 or the Variable Life Policies issued by
Hartford Life Insurance Company or ITT Hartford Life and Annuity Insurance
Company. The Companies will redeem shares to the extent necessary to provide
benefits under the Contracts. It is conceivable that in the future it may become
disadvantageous for both variable life insurance 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, 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.
2
<PAGE>
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
THE FUND
The Fund was organized under the laws of the Commonwealth of Massachusetts
on June 2, 1994 and is a trust of the type commonly known as a "Massachusetts
Business Trust."
THE INVESTMENT MANAGER
Dean Witter InterCapital Inc. (the "Investment Manager" or "InterCapital"),
a Delaware corporation, whose address is Two World Trade Center, New York, New
York 10048, is the Fund's Investment Manager. InterCapital is a wholly-owned
subsidiary of Dean Witter, Discover & Co. ("DWDC"), a Delaware corporation. In
an internal reorganization which took place in January, 1993, InterCapital
assumed the investment advisory, administrative and management activities
previously performed by the InterCapital Division of Dean Witter Reynolds Inc.
("DWR"), a broker-dealer affiliate of InterCapital. (As hereinafter used in this
Statement of Additional Information, the terms "InterCapital" and "Investment
Manager" refer to DWR's InterCapital Division prior to the internal
reorganization and Dean Witter InterCapital Inc. thereafter.) The daily
management of the Fund and research relating to the Fund's portfolios are
conducted by or under the direction of officers of the Fund and of the
Investment Manager, subject to periodic review by the Fund's Board of Trustees.
Information as to these Trustees and officers is contained under the caption,
"Trustees and Officers."
The Investment Manager is also the investment manager or investment adviser
of the following investment companies: Dean Witter Liquid Asset Fund Inc., Dean
Witter High Yield Securities Inc., Dean Witter Tax-Free Daily Income Trust, Dean
Witter Developing Growth Securities Trust, Dean Witter Tax-Exempt Securities
Trust, Dean Witter Natural Resource Development Securities Inc., Dean Witter
Dividend Growth Securities Inc., Dean Witter American Value Fund, Dean Witter
U.S. Government Money Market Trust, Dean Witter World Wide Investment Trust,
Dean Witter Select Municipal Reinvestment Fund, Dean Witter U.S. Government
Securities Trust, Dean Witter California Tax-Free Income Fund, Dean Witter New
York Tax-Free Income Fund, Dean Witter Convertible Securities Trust, Dean Witter
Federal Securities Trust, Dean Witter Value-Added Market Series, Dean Witter
Utilities Fund, Dean Witter California Tax-Free Daily Income Trust, Dean Witter
Strategist Fund, Dean Witter World Wide Income Trust, Dean Witter Intermediate
Income Securities, Dean Witter Capital Growth Securities, Dean Witter New York
Municipal Money Market Trust, Dean Witter European Growth Fund Inc., Dean Witter
Precious Metals and Minerals Trust, Dean Witter Global Short-Term Income Fund
Inc., Dean Witter Pacific Growth Fund Inc., Dean Witter Multi-State Municipal
Series Trust, Dean Witter Premier Income Trust, Dean Witter Short-Term U.S.
Treasury Trust, Dean Witter Health Sciences Trust, Dean Witter Retirement
Series, Dean Witter Global Dividend Growth Securities, Dean Witter Limited Term
Municipal Trust, Dean Witter Short-Term Bond Fund, Dean Witter Global Utilities
Fund, Dean Witter High Income Securities, Dean Witter National Municipal Trust,
Dean Witter International SmallCap Fund, Dean Witter Mid-Cap Growth Fund, Dean
Witter Global Asset Allocation Fund, Dean Witter Hawaii Municipal Trust, Dean
Witter Capital Appreciation Fund, Dean Witter Information Fund, Dean Witter
Intermediate Term U.S. Treasury Trust, Dean Witter Japan Fund, Dean Witter
Income Builder Fund, Dean Witter Special Value Fund, InterCapital Income
Securities Inc., High Income Advantage Trust, High Income Advantage Trust II,
High Income Advantage Trust III, Dean Witter Government Income Trust,
InterCapital Insured Municipal Bond Trust, InterCapital Insured Municipal Trust,
InterCapital Insured Municipal Income Trust, InterCapital Insured Municipal
Securities, InterCapital California Insured Municipal Income Trust, InterCapital
Insured California Municipal Securities, InterCapital Quality Municipal
Investment Trust, InterCapital Quality Municipal Income Trust, InterCapital
Quality Municipal Securities, InterCapital California Quality Municipal
Securities, InterCapital New York Quality Municipal Securities, Active Assets
Money Trust, Active Assets Tax-Free Trust, Active Assets California Tax-Free
Trust, Active Assets Government Securities Trust, Municipal Income Trust,
Municipal Income Trust II, Municipal Income Trust III, Municipal Income
Opportunities Trust, Municipal Income Opportunities Trust II, Municipal Income
Opportunities Trust III, Municipal Premium Income Trust and Prime Income Trust.
The foregoing investment companies, together with the Fund, are collectively
referred to as the Dean Witter Funds.
3
<PAGE>
In addition, Dean Witter Services Company Inc. ("DWSC"), a wholly-owned
subsidiary of InterCapital, serves as manager for the following investment
companies for which TCW Funds Management, Inc., the Sub-Adviser of various
Portfolios of the Fund, is the investment adviser: TCW/DW Core Equity Trust,
TCW/DW North American Government Income Trust, TCW/DW Latin American Growth
Fund, TCW/DW Income and Growth Fund, TCW/DW Small Cap Growth Fund, TCW/DW Total
Return Trust, TCW/DW Mid-Cap Equity Trust, TCW/DW Balanced Fund, TCW/DW Global
Telecom Trust, TCW/DW Strategic Income Trust, TCW/DW Emerging Markets
Opportunities Trust, TCW/DW Term Trust 2000, TCW/DW Term Trust 2002 and TCW/DW
Term Trust 2003 (the "TCW/DW Funds"). InterCapital also serves as: (i)
sub-adviser to Templeton Global Opportunities Trust, an open-end investment
company; (ii) administrator of The BlackRock Strategic Term Trust Inc., a
closed-end investment company; and (iii) sub-administrator of MassMutual
Participation Investors and Templeton Global Governments Income Trust,
closed-end investment companies.
Pursuant to an Investment Management Agreement (the "Management Agreement")
with the Investment Manager, the Fund has retained the Investment Manager to
manage the investment of the assets of each Portfolio, including the placing of
orders for the purchase and sale of portfolio securities. The Investment Manager
obtains and evaluates such information and advice relating to the economy,
securities markets, and specific securities as it considers necessary or useful
to continuously manage the assets of the Portfolios of the Fund in a manner
consistent with their investment objectives and policies.
Under the terms of the Management Agreement, the Investment Manager also
maintains certain of the Fund's books and records and furnishes, at its own
expense, such office space, facilities, equipment, clerical help, bookkeeping
and certain legal services as the Fund may reasonably require in the conduct of
its business, including the preparation of prospectuses, statements of
additional information, proxy statements and reports required to be filed with
federal and state securities commissions (except insofar as the participation or
assistance of independent accountants and attorneys is, in the opinion of the
Investment Manager, necessary or desirable). In addition, the Investment Manager
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 service, heat, light, power and other utilities provided to the
Fund. The Investment Manager has retained DWSC to perform its administrative
services under the Management Agreement.
Under the terms of the Management Agreement, the Investment Manager is
authorized to retain a sub-adviser and, pursuant to a Sub-Advisory Agreement
between the Investment Manager and TCW Funds Management, Inc. (the
"Sub-Adviser"), the Investment Manager has retained the Sub-Adviser to provide
the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the BALANCED PORTFOLIO, the
CORE EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO of the Fund with
investment advice and portfolio management, in each case subject to the overall
supervision of the Investment Manager. The Sub-Adviser is a wholly-owned
subsidiary of The TCW Group, Inc. ("TCW"), whose direct and indirect
subsidiaries, including Trust Company of the West and TCW Asset Management
Company, provide a variety of trust, investment management and investment
advisory services. As of October 31, 1996, the Sub-Adviser and its affiliates
had approximately $53 billion under management or committed to management. Trust
Company of the West and its affiliates have managed securities portfolios for
institutional investors since 1971. The Sub-Adviser is headquartered at 865
South Figueroa Street, Suite 1800, Los Angeles, California 90017 and is
registered as an investment adviser under the Investment Advisers Act of 1940.
The Sub-Adviser serves as investment adviser to the eleven TCW/DW Funds named
above and also serves as investment adviser to TCW Convertible Securities Fund,
Inc., a closed-end investment company traded on the New York Stock Exchange, and
to TCW Funds, Inc., open-end investment companies, and acts as adviser or
sub-adviser to other investment companies.
Robert A. Day, who is Chairman of the Board of Directors of TCW, 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 TCW.
4
<PAGE>
The Sub-Adviser in turn has entered into further sub-advisory agreements
(the "Secondary Sub-Advisory Agreements") with two of its affiliates, TCW Asia
Limited, a Hong Kong corporation, and TCW London International, Limited, a
California corporation (the "Secondary Sub-Advisers"), pursuant to which the
Secondary Sub-Advisers will assist the Sub-Adviser in providing services under
the Sub-Advisory Agreement in respect of the EMERGING MARKETS PORTFOLIO. Each of
the Secondary Sub-Advisers is a wholly-owned subsidiary of The TCW Group, Inc.
Expenses not expressly assumed by the Investment Manager under the
Management Agreement or by the Sub-Adviser of the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the BALANCED PORTFOLIO, the CORE EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO pursuant to the Sub-Advisory Agreement (see below)
will be paid by the Fund. Each Portfolio pays all other expenses incurred in its
operation and a portion of the Fund's general administration expenses allocated
on the basis of the asset size of the respective Portfolios. Expenses that are
borne directly by a Portfolio include, but are not limited to: charges and
expenses of any registrar, custodian, share transfer and dividend disbursing
agent; brokerage commissions; certain taxes; registration costs of the Portfolio
and its shares under federal and state securities laws; shareholder servicing
costs; charges and expenses of any outside service used for pricing of the
shares of the Portfolio; interest on borrowings by the Portfolio; fees and
expenses of legal counsel, including counsel to the Trustees who are not
interested persons of the Fund or of the Investment Manager (or the Sub-Adviser)
(not including compensation or expenses of attorneys who are employees of the
Investment Manager (or the Sub-Adviser)) and independent accountants; and all
other expenses attributable to a particular Portfolio. Expenses which are
allocated on the basis of size of the respective Portfolios include the costs
and expenses of printing, including typesetting, and distributing prospectuses
and statements of additional information of the Fund and supplements thereto to
the Fund's shareholders; all expenses of shareholders' and Trustees' meetings
and of preparing, printing and mailing proxy statements and reports to
shareholders; fees and travel expenses of Trustees or members of any advisory
board or committee who are not employees of the Investment Manager (or the
Sub-Adviser) or any corporate affiliate of the Investment Manager (or the
Sub-Adviser); state franchise taxes; Securities and Exchange Commission fees;
membership dues of industry associations; postage; insurance premiums on
property or personnel (including officers and Trustees) of the Fund which inure
to its benefit; and all other costs of the Fund's operations properly payable by
the Fund and allocable on the basis of size of the respective Portfolios.
Depending on the nature of a legal claim, liability or lawsuit, litigation
costs, payment of legal claims or liabilities and any indemnification relating
thereto may be directly applicable to the Portfolio or allocated on the basis of
the size of the respective Portfolios. The Trustees have determined that this is
an appropriate method of allocation of expenses.
As full compensation for the services and facilities furnished to the Fund
and expenses of the Fund assumed by the Investment Manager, the Fund 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 each of
the BALANCED PORTFOLIO and the MID-CAP GROWTH 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. Until December 31, 1995, the Investment Manager
assumed all operating expenses of each Portfolio then in existence (except for
any brokerage fees and a portion of organizational expenses) and waived the
compensation provided for each Portfolio in its Management Agreement with the
Fund. The Investment Manager had undertaken, until the earlier of December 31,
1996 or the attainment by the respective Portfolio of $50 million of net assets,
to continue to assume such expenses and waive such compensation for each
Portfolio then in existence (other than the DIVIDEND GROWTH PORTFOLIO, whose net
assets exceeded $50 million on December 31, 1995) to the extent that such
expenses and compensation on an annualized basis exceeded 0.50% of the average
daily net assets of each respective Portfolio. The AMERICAN VALUE PORTFOLIO, the
MONEY MARKET PORTFOLIO, the VALUE-ADDED
5
<PAGE>
MARKET PORTFOLIO, the DEVELOPING GROWTH PORTFOLIO and the GLOBAL EQUITY
PORTFOLIO attained $50 million of net assets on February 26, 1996, March 20,
1996, August 13, 1996, September 14, 1996, and October 15, 1996, respectively.
The Management Agreement also provides that if the total operating expenses of a
Portfolio, exclusive of taxes, interest, brokerage fees and certain legal claims
and liabilities and litigation and indemnification expenses, as described in the
Management Agreement, for the fiscal year exceed 2.5% of the first $30,000,000
of average daily net assets of the Portfolio, 2% of the next $70,000,000 and
1.5% of any excess over $100,000,000, the Investment Manager will reimburse the
Portfolio for the amount of such excess, up to the amount of the management fee
for such Portfolio for that year. Such amount, if any, will be calculated daily
and credited on a monthly basis.
The Management Agreement provides that in the absence of willful
misfeasance, bad faith, negligence or reckless disregard of its obligations
thereunder, the Investment Manager is not liable to the Fund or any of its
investors for any act or omission by the Investment Manager or for any losses
sustained by the Fund or its investors. The Management Agreement in no way
restricts the Investment Manager from acting as investment manager or adviser to
others.
The Investment Manager paid the organizational expenses of the Fund of
approximately $100,000 ($8,333 for each respective initial Portfolio) incurred
prior to the offering of the Fund's shares. The Fund will reimburse the
Investment Manager for the full amount, exclusive of amounts waived of $19,967
($1,664 for each respective initial Portfolio except $1,663 for the Money Market
Portfolio). Such expenses have been deferred and are being amortized by the
straight line method over a period not to exceed five years from the date of
commencement of the Fund's operations.
Both the Investment Manager and the Sub-Adviser have authorized any of their
directors, officers and employees who have been elected as Trustees or officers
of the Fund to serve in the capacities in which they have been elected. Services
furnished to the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the BALANCED
PORTFOLIO, the CORE EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO by the
Investment Manager and the Sub-Adviser may be furnished by directors, officers
and employees of the Investment Manager and the Sub-Adviser. In connection with
the services rendered by the Sub-Adviser, the Sub-Adviser bears the following
expenses: (a) the salaries and expenses of its personnel; and (b) all expenses
incurred by it in connection with performing the services provided by it as
Sub-Adviser, as described above.
As full compensation for the services and facilities furnished to the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the BALANCED PORTFOLIO, the CORE
EQUITY PORTFOLIO, the EMERGING MARKETS PORTFOLIO and the Investment Manager, and
the expenses of these Portfolios and the Investment Manager assumed by the
Sub-Adviser, the Investment Manager pays the Sub-Adviser monthly compensation
equal to 40% of the Investment Manager's monthly compensation payable under the
Management Agreement in respect of the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the BALANCED PORTFOLIO, the CORE EQUITY PORTFOLIO and the EMERGING
MARKETS PORTFOLIO. Pursuant to the Sub-Advisory Agreement, if any reimbursement
is made by the Investment Manager to the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the BALANCED PORTFOLIO, the CORE EQUITY PORTFOLIO and the EMERGING
MARKETS PORTFOLIO as a result of the Portfolio exceeding the expense limitation,
the Investment Manager will be reimbursed for 40% of such payment by the
Sub-Adviser. For the services to be provided to the Sub-Adviser by the Secondary
Sub-Advisers under the Secondary Sub-Advisory Agreements, the Sub-Adviser pays a
portion of its compensation under the Sub-Advisory Agreement to the Secondary
Sub-Advisers, which portion shall vary from time to time.
The Management Agreement, the Sub-Advisory Agreement in respect of the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the BALANCED PORTFOLIO, the CORE
EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO, and the Secondary
Sub-Advisory Agreements in respect of the EMERGING MARKETS PORTFOLIO were
initially approved by the Trustees of the Fund on August 25, 1994 and by
Hartford Life Insurance Company as the then sole shareholder on August 31, 1994.
The Management Agreement, the Sub-Advisory Agreement and the Secondary
Sub-Advisory Agreements are sometimes herein referred to as the "Agreements."
The Agreements may be terminated at any time, without penalty, on thirty days'
notice by the Trustees of the Fund, by the holders of a majority, as defined in
the Investment Company
6
<PAGE>
Act of 1940, as amended (the "Act"), of the outstanding shares of the Fund, or
by the other party or parties to the Agreements. Each Agreement will
automatically terminate in the event of its assignment (as defined in the Act).
Under their terms, each Agreement had an initial term ending April 30, 1996 and
will continue from year to year thereafter, provided continuance of the
Agreement is approved at least annually by the vote of the holders of a
majority, as defined in the Act, of the outstanding shares of each Portfolio
(or, in the case of the Sub-Advisory Agreement in respect of the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the BALANCED PORTFOLIO, the CORE EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO, the outstanding shares of each of
those Portfolios, or, in the case of the Secondary Sub-Advisory Agreements in
respect of the EMERGING MARKETS PORTFOLIO, the outstanding shares of that
Portfolio), or by the Trustees of the Fund; provided that in either event such
continuance is approved annually by the vote of a majority of the Trustees of
the Fund who are not parties to the Agreement or "interested persons" (as
defined in the Act) of any such party (the "Independent Trustees"), which vote
must be cast in person at a meeting called for the purpose of voting on such
approval. If the question of continuance of the Management Agreement, the
Sub-Advisory Agreement or the Secondary Sub-Advisory Agreements (or adoption of
any new Management, Sub-Advisory or Secondary Sub-Advisory Agreement) is
presented to shareholders, continuance (or adoption) with respect to a Portfolio
shall be effective only if approved by a majority vote of the outstanding voting
securities of that Portfolio. If the shareholders of any one or more of the
Portfolios should fail to approve the Management Agreement, the Sub-Advisory
Agreement or a Secondary Sub-Advisory Agreement, the Investment Manager may
nonetheless serve as Investment Manager with respect to any Portfolio whose
shareholders approved the Management Agreement, and the Sub-Adviser and the
Secondary Sub-Advisers may nonetheless serve as Sub-Adviser or Secondary
Sub-Adviser, as the case may be, with respect to any Portfolio whose
shareholders have approved the Management Agreement, the Sub-Advisory Agreement
and the Secondary Sub-Advisory Agreements.
At their meeting held on April 17, 1996, the Fund's Board of Trustees,
including all of the Independent Trustees, approved continuation of the
Agreements until April 30, 1997. 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 by them
in accordance with instructions from Contract Owners, as more fully described
under the caption "Voting Rights" in the Prospectuses for the Contracts.
The Management Agreement was approved with respect to the MID-CAP GROWTH
PORTFOLIO by the Board of Trustees on October 25, 1996 and by Hartford Life
Insurance Company as the sole shareholder of the Portfolio on October 28, 1996.
The Fund has acknowledged that the name "Dean Witter" is a property right of
DWR. The Fund has agreed that DWR or its parent company may use or, at any time,
permit others to use, the name "Dean Witter." The Fund has also agreed that in
the event the Management Agreement is terminated, or if the affiliation between
InterCapital and its parent company is terminated, the Fund will eliminate the
name "Dean Witter" from its name if DWR or its parent company shall so request.
7
<PAGE>
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The Trustees and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with
InterCapital and TCW Funds Management, Inc. and with the 82 Dean Witter Funds
and the 14 TCW/DW Funds are shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Michael Bozic (55) Chairman and Chief Executive Officer of Levitz Furniture Corporation
Trustee (since November, 1995); Director or Trustee of the Dean Witter Funds;
c/o Levitz Furniture Corporation formerly President and Chief Executive Officer of Hills Department
6111 Broken Sound Parkway, N.W. Stores (May, 1991-July, 1995); formerly variously Chairman, Chief
Boca Raton, Florida Executive Officer, President and Chief Operating Officer (1987-1991) of
the Sears Merchandise Group of Sears, Roebuck and Co.; Director of
Eaglemark Financial Services, Inc., the United Negro College Fund and
Weirton Steel Corporation.
Charles A. Fiumefreddo* (63) Chairman and Chief Executive Officer and Director of InterCapital, DWSC
Chairman of the Board, and Dean Witter Distributors Inc. ("Distributors"); Executive Vice
President and Chief Executive President and Director of DWR; Chairman, Director or Trustee, President
Officer and Trustee and Chief Executive Officer of the Dean Witter Funds; Chairman, Chief
Two World Trade Center Executive Officer and Trustee of the TCW/DW Funds; Chairman and
New York, New York Director of Dean Witter Trust Company ("DWTC"); Director and/or officer
of various DWDC subsidiaries; formerly Executive Vice President and
Director of DWDC (until February, 1993).
Edwin J. Garn (63) Director or Trustee of the Dean Witter Funds; formerly United States
Trustee Senator (R-Utah) (1974-1992) and Chairman, Senate Banking Committee
c/o Huntsman Chemical (1980-1986); formerly Mayor of Salt Lake City, Utah (1972-1974);
Corporation formerly Astronaut, Space Shuttle Discovery (April 12-19, 1985); Vice
500 Huntsman Way Chairman, Huntsman Chemical Corporation (since January, 1993); Director
Salt Lake City, Utah of Franklin Quest (time management systems) and John Alden Financial
Corp; member of the board of various civic and charitable organiza-
tions.
John R. Haire (71) Chairman of the Audit Committee and Chairman of the Committee of the
Trustee Independent Directors or Trustees and Director or Trustee of the Dean
Two World Trade Center Witter Funds; Chairman of the Audit Committee and Chairman of the
New York, New York Committee of the Independent Trustees and Trustee of the TCW/DW Funds;
formerly President, Council for Aid to Education (1978-October, 1989)
and Chairman and Chief Executive Officer of Anchor Corporation, an
Investment Adviser (1964-1978); Director of Washington National
Corporation (insurance).
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Dr. Manuel H. Johnson (47) Senior Partner, Johnson Smick International, Inc., a consulting firm;
Trustee Koch Professor of International Economics and Director of the Center
c/o Johnson Smick International, for Global Market Studies at George Mason University; Co-Chairman and a
Inc. founder of the Group of Seven Council (G7C), an international economic
1133 Connecticut Avenue, N.W. commission; Director or Trustee of the Dean Witter Funds; Trustee of
Washington, DC the TCW/DW Funds; Director of NASDAQ (since June, 1995); Director of
Greenwich Capital Markets Inc. (broker-dealer); formerly Vice Chairman
of the Board of Governors of the Federal Reserve System (1986-1990) and
Assistant Secretary of the U.S. Treasury (1982-1986).
Michael E. Nugent (60) General Partner, Triumph Capital, L.P., a private investment part-
Trustee nership (since 1988); Director or Trustee of the Dean Witter Funds;
c/o Triumph Capital, L.P. Trustee of the TCW/DW Funds; formerly Vice President, Bankers Trust
237 Park Avenue, Company and BT Capital Corporation (1984-1988); director of various
New York, New York business organizations.
Philip J. Purcell* (53) Chairman of the Board of Directors and Chief Executive Officer of DWDC,
Trustee DWR and Novus Credit Services Inc.; Director of InterCapital, DWSC and
Two World Trade Center Distributors; Director or Trustee of the Dean Witter Funds; Director
New York, New York and/or officer of various DWDC subsidiaries.
John L. Schroeder (66) Retired; Director or Trustee of the Dean Witter Funds; Trustee of the
Trustee TCW/DW Funds; Director of Citizens Utilities Company; formerly
c/o Gordon Altman Butowsky Executive Vice President and Chief Investment Officer of the Home
Weitzen Shalov & Wein Insurance Company (August, 1991-September 1995) and Chairman and Chief
Counsel to the Independent Investment Officer of Axe-Houghton Management and the Axe-Houghton
Trustees Funds (April, 1983-June, 1991).
114 West 47th Street
New York, New York
Sheldon Curtis (64) Senior Vice President, Secretary and General Counsel of InterCapital
Vice President, Secretary and DWSC; Senior Vice President, Assistant Secretary and Assistant
and General Counsel General Counsel of Distributors; Senior Vice President and Secretary of
Two World Trade Center DWTC; Assistant Secretary of DWR and Vice President, Secretary and
New York, New York General Counsel of the Dean Witter Funds and the TCW/DW Funds.
Peter M. Avelar (38) Senior Vice President of InterCapital (since April, 1992); Vice
Vice President President of various Dean Witter Funds; previously Vice President of
Two World Trade Center InterCapital.
New York, New York
Kirk Balzer (34) Vice President of InterCapital (since April, 1996); previously Port-
Vice President folio Manager with Chancellor Capital Management (July, 1994-March,
Two World Trade Center 1996) and GT Capital Management (June, 1992-July, 1994) and prior
New York, New York thereto a graduate student at the University of Chicago.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Mark Bavoso (35) Senior Vice President of InterCapital (since June, 1993); Vice
Vice President President of various Dean Witter Funds; previously Vice President of
Two World Trade Center InterCapital.
New York, New York
Patricia A. Cuddy (42) Vice President of InterCapital (since June, 1994); Vice President of
Vice President various Dean Witter Funds; formerly Senior Vice President of Dreyfus
Two World Trade Center Corporation.
New York, New York
Edward F. Gaylor (55) Senior Vice President of InterCapital (since April, 1992); Vice
Vice President President of various Dean Witter Funds; previously Vice President of
Two World Trade Center InterCapital.
New York, New York
Rajesh K. Gupta (36) Senior Vice President of InterCapital; Vice President of various Dean
Vice President Witter Funds.
Two World Trade Center
New York, New York
Kenton J. Hinchliffe (52) Senior Vice President of InterCapital; Vice President of various Dean
Vice President Witter Funds.
Two World Trade Center
New York, New York
Anita H. Kolleeny (41) Senior Vice President of InterCapital (since April, 1992); Vice
Vice President President of various Dean Witter Funds; previously Vice President of
Two World Trade Center InterCapital.
New York, New York
Paula LaCosta (45) Vice President of InterCapital (since April, 1992); Vice President of
Vice President various Dean Witter Funds; previously Assistant Vice President of
Two World Trade Center InterCapital.
New York, New York
Jonathan R. Page (50) Senior Vice President of InterCapital; Vice President of various Dean
Vice President Witter Funds.
Two World Trade Center
New York, New York
Vinh Q. Tran (50) Vice President of InterCapital; Vice President of various Dean Witter
Vice President Funds.
Two World Trade Center
New York, New York
Paul D. Vance (61) Senior Vice President of InterCapital; Vice President of various Dean
Vice President Witter Funds.
Two World Trade Center
New York, New York
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Jayne Stevlingson (37) Vice President of InterCapital (since October, 1992); formerly
Vice President Assistant Vice President of Bankers Trust New York Corp. (January,
Two World Trade Center 1990-September, 1992).
New York, New York
Ronald J. Worobel (54) Senior Vice President of InterCapital (since June 1993); Vice President
Vice President of various Dean Witter Funds; formerly Vice President of InterCapital
Two World Trade Center (June, 1992-June, 1993) and Managing Director, MacKay-Shields Financial
New York, New York Corp. (February, 1989-June, 1992).
Philip A. Barach (44) Managing Director of TCW Funds Management, Inc.; Managing Director,
Vice President Mortgage-Backed Securities of Trust Company of the West and TCW Asset
865 South Figueroa Street Management Company; Vice President of various TCW/DW Funds.
Los Angeles, California
James M. Goldberg (51) Managing Director of TCW Funds Management, Inc.; Managing Director and
Vice President Chairman of the Fixed Income Policy Committee of Trust Company of the
865 South Figueroa Street West and TCW Asset Management Company; Vice President of various TCW/DW
Los Angeles, California Funds.
Jeffrey E. Gundlach (37) Managing Director of TCW Funds Management, Inc.; Managing Director,
Vice President Mortgage-Backed Securities of Trust Company of the West and TCW Asset
865 South Figueroa Street Management Company; Vice President of various TCW/DW Funds.
Los Angeles, California
Robert M. Hanisee (58) Managing Director of TCW Funds Management, Inc.; Managing Director,
Vice President Director of Research and Chairman of the Equity Policy Committee of
865 South Figueroa Street Trust Company of the West and TCW Asset Management Company.
Los Angeles, California
Frederick H. Horton (38) Managing Director of TCW Funds Management, Inc. (since October, 1993);
Vice President previously Senior Portfolio Manager for Dewey Square Investors (June,
865 South Figueroa Street 1991-September, 1993) and prior thereto Senior Portfolio Manager for
Los Angeles, California the Putnam Companies; Vice President of various TCW/DW Funds.
Terence F. Mahony (54) Managing Director of TCW Funds Management, Inc. (since April, 1996);
Vice President previously Chief Investment Officer for Global Emerging Markets at HSBC
865 South Figueroa Street Asset Management (September, 1993-April, 1996) and prior thereto a
Los Angeles, California Director of Baring Asset Management.
Michael P. Reilly (33) Senior Vice President of TCW Funds Management, Inc. (since June, 1992);
Vice President previously Vice President of Security Pacific Bank; Vice President of
865 South Figueroa Street various TCW/DW Funds.
Los Angeles, California
James A. Tilton (56) Managing Director of TCW Funds Management, Inc.; Managing Director and
Vice President member of the Equity Policy Committee of Trust Company of the West and
865 South Figueroa Street TCW Asset Management Company; Chairman of the Board of Verdugo Hills
Los Angeles, California Hospital and Chairman of the Board of Councilors of the University of
Southern California School of Public Administration; director of
various other business organizations; Vice President of various TCW/DW
Funds.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Thomas F. Caloia (50) First Vice President and Assistant Treasurer of InterCapital and DWSC;
Treasurer Treasurer of the Dean Witter Funds and the TCW/DW Funds; previously
Two World Trade Center Vice President of InterCapital.
New York, New York
</TABLE>
- ---------
* Denotes Trustees who are "interested persons" of the Fund, as defined in the
Investment Company Act of 1940, as amended.
In addition, Robert M. Scanlan, President and Chief Operating Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWTC and
Director of DWTC, Robert S. Giambrone, Senior Vice President of InterCapital,
DWSC, Distributors and DWTC and Director of DWTC, Joseph J. McAlinden, Executive
Vice President and Chief Investment Officer of InterCapital and Director of
DWTC, and Kevin Hurley, Senior Vice President of InterCapital, are Vice
Presidents of the Fund, and Marilyn K. Cranney and Barry Fink, First Vice
Presidents and Assistant General Counsels of InterCapital and DWSC, LouAnne D.
McInnis and Ruth Rossi, Vice Presidents and Assistant General Counsels of
InterCapital and DWSC, and Carsten Otto and Frank Bruttomesso, Staff Attorneys
with InterCapital, are Assistant Secretaries of the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees consists of eight (8) trustees. These same individuals
also serve as directors or trustees for all of the Dean Witter Funds, and are
referred to in this section as Trustees. As of the date of this Statement of
Additional Information, there are a total of 82 Dean Witter Funds, comprised of
122 portfolios. As of November 30, 1996, the Dean Witter Funds had total net
assets of approximately $82.2 billion and more than five million shareholders.
Six Trustees (75% of the total number) have no affiliation or business
connection with InterCapital or any of its affiliated persons and do not own any
stock or other securities issued by InterCapital's parent company, DWDC. These
are the "disinterested" or "independent" Trustees. The other two Trustees (the
"management Trustees") are affiliated with InterCapital. Four of the six
independent Trustees are also Independent Trustees of the TCW/DW Funds.
Law and regulation establish both general guidelines and specific duties for
the Independent Trustees. The Dean Witter Funds seek as Independent Trustees
individuals of distinction and experience in business and finance, government
service or academia; these are people whose advice and counsel are in demand by
others and for whom there is often competition. To accept a position on the
Funds' Boards, such individuals may reject other attractive assignments because
the Funds make substantial demands on their time. Indeed, by serving on the
Funds' Boards, certain Trustees who would otherwise be qualified and in demand
to serve on bank boards would be prohibited by law from doing so.
All of the Independent Trustees serve as members of the Audit Committee and
the Committee of the Independent Trustees. Three of them also serve as members
of the Derivatives Committee. During the calendar year ended December 31, 1995,
the three Committees held a combined total of fifteen meetings. The Committees
hold some meetings at InterCapital's offices and some outside InterCapital.
Management Trustees or officers do not attend these meetings unless they are
invited for purposes of furnishing information or making a report.
The Committee of the Independent Trustees is charged with recommending to
the full Board approval of management, advisory and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing Fund performance; checking on the pricing of portfolio securities,
brokerage commissions, transfer agent costs and performance, and trading among
Funds in the same complex; and approving fidelity bond and related insurance
coverage and allocations, as well as other matters that arise from time to time.
The Independent Trustees are required to select and nominate individuals to fill
any Independent Trustee vacancy on the Board of any Fund that has a Rule 12b-1
plan of distribution. Most of the Dean Witter Funds have such a plan.
12
<PAGE>
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of such services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; reviewing the adequacy of the Fund's system of internal
controls; and preparing and submitting Committee meeting minutes to the full
Board.
Finally, the Board of each Fund has formed a Derivatives Committee to
establish parameters for and oversee the activities of the Fund with respect to
derivative investments, if any, made by the Fund.
DUTIES OF CHAIRMAN OF COMMITTEE OF THE INDEPENDENT TRUSTEES AND AUDIT COMMITTEE
The Chairman of the Committee of the Independent Trustees and the Audit
Committee maintains an office at the Funds' headquarters in New York. He is
responsible for keeping abreast of regulatory and industry developments and the
Funds' operations and management. He screens and/or prepares written materials
and identifies critical issues for the Independent Trustees to consider,
develops agendas for Committee meetings, determines the type and amount of
information that the Committees will need to form a judgment on various issues,
and arranges to have that information furnished to Committee members. He also
arranges for the services of independent experts and consults with them in
advance of meetings to help refine reports and to focus on critical issues.
Members of the Committees believe that the person who serves as Chairman of both
Committees and guides their efforts is pivotal to the effective functioning of
the Committees.
The Chairman of the Committees also maintains continuous contact with the
Funds' management, with independent counsel to the Independent Trustees and with
the Funds' independent auditors. He arranges for a series of special meetings
involving the annual review of investment advisory, management and other
operating contracts of the Funds and, on behalf of the Committees, conducts
negotiations with the Investment Manager and other service providers. In effect,
the Chairman of the Committees serves as a combination of chief executive and
support staff of the Independent Trustees.
The Chairman of the Committee of the Independent Trustees and the Audit
Committee is not employed by any other organization and devotes his time
primarily to the services he performs as Committee Chairman and Independent
Trustee of the Dean Witter Funds and as an Independent Trustee and, since July
1, 1996, as Chairman of the Committee of the Independent Trustees and the Audit
Committee of the TCW/DW Funds. The current Committee Chairman has had more than
35 years experience as a senior executive in the investment company industry.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL DEAN
WITTER FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the Dean Witter Funds avoids the
duplication of effort that would arise from having different groups of
individuals serving as Independent Trustees for each of the Funds or even of
sub-groups of Funds. They believe that having the same individuals serve as
Independent Trustees of all the Funds tends to increase their knowledge and
expertise regarding matters which affect the Fund complex generally and enhances
their ability to negotiate on behalf of each Fund with the Fund's service
providers. This arrangement also precludes the possibility of separate groups of
Independent Trustees arriving at conflicting decisions regarding operations and
management of the Funds and avoids the cost and confusion that would likely
ensue. Finally, having the same Independent Trustees serve on all Fund Boards
enhances the ability of each Fund to obtain, at modest cost to each separate
Fund, the services of Independent Trustees, and a Chairman of their Committees,
of the caliber, experience and business acumen of the individuals who serve as
Independent Trustees of the Dean Witter Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Fund pays each Independent Trustee an annual fee of $1,000 plus a per
meeting fee of $50 for meetings of the Board of Trustees or committees of the
Board of Trustees attended by the Trustee (the Fund pays the Chairman of the
Audit Committee an annual fee of $750 and pays the Chairman of the
13
<PAGE>
Committee of the Independent Trustees an additional annual fee of $1,200). The
Fund also reimburses such Trustees for travel and other out-of-pocket expenses
incurred by them in connection with attending such meetings. Trustees and
officers of the Fund who are or have been employed by the Investment Manager or
an affiliated company receive no compensation or expense reimbursement from the
Fund.
At such time as the Fund has been in operation, and has paid fees to the
Independent Trustees, for a full fiscal year, and assuming that during such
fiscal year the Fund holds the same number of Board and committee meetings as
were held by the other Dean Witter Funds during the calendar year ended December
31, 1995, it is estimated that the compensation paid to each Independent Trustee
during such fiscal year will be the amount shown in the following table:
FUND COMPENSATION (ESTIMATED)
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- -------------------------------------------------------------- ---------------
<S> <C>
Michael Bozic................................................. $2,000
Edwin J. Garn................................................. 2,000
John R. Haire................................................. 3,950
Dr. Manuel H. Johnson......................................... 2,000
Michael E. Nugent............................................. 2,000
John L. Schroeder............................................. 2,000
</TABLE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1995 for services
to the 79 Dean Witter Funds and, in the case of Messrs. Haire, Johnson, Nugent
and Schroeder, the 11 TCW/DW Funds that were in operation at December 31, 1995.
With respect to Messrs. Haire, Johnson, Nugent and Schroeder, the TCW/DW Funds
are included solely because of a limited exchange privilege between those Funds
and five Dean Witter Money Market Funds. Mr. Schroeder was elected as a Trustee
of the TCW/DW Funds on April 20, 1995.
COMPENSATION FROM DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
TOTAL
FOR SERVICE AS COMPENSATION
FOR SERVICE CHAIRMAN OF PAID
AS DIRECTOR OR COMMITTEES OF FOR SERVICES
TRUSTEE AND FOR SERVICE AS INDEPENDENT TO
COMMITTEE MEMBER TRUSTEE AND DIRECTORS/ 79 DEAN
OF 79 DEAN COMMITTEE MEMBER TRUSTEES AND WITTER
WITTER OF 11 TCW/DW AUDIT FUNDS AND 11
NAME OF INDEPENDENT TRUSTEE FUNDS FUNDS COMMITTEES TCW/DW FUNDS
- --------------------------- ---------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
Michael Bozic.............. $126,050 -- -- $126,050
Edwin J. Garn.............. 136,450 -- -- 136,450
John R. Haire.............. 98,450 $82,038 $217,350(1) 397,838
Dr. Manuel H. Johnson...... 136,450 82,038 -- 218,488
Michael E. Nugent.......... 124,200 75,038 -- 199,238
John L. Schroeder.......... 136,450 46,964 -- 183,414
</TABLE>
- ---------
(1) For the 79 Dean Witter Funds in operation at December 31, 1995. As noted
above, on July 1, 1996, Mr. Haire became Chairman of the Committee of the
Independent Trustees and the Audit Committee of the TCW/DW Funds in addition
to continuing to serve in such positions for the Dean Witter Funds.
As of the date of this Statement of Additional Information, 57 of the Dean
Witter Funds, not including the Fund, have adopted a retirement program under
which an Independent Trustee who retires after serving for at least five years
(or such lesser period as may be determined by the Board) as an Independent
Director or Trustee of any Dean Witter Fund that has adopted the retirement
program (each
14
<PAGE>
such Fund referred to as an "Adopting Fund" and each such Trustee referred to as
an "Eligible Trustee") is entitled to retirement payments upon reaching the
eligible retirement age (normally, after attaining age 72). Annual payments are
based upon length of service. Currently, upon retirement, each Eligible Trustee
is entitled to receive from the Adopting Fund, commencing as of his or her
retirement date and continuing for the remainder of his or her life, an annual
retirement benefit (the "Regular Benefit") equal to 25.0% of his or her Eligible
Compensation plus 0.4166666% of such Eligible Compensation for each full month
of service as an Independent Director or Trustee of any Adopting Fund in excess
of five years up to a maximum of 50.0% after ten years of service. The foregoing
percentages may be changed by the Board.(2) "Eligible Compensation" is one-fifth
of the total compensation earned by such Eligible Trustee for service to the
Adopting Fund in the five year period prior to the date of the Eligible
Trustee's retirement. Benefits under the retirement program are not secured or
funded by the Adopting Funds.
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the 57 Dean Witter Funds (not including the Fund)
as of December 31, 1995, and the estimated retirement benefits for the Fund's
Independent Trustees from the 57 Dean Witter Funds as of December 31, 1995.
RETIREMENT BENEFITS FROM ALL DEAN WITTER FUNDS
<TABLE>
<CAPTION>
ESTIMATED
RETIREMENT ANNUAL
BENEFITS BENEFITS
ESTIMATED ACCRUED AS UPON
CREDITED YEARS ESTIMATED EXPENSES RETIREMENT
OF SERVICE AT PERCENTAGE OF BY ALL FROM ALL
RETIREMENT ELIGIBLE ADOPTING ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUNDS FUNDS(3)
- ----------------------------------------------------- ------------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
Michael Bozic........................................ 10 50.0% $ 26,359 $ 51,550
Edwin J. Garn........................................ 10 50.0 41,901 51,550
John R. Haire........................................ 10 50.0 261,763 130,404
Dr. Manuel H. Johnson................................ 10 50.0 16,748 51,550
Michael E. Nugent.................................... 10 50.0 30,370 51,550
John L. Schroeder.................................... 8 41.7 51,812 42,958
</TABLE>
- ---------
(2) An Eligible Trustee may elect alternate payments of his or her retirement
benefits based upon the combined life expectancy of such Eligible Trustee
and his or her spouse on the date of such Eligible Trustee's retirement. The
amount estimated to be payable under this method, through the remainder of
the later of the lives of such Eligible Trustee and spouse, will be the
actuarial equivalent of the Regular Benefit. In addition, the Eligible
Trustee may elect that the surviving spouse's periodic payment of benefits
will be equal to either 50% or 100% of the previous periodic amount, an
election that, respectively, increases or decreases the previous periodic
amount so that the resulting payments will be the actuarial equivalent of
the Regular Benefit.
(3) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (2) above.
As of the date of this Statement of Additional Information, Hartford Life
Insurance Company and ITT Hartford Life and Annuity Insurance Company owned all
of the outstanding shares of the Fund for allocation to the Accounts, and none
of the Fund's officers or Trustees was a Contract Owner under the Accounts.
15
<PAGE>
INVESTMENT PRACTICES AND POLICIES
- --------------------------------------------------------------------------------
The Fund is an open-end diversified management investment company which is
intended to provide a broad range of investment alternatives with its thirteen
separate Portfolios, each of which has distinct investment objectives and
policies, as set forth below and in the Prospectus:
-THE MONEY MARKET PORTFOLIO seeks high current income, preservation of
capital and liquidity by investing in short-term money market instruments.
-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.
-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").
-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.
-THE UTILITIES PORTFOLIO seeks 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 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.
-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.
-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 and foreign companies.
-THE AMERICAN VALUE PORTFOLIO seeks long-term 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 attractively valued given their above average relative earnings
growth potential at that time.
-THE MID-CAP GROWTH PORTFOLIO seeks long-term capital growth by investing
principally in equity securities of "mid-cap" companies.
-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. It seeks to achieve this objective through investments in all
types of common stocks and equivalents, preferred stocks and bonds and
other debt obligations of domestic and foreign companies and governments
and international organizations.
-THE DEVELOPING GROWTH PORTFOLIO seeks long-term capital growth by 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.
-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.
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There can be no assurance that the Portfolios' investment objectives will be
achieved.
Each Portfolio of the Fund is subject to the diversification requirements of
Section 817(h) of the Internal Revenue Code relating to the favorable tax
treatment of variable annuity contracts. Regulations issued under such section
require each Portfolio to invest no more than 55% of its assets in any one
investment; no more than 70% of its assets in any two investments; no more than
80% of its total assets in any three investments; and no more than 90% of its
total assets in any four investments. For purposes of the regulations, all
securities of the same issuer are treated as a single investment. In addition,
the Portfolios are subject to the diversification requirements of the Act, as
described under the heading "Investment Restrictions" below and in the
Prospectus.
THE MONEY MARKET PORTFOLIO
VARIABLE AND FLOATING RATE OBLIGATIONS. As stated in the Prospectus, the
MONEY MARKET PORTFOLIO may invest in variable and floating rate obligations. The
interest rate payable on a variable rate obligation is adjusted at predesignated
periodic intervals and, on floating rate obligations, whenever there is a change
in the market rate of interest on which the interest rate payable is based.
Other features may include the right whereby the MONEY MARKET PORTFOLIO may
demand prepayment of the principal amount of the obligation prior to its stated
maturity (a "demand feature") and the right of the issuer to prepay the
principal amount prior to maturity. The principal benefit of a variable rate
obligation is that the interest rate adjustment minimizes changes in the market
value of the obligation. As a result, the purchase of variable rate and floating
rate obligations should enhance the ability of the MONEY MARKET PORTFOLIO to
maintain a stable net asset value per share (see "How Net Asset Value is
Determined") and to sell obligations prior to maturity at a price approximating
the full principal amount of the obligations. The principal benefits to the
MONEY MARKET PORTFOLIO of purchasing obligations with a demand feature are that
liquidity and the ability of the MONEY MARKET PORTFOLIO to obtain repayment of
the full principal amount of an obligation prior to maturity are enhanced. The
payment of principal and interest by issuers of certain obligations purchased by
the MONEY MARKET PORTFOLIO may be guaranteed by letters of credit or other
credit facilities offered by banks or other financial institutions. Such
guarantees will be considered in determining whether an obligation meets the
MONEY MARKET PORTFOLIO's investment quality requirements.
PRIVATE PLACEMENTS. As discussed in the Prospectus, the MONEY MARKET
PORTFOLIO may invest in commercial paper issued in reliance on the so-called
"private placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 (the "Securities Act") and which may be sold to other
institutional investors pursuant to Rule 144A under the Securities Act. The
adoption by the Securities and Exchange Commission of Rule 144A, which permits
the resale of certain restricted securities to institutional investors, had the
effect of broadening and increasing the liquidity of the institutional trading
market for securities subject to restrictions on resale to the general public.
Section 4(2) commercial paper sold pursuant to Rule 144A is restricted in that
is can be resold only to qualified institutional investors. However, since
institutions constitute virtually the entire market for such commercial paper,
the market for such Section 4(2) commercial paper is, in reality, as liquid as
that for other commercial paper. While the MONEY MARKET PORTFOLIO generally
holds to maturity commercial paper in its portfolio, the advent of Rule 144A has
greatly simplified the ability to sell Section 4(2) commercial paper to other
institutional investors.
Open-end investment companies are not permitted to hold over 15% (10% for
money market funds) of their net assets in securities for which there is no
established market ("illiquid securities"). However, under procedures adopted by
the Trustees of the Fund, the MONEY MARKET PORTFOLIO may purchase Section 4(2)
commercial paper without being subject to the limitation on illiquid investments
and will be able to utilize Rule 144A to sell that paper to other institutional
investors. The procedures require that the Investment Manager consider the
following factors in determining that any restricted security eligible for sale
pursuant to Rule 144A be considered liquid: (1) the frequency of trades and
quotes for the security, (2) the number of dealers willing to purchase or sell
the security and the number of other potential purchasers, (3) dealer
undertakings to make a market in the security, and (4) the nature of the
security and the nature of the marketplace trades (i.e., the time needed to
dispose of the security, the method of soliciting offers and the
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mechanics of transfer). The Investment Manager will report to the Trustees on a
quarterly basis on all restricted securities held by the MONEY MARKET PORTFOLIO
with regard to their ongoing liquidity. In the event any Section 4(2) commercial
paper or other restricted security held by the MONEY MARKET PORTFOLIO is
determined to be illiquid by the Trustees and the Investment Manager, that
investment would be included as an illiquid security subject to the limitation
on illiquid investments referred to above.
THE AMERICAN VALUE PORTFOLIO
INDUSTRY VALUATION APPROACH. As stated in the Prospectus, in managing the
AMERICAN VALUE PORTFOLIO, the Investment Manager generally seeks to identify
industries, rather than individual companies, as prospects for capital
appreciation. This approach is designed to capitalize on the basic assumptions
that industry trends are a primary force governing company earnings;
conventional forecasts may not fully reflect underlying industry conditions or
changing economic cycles; the market's perception of industry trends is often
transitory or exaggerated; and distortions in relative valuations may provide
significant buying or selling opportunities.
The Investment Manager generally seeks to invest assets of the AMERICAN
VALUE PORTFOLIO in industries it considers to exhibit underappreciated earnings
potential at the time of purchase and to sell those it considers to have peaked
in relative earnings potential.
The Investment Manager also uses models which employ economic indicators or
other financial variables to evaluate the relative attractiveness of industries.
Economic analysis includes traditional business cycle analysis and such
signposts as current Federal Reserve monetary posture, direction of commodity
prices, and global currency and economic trends. Economic indicators most
relevant to particular industries are reviewed. Some industries analyzed such as
aerospace and energy do not correlate with economic indicators and must be
analyzed relative to their respective specific industry cycles. Financial
variables under consideration may include corporate earnings growth and
cashflow, corporate and industry asset valuation, absolute and relative
price/earnings ratios and dividend discount valuations.
Once attractive industries have been identified, stocks to represent those
industries are selected utilizing a multivariate process that includes size and
quality of the company, earnings visibility of the company and various valuation
parameters. Valuation screens may include dividend discount model values,
price-to-book ratios, price to cashflow values, relative and absolute
price-to-earnings ratios and ratios of price to earnings multiples to earnings
growth. Price and earnings momentum ratings derived from external sources are
also factored into the stock selection decision. The Investment Manager also
evaluates fundamental company criteria such as product cycle analysis, revenue
growth, margin analysis, consistency of earnings profitability, proprietary
nature of the product and quality of management. Stocks may be selected from the
three capitalization tiers of the market: large capitalization, medium
capitalization, and small capitalization.
Based on the sum total of this analysis, approximately 40-60 industries are
studied and classified as attractive, moderately attractive or unattractive.
Attractive groups are purchased, moderately attractive groups are bought or
held, and unattractive groups are sold. The Investment Manager may utilize
services that examine historical industry relative price-to-earnings ranges for
input on the Investment Manager's valuation analysis.
A basic tenet of the industry valuation approach is that there is no
certainty of superior performance in any specific industry selection, but rather
that approximately equal weighting of investments in a group of industries, each
of which has been identified as underappreciated, can benefit from the
performance probabilities of the total group.
The foregoing represents the main outlines of the industry valuation
approach. The following describes its key features, all of which are subject to
modification as described below or as result of applying the asset allocation
disciplines described later.
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1. Equal Industry Weightings.
After determining the industries that it considers to be attractive, the
Investment Manager generally attempts to invest approximately equal amounts of
the equity portion of the portfolio in securities of companies in each of such
industries, subject to adjustment for company weightings as set forth in the
next paragraph.
2. Equal Company Weightings.
From the total of all companies included in the industry valuation process,
the Investment Manager selects a limited number from each industry as
representative of that industry. Such selections are made on the basis of
various criteria, including size and quality of a company, the visibility of
earnings, product cycle analysis, historic track record and various valuation
parameters. Valuation screens may include dividend discount model values,
price-to-book ratios, price-to-cashflow values, relative and absolute
price-to-earnings ratios and ratios of price-earnings multiples to earnings
growth. Price and earnings momentum ratings derived from external sources are
also factored into the stock selection decision. Those companies which are in
attractive industries and which the Investment Manager believes to be attractive
investments are finally selected for inclusion in the portfolio. When final
selections are made, approximately equal amounts of the equity portion of the
portfolio are invested in each of such companies. This may vary depending on
whether the Investment Manager is in the process of building or reducing a stock
position. Consideration will also be given to valuation, capitalization and
liquidity profile. Stocks in industries not characterized as attractive may be
underweighted. Also, smaller capitalization issues may not be equally weighted
due to liquidity considerations.
3. Relative Industry Values.
Industry selection only attempts to identify industries whose securities
might be expected to perform relatively better than the market as represented by
the S&P Index. It does not seek to identify securities which will experience an
absolute increase in value notwithstanding market conditions. However, the
process assumes that, despite interim fluctuations in stock market prices, the
long-term trend in equity security values will be up.
4. Practical Applications.
In applying the industry valuation approach to management of the AMERICAN
VALUE PORTFOLIO, the Investment Manager will make adjustments in the portfolio
which reflect modifications of the underlying concepts whenever, in its opinion,
such adjustments are necessary or desirable to achieve the AMERICAN VALUE
PORTFOLIO's objectives. Such adjustments may include, for example, weighting
some industries or companies more or less than others, based upon the Investment
Manager's judgment as to the investment merits of specific companies. In
addition, without specific action by the Investment Manager, adjustments may
result from fluctuations in market prices which distort previously established
industry and company weightings. The portfolio may, at times, include securities
of industries which are unattractive due to consideration of stage-of-cycle
analysis or may not include representation in industries considered attractive
due to considerations such as valuation criteria, stage-of-cycle analysis or
lack of earnings visibility, balance sheet viability or management quality.
Also, independent of the application of the industry valuation process, the
AMERICAN VALUE PORTFOLIO continuously sells and redeems its own shares, and, as
a result, securities may have to be sold at times from the portfolio to meet
redemptions and monies received upon sale of the AMERICAN VALUE PORTFOLIO's
shares must be used to purchase portfolio securities. Such sales and purchases
of portfolio securities will result in a portfolio that does not completely
reflect equal weighting of investment in industries or companies.
ASSET ALLOCATION. Common stocks, particularly those sought for possible
capital appreciation, have historically experienced a great amount of price
fluctuation. The Investment Manager believes it is desirable to attempt to
reduce the risks of extreme price fluctuations even if such an attempt results,
as it likely will at times, in reducing the probabilities of obtaining greater
capital appreciation. Accordingly, the Investment Managers's investment process
incorporates elements which may reduce, although certainly not eliminate, the
volatility of a portfolio. The AMERICAN VALUE PORTFOLIO may hold a portion of
its
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assets in fixed-income securities in an effort to moderate extremes of price
fluctuation. The determination of the appropriate asset allocation as between
equity and fixed-income investments will be made by the Investment Manager in
its discretion, based upon its evaluation of economic and market conditions.
THE MID-CAP GROWTH PORTFOLIO
As discussed in the Prospectus, the MID-CAP GROWTH PORTFOLIO offers
investors an opportunity to participate in a diversified portfolio of
securities, consisting principally of common stocks. The portfolio reflects an
investment decision-making process developed by the Portfolio's Investment
Manager.
INDUSTRY AND STOCK SELECTION APPROACH
As stated in the Prospectus, in managing the portfolio of the MID-CAP GROWTH
PORTFOLIO the Investment Manager generally seeks to identify industries, rather
than individual companies, as prospects for capital appreciation. This approach
is designed to capitalize on four basic assumptions: (1) industry trends are a
primary force governing company earnings; (2) conventional forecasts by security
analysts of company earnings do not fully reflect underlying industry conditions
or changing economic cycles; (3) the market's perception of industry trends is
often transitory or exaggerated; and (4) distortions in relative valuations
beyond their normal ranges provide significant buying or selling opportunities.
The Investment Manager will invest principally in those mid-cap companies
that have above-average relative growth potential. Mid-cap companies typically
have a better growth potential than their large-cap counterparts because they
are still in the early and more dynamic period of their corporate existences.
Often mid-size companies and the industries in which they are focused are still
evolving as opposed to the more mature industries served by large-cap companies.
Moreover, mid-cap companies are not considered "emerging" stocks, nor are they
as volatile as small-cap firms. This is due to the fact that mid-cap companies
have increased liquidity, attributable to their larger market capitalization as
well as longer and more established track records, and a stronger market
presence and dominance than small-cap firms. Consequently, because of the better
growth inherent in these companies and their industries, mid-cap companies offer
superior return potential to large-cap companies; yet, owing to their relatively
larger size and better recognition in the investment community, they have a
reduced risk profile compared to smaller, emerging or micro-cap companies.
The Investment Manager may use models which employ economic indicators or
other financial variables to evaluate the relative attractiveness of industries.
Considerations may pertain to an assessment of the stage of the economic cycle,
the anticipated direction or movement of interest rates, or a judgment as to
which industries and common stocks may show relative outperformance based on the
following: (1) economic indicators that may be specific to particular
industries; and (2) financial variables which could include an analysis of cash
flow, asset value, historical or projected earnings, absolute or relative
price/earnings ratios, dividend discount models, or other factors.
The Investment Manager will use an industry approach that seeks to diversify
the assets of the MID-CAP GROWTH PORTFOLIO in approximately 18 to 35 industries.
The Portfolio will hold less than 5% of its net assets in any one security and
will hold less than 10% of its net assets in any one industry. Companies will be
selected based on at least three-year track records, and purchases will be
primarily focused on companies that: (1) have the potential for above-average
relative earnings growth; (2) are focused in industries that are rapidly
expanding or have the potential to see increasing sales or earnings; (3)
historically have had well-defined and recurring revenues; or (4) are attractive
based on an assessment of private market or franchise values.
ASSET ALLOCATION. Common stocks, particularly those sought for possible
capital appreciation, have historically experienced a great amount of price
fluctuation. The Investment Manager believes it is desirable to attempt to
reduce the risks of extreme price fluctuations even if such an attempt results,
as it likely will at times, in reducing the probabilities of obtaining greater
capital appreciation. Accordingly, the Investment Manager's investment process
incorporates elements which may reduce, although certainly not eliminate, the
volatility of a portfolio. The MID-CAP GROWTH PORTFOLIO may hold a portion of
its portfolio in fixed-income securities in an effort to moderate extremes of
price fluctuation. The determination of the
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appropriate asset allocation as between equity and fixed-income investments will
be made by the Investment Manager in its discretion, based upon its evaluation
of economic and market conditions.
THE DEVELOPING GROWTH PORTFOLIO
LEVERAGING. As discussed in the Prospectus, the DEVELOPING GROWTH PORTFOLIO
may borrow money, but only from a bank and in an amount up to 25% of the
Portfolio's total assets taken at the lower of market value or cost, not
including the amount borrowed, to seek to enhance capital appreciation by
leveraging its investments through purchasing securities with the borrowed
funds. Such borrowings will be subject to current margin requirements of the
Federal Reserve Board and where necessary the Portfolio may use any or all of
its securities as collateral for such borrowings. 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 DEVELOPING GROWTH 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 Act. If, due to market
fluctuations or other reasons, the value of the Portfolio's assets (including
the proceeds of borrowings) becomes at any time less than three times the amount
of any outstanding bank debt, the Portfolio, within three business days, will
reduce its bank debt to the extent necessary to meet the required 300% asset
coverage. In restoring the 300% asset coverage, the Portfolio may have to sell a
portion of its investments at a time when it may be disadvantageous to do so.
The investment policy provides that the Portfolio may not purchase or sell a
security on margin. The margin and bank borrowing restrictions will prevent the
ordinary purchase of a security which involves a cash borrowing from a broker of
any part of the purchase price of a security.
In addition to borrowings for leverage, the Portfolio may also borrow from
banks an additional amount as a temporary measure for extraordinary or emergency
purposes and, for these purposes, in no event an amount greater than 5% of total
assets taken at the lower of market value or cost.
THE EMERGING MARKETS PORTFOLIO
EMERGING MARKET COUNTRY DESIGNATION. The following countries are not
included within the International Bank of Reconstruction and Development (the
"World Bank") definition of an emerging market country: Saudi Arabia, Ireland,
Spain, Israel, Hong Kong, Singapore, New Zealand, Australia, The United Kingdom,
Italy, The Netherlands, Kuwait, Canada, Belgium, Austria, France, United Arab
Emirates, Germany, Denmark, United States, Sweden, Finland, Norway, Japan and
Switzerland.
POLITICAL AND ECONOMIC RISKS. Even though opportunities for investment may
exist in emerging countries, any change in the leadership or policies of the
governments of those countries or in the leadership or policies of any other
government which exercises a significant influence over those countries, may
halt the expansion, or reverse the liberalization, of foreign investment
policies now occurring and thereby eliminate any investment opportunities which
may currently exist.
Investors should note that upon the accession to power of authoritarian
regimes, the governments of a number of emerging market countries previously
expropriated large quantities of real and personal property. The claims of
property owners against those governments were never finally settled. There can
be no assurance that any property represented by securities purchased by the
EMERGING MARKETS PORTFOLIO will not also be expropriated, nationalized, or
otherwise confiscated. If such confiscation were to occur, the Portfolio could
lose a substantial portion of its investments in such countries. The Portfolio's
investments would similarly be adversely affected by exchange control
regulations in any of those countries.
SECURITIES MARKETS. The market capitalizations of listed equity securities
on major exchanges in emerging market countries is significantly smaller than in
the United States. A high proportion of the shares of many companies in emerging
market countries may be held by a limited number of persons,
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which may further limit the number of shares available for investment by the
EMERGING MARKETS PORTFOLIO. A limited number of issuers in most, if not all,
emerging securities markets may represent a disproportionately large percentage
of market capitalization and trading value. The limited liquidity of emerging
securities markets may also affect the Portfolio's ability to acquire or dispose
of securities at the price and time it wishes to do so. In addition, certain
emerging securities markets are susceptible to being influenced by large
investors trading significant blocks of securities or by large dispositions of
securities resulting from the failure to meet margin calls when due.
The high volatility of certain emerging securities markets, as well as
currency fluctuations, may result in greater volatility in the Portfolio's net
asset value than would be the case for companies investing in domestic
securities. If the Portfolio were to experience unexpected net redemptions, it
could be forced to sell securities in its portfolio without regard to investment
merit, thereby decreasing the asset base over which Portfolio expenses can be
spread and possibly reducing the Portfolio's rate of return.
Emerging market securities exchanges and brokers are generally subject to
less governmental supervision and regulation than in the U.S., and emerging
market securities exchange transactions are usually subject to fixed
commissions, which are generally higher than negotiated commissions on U.S.
transactions. In addition, emerging market securities exchange transactions may
be subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the
Portfolio are uninvested and no return is earned thereon. The inability of the
Portfolio to make intended security purchases due to settlement problems could
cause the Portfolio to miss attractive investment opportunities. Inability to
dispose of a portfolio security due to settlement problems either could result
in losses to the Portfolio due to subsequent declines in value of the portfolio
security or, if the Portfolio has entered into a contract to sell the security,
could result in possible liability to the purchaser.
RESTRICTIONS ON INVESTMENTS. The EMERGING MARKETS PORTFOLIO may be
prohibited under the Act from purchasing the securities of any company that, in
its most recent fiscal year, derived more than 15% of its gross revenues from
securities related activities. In a number of emerging market countries,
commercial banks act as securities brokers and dealers, investment advisers and
underwriters or are otherwise engaged in securities-related activities, which
may limit the Portfolio's ability to hold securities issued by the banks. The
U.S. Securities and Exchange Commission has proposed a rule which, if adopted,
may permit the Portfolio to invest in certain of these securities subject to
certain restrictions.
FOREIGN INVESTMENT RESTRICTIONS. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the EMERGING MARKETS
PORTFOLIO. For example, certain countries require governmental approval prior to
investments by foreign persons or limit the amount of investment by foreign
persons in a particular company or limit the investment by foreign persons to
only a specific class of securities of a company that may have less advantageous
terms than securities of the company available for purchase by nationals.
Moreover, the national policies of certain countries may restrict investment
opportunities in issuers or industries deemed sensitive to national interests.
In addition, some countries require governmental approval for the repatriation
of investment income, capital or the proceeds of securities sales by foreign
investors. The Portfolio could be adversely affected by delays in or a refusal
to grant any required governmental approval for repatriation, such as by the
application to it of other restrictions on investments.
DEBT-TO-EQUITY CONVERSIONS. THE EMERGING MARKETS PORTFOLIO may participate
with respect to up to 5% of its total assets in debt-to-equity conversions.
Debt-to-equity conversion programs are sponsored in varying degrees by certain
emerging market countries and permit investors to use external debt of a country
to make equity investments in local companies. Many conversion programs relate
primarily to investments in transportation, communication, utilities and similar
infrastructure related areas. The terms of the programs vary from country to
country, but include significant restrictions on the application of the proceeds
received in the conversion and on the repatriation of investment profits and
capital. In inviting conversion applications by holders of eligible debt, a
government will usually specify a minimum discount from par value that it will
accept for conversion. The Sub-Adviser believes that emerging market
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debt-to-equity conversion programs may offer investors opportunities to invest
in otherwise restricted equity securities of emerging market countries with a
potential for significant capital appreciation and, to a limited extent, intends
to invest assets of the Portfolio in such programs in appropriate circumstances.
There can be no assurance that debt-to-equity conversion programs will continue
or be successful or that the Portfolio will be able to convert all or any of its
emerging market debt portfolio into equity investments.
ASIAN ECONOMIES AND SECURITIES MARKETS
The Asian continent covers approximately one-fifth of the earth's surface
and is home to over half the world's population. Certain of the Asian countries
in which the EMERGING MARKETS PORTFOLIO may invest include China, Hong Kong,
India, Indonesia, Korea, Malaysia, Pakistan, the Philippines, Singapore, Sri
Lanka, Taiwan and Thailand. The discussion below focuses on some of the emerging
market countries in which the Sub-Adviser anticipates that the EMERGING MARKETS
PORTFOLIO will initially invest.
ASIAN ECONOMIES. In recent years, countries in the Asian region have
experienced real economic growth rates exceeding those experienced by many
Western industrialized countries.
The Sub-Adviser of the EMERGING MARKETS PORTFOLIO believes that economic
conditions in the Asian region exist to provide for high levels of economic
activity in the long-term, offering the potential for long-term capital
appreciation from investment in equity securities of Asian Companies (as defined
in the Prospectus). Among these conditions, as discussed below, are the
following: (i) the increasing industrialization of Asian economies, (ii)
favorable demographics and competitive wage rates, (iii) high rates of domestic
savings available to fund investment, particularly in the area of
infrastructure, (iv) the ability to attract foreign direct investment, (v) the
emergence of a regional trading zone and (vi) rising per capita incomes
available to support local markets for consumer goods.
INDUSTRIALIZATION OF ASIA. The rapid ongoing shift from primary industries
into industrial manufacturing has contributed to high rates of economic
activity. During the last two decades, there was a significant shift in the
percentage of gross domestic product ("GDP") accounted for by the agricultural
sector in these markets and a marked increase in output by the industrial
sector, most markedly in Indonesia, Malaysia and Thailand. Generally, in the
Asian countries there is still potential for further industrialization so as to
reach the levels presently attained by the countries of the industrialized
world.
FAVORABLE DEMOGRAPHICS AND COMPETITIVE WAGES. Based on favorable
demographic statistics as to the Asian countries relative to the United States
and Western Europe and the existence in the region of low relative wage rates,
the Sub-Adviser believes that the competitive advantages of Asia through access
to a large pool of disciplined and low cost (and, in East Asia, well educated)
labor, will continue to lead to high levels of inward capital investment by
companies based in the industrialized world. Moreover, the demographic profile
of Asian countries shows a plentiful potential supply of new labor force
participants as indicated by the high percentage of the populations under
fifteen years of age. In this respect, China, India, Indonesia, Malaysia, the
Philippines and Thailand are well positioned. The larger this percentage, the
lower the likelihood of significant upward pressure on wage rates over the
medium term, thus ensuring a continuation of the current, favorable cost
structure these countries enjoy relative to the United States and Japan. In
addition, these countries in particular need to maintain a sufficient level of
overall economic activity in order to provide employment opportunities to new
entrants. If this cannot be achieved, as in the case of the Philippines, the
export of labor may occur. Direct investment and the establishment of labor
intensive industries, such as textiles, have had a favorable impact on job
creation in the Asian region. However, direct investment may be deterred by the
absence of basic infrastructure such as energy, telephone lines, ports, roads
and railways, as has occurred in the Philippines with shortages of electricity.
SAVINGS AND INFRASTRUCTURE. There is a need in the Asian countries for
substantial investment in infrastructure. A low penetration rate of telephone
lines per 1,000 population exists in each of China, India, Indonesia, Malaysia
and Thailand. Asia has the means to overcome the deficiency in infrastructure
given its high domestic savings rates. A high rate of savings is generally
associated with strong investment, rising productivity and faster GDP growth.
China, Indonesia, Korea and Singapore compare
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favorably with the United States in this regard. The savings rates of India and
the Philippines are the lowest in the region and, in the opinion of the
Sub-Adviser, may have to be raised if investment, and hence growth, is to
accelerate in such countries. China is still in the process of developing a
network of financial intermediaries capable of channeling available funds
between savers and investors, the lack of which may constrain growth in the
short term.
ABILITY TO ATTRACT FOREIGN DIRECT INVESTMENT. Foreign direct investment has
underpinned economic growth in the Asian region. With the rapid appreciation of
the Yen since the end of 1985, Japanese investment flows have increased
considerably. Japanese firms have built regional networks of affiliates in Asia,
where Japanese direct investment has grown predominantly in manufacturing,
especially in the electronics industry.
The Sub-Adviser believes that in addition to increasing the foreign supply
of capital, direct foreign investment from Japan confers a number of benefits
which enhance the long-term growth potential of a recipient country, including
but not limited to (i) the mobilization of domestic savings for productive
purpose in joint ventures between multinational corporations and local
companies, (ii) the improvement of local training and education as local
employees are exposed to modern production techniques and established training
methods, (iii) the modernization of management and accounting, (iv) a transfer
of technology and (v) the promotion of exports.
TRADE AND EXPORTS. Most of the countries in the Asian region have
historically pursued the Japanese development model of export-led growth. This,
together with the inflow of foreign manufacturing facilities, has led in general
to strong export sector performances. During the 1980s a significant proportion
of Asian exports were shipped to the United States and Europe, which resulted in
severe trade account imbalances. The appreciation of the Japanese Yen since the
end of 1985, together with increasingly persistent attempts on the part of
various U.S. administrations to lower Asian trade barriers, has resulted in a
shift in the pattern of trade.
RISING PER CAPITA INCOMES. Overall economic activity in the Asian region
has been supported by a rising trend in per capita GDP. This trend is highly
significant in light of the fact that the Asian region contains three of the
world's four most populous nations: China, India and Indonesia. Consequently, in
the Sub-Adviser's opinion, the prospects for the establishment of substantial
local markets for a wide range of consumer products, both imported and
manufactured locally, are attractive.
ASIAN SECURITIES MARKETS. There has been no set pattern to the historical
developments of the stock markets in the region. Some stock exchanges, such as
that in Bombay, India, have been operating since as early as 1875, while the
Shenzhen Exchange in China, the most recently established, has operated only
since April, 1991. Additionally, for a wide variety of historical and/or
ideological reasons, foreign ownership restrictions have at some time been
imposed over most stock exchanges in the region.
Until 1987, investment in Indonesia was effectively closed to foreigners;
Korea generally opened up 10% of equity ownership to foreigners in 1992; Taiwan
offers extremely limited access to foreign investors and India is only now in
the process of authorizing direct access for approved international
institutional investors. China, Indonesia, Korea, Malaysia, the Philippines,
Singapore and Thailand have foreign investment restrictions which can result in
foreign owned stock trading at a substantial premium or discount to local
shares. Average daily volume can be much lower in these markets than a typical
day's trading volume in the United States, particularly in the small and medium
capitalization sectors of the less well developed stock markets. In some of
these markets, for example, Hong Kong, Taiwan and Thailand, retail trading is
comparatively more active and institutional investment accounts for a lower
proportion of total trading. A large volume of retail trading can result in more
volatile stock markets, although some markets have daily price fluctuation
limits.
Foreign investment restrictions may in the future be subject to change. For
example, the Securities Exchange Commission of Thailand is currently studying
various proposals to permit foreigners to hold local stock without voting
rights. If adopted, such proposals could have the effect of reducing or
eliminating the premium at which many foreign owned stocks presently trade. This
could have an
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adverse affect on the EMERGING MARKETS PORTFOLIO if it has previously purchased
such stocks at a premium. It is uncertain when or if such a change may be
implemented.
Since the mid 1980s, however, stock market development throughout the
region, both with respect to daily trading volume and the number of securities
traded, has gained momentum. In terms of market capitalization, after Japan,
Hong Kong is the largest stock market in Asia, followed by Korea. In recent
years, Indonesia has seen a significant expansion in the number of listed
companies, coupled with a significant increase in market capitalization. Also,
the number of listed companies in India, Taiwan and Thailand has increased
significantly in recent years, while annual stock exchange turnover in these
markets has risen dramatically.
LATIN AMERICAN ECONOMIES AND SECURITIES MARKETS
LATIN AMERICAN ECONOMIES. During the past ten years, the countries of Latin
America have undergone tremendous political and economic change. As countries
have moved towards democratic reforms and market-oriented economic policies,
many have benefited from an increase in trade and foreign investment which has
helped propel economic growth. In the opinion of the Sub-Adviser, with GDP
growth in the region expected to average between 4% to 6% over the next three to
five years, investment in equity securities of Latin American companies provides
the potential for high returns.
Political and economic reform in Latin America have been closely linked. At
the beginning of the 1980s, many Latin American countries were ruled by
authoritative, and often military, governments. The traditional inward-oriented
economics policies, which were characterized by state ownership of industries
and restrictive trade barriers, became discredited as countries in the region
continuously suffered from heavy debt loads, shrinking economies, balance of
payment difficulties and high inflation. More recently, economic reforms in the
region have begun under democratically elected governments. Reform has centered
around lowering tariffs and dismantling trade barriers, privatizing state-owned
industrial and utility companies and reducing government spending. The incoming
democratic movement was partially dependent on economic revival.
Trade barriers were reduced by several means. First, nominal tariffs were
lowered significantly, especially in countries such as Brazil, Mexico, Argentina
and Colombia. Although Latin American tariffs have seen substantial declines as
a result of reforms, tariffs are still relatively high compared to those of
industrialized nations. Second, import restrictions were sharply reduced and
trade borders were opened.
Privatization has also been a key component of economic reform. The
conversion of ownership from the state to the private sector has attracted
foreign and repatriated capital. Privatized business include railroads,
telephones/telecommunications, airlines and other industrial concerns. Monies
raised from privatization provide an additional source of financing for Latin
American governments, and the newly privatized businesses have incentives to
operate efficiently since they must now compete against foreign imports and must
also provide a return to shareholders.
While economic and political reforms in Latin America have been successful
to date, it is uncertain whether these reforms can be sustained over the
long-term. The prospects for sustained democratic and market-oriented policies
are improved since countries in the region are joining GATT (General Agreements
on Tariffs and Trade), which has forced the adoption of GATT rules regarding
customs valuation, anti-dumping and subsidies. In addition, the recent passage
of NAFTA (North American Free Trade Agreement), which took effect on January 1,
1994, will have a positive effect on cross-border trade between the U.S. and
Mexico. In addition, other trade pacts such as the Columbia-Venezuela free trade
agreement, the G-3 Agreement (Mexico, Venezuela and Columbia) and the Mercosur
agreement, which were implemented on January 1, 1995 (Argentina, Brazil, Uruguay
and Paraguay), will further expand trade and investment opportunities.
However, many problems still exist in Latin America. The region continues to
experience social and income inequities, and the high levels of poverty have
contributed to increased levels of social unrest. In addition, not all countries
have tightened fiscal and monetary policies. While there are opportunities for
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extraordinary returns in Latin America, such returns are accompanied by greater
risk of loss of capital than in developed countries.
LATIN AMERICAN SECURITIES MARKETS. Latin American stock markets have grown
significantly over the past decade. The largest of these stock markets, measured
in terms of market capitalization, are Mexico, Brazil, Chile and Argentina.
The Sub-Adviser believes that economic growth and growth in stock market
capitalization may create an environment for improving performance in stock
markets. The Sub-Adviser also believes the economic expansion of developing
markets in part is led by increased foreign investment from companies seeking
lower cost production facilities or new markets. Latin American markets with low
hourly wages and large populations have attracted companies relocating from the
higher production cost environments of North America, Western Europe and Japan.
Other characteristics, including high economic growth rates, falling rates of
inflation, falling interest rates and improving credit ratings, may also
contribute to attracting new foreign investment for capital improvement or
manufacturing, and potentially to improving performance of stock markets.
Historic and current economic data demonstrate the positive changes experienced
by several Latin American markets over the past decade. Of course, this past
performance was achieved during a period of generally favorable circumstances
for emerging and developing markets and is no guarantee of future trends or
results.
GENERAL PORTFOLIO TECHNIQUES
MONEY MARKET SECURITIES
As stated in the Prospectus, the money market instruments in which each
Portfolio other than the MONEY MARKET PORTFOLIO and the DIVERSIFIED INCOME
PORTFOLIO may invest include U.S. Government securities, bank obligations,
Eurodollar certificates of deposit, obligations of savings institutions, fully
insured certificates of deposit and commercial paper. Such securities are
limited to:
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), including Treasury bills, notes and bonds;
BANK OBLIGATIONS. Obligations (including certificates of deposit, bankers'
acceptances, commercial paper (see below) and other debt obligations) 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 except as permitted below;
EURODOLLAR CERTIFICATES OF DEPOSIT. Eurodollar certificates of deposit
issued by foreign branches of domestic banks having total assets of $1 billion
or more (investments in Eurodollar certificates may be affected by changes in
currency rates or exchange control regulations, or changes in governmental
administration or economic or monetary policy in the United States and abroad);
OBLIGATIONS OF SAVING INSTITUTIONS. Certificates of deposit of savings
banks and savings and loan associations, having total assets of $1 billion or
more (investments in savings institutions above $100,000 in principal amount are
not protected by federal deposit insurance);
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 15% or less of the Portfolio's total assets in all such
obligations and in all illiquid assets, in the aggregate; and
COMMERCIAL PAPER. Commercial paper rated within the two highest grades by
Standard & Poor's Corporation ("S&P") or the highest grade by Moody's Investors
Service Inc. ("Moody's") or, if not rated, issued by a company having an
outstanding debt issue rated at least AAA by S&P or Aaa by Moody's.
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U.S. GOVERNMENT SECURITIES
As discussed in the Prospectus, 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 MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO AND THE
EMERGING MARKETS PORTFOLIO may invest in, among other securities, securities
issued by the U.S. Government, its agencies or instrumentalities. Such
securities include:
(1) U.S. Treasury bills (maturities of one year or less), U.S. Treasury
notes (maturities of one to ten years) and U.S. Treasury bonds (generally
maturities of greater than ten years), all of which are direct obligations
of the U.S. Government and, as such, are backed by the "full faith and
credit" of the United States.
(2) Securities issued by agencies and instrumentalities of the U.S.
Government which are backed by the full faith and credit of the United
States. Among the agencies and instrumentalities issuing such obligations
are the Federal Housing Administration, the Government National Mortgage
Association ("GNMA"), the Department of Housing and Urban Development, the
Export-Import Bank, the Farmers Home Administration, the General Services
Administration, the Maritime Administration and the Small Business
Administration. The maturities of such obligations range from three months
to 30 years.
(3) Securities issued by agencies and instrumentalities which are not
backed by the full faith and credit of the United States, but 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. Among the agencies
and instrumentalities issuing such obligations are the Tennessee Valley
Authority, the Federal National Mortgage Association ("FNMA"), the Federal
Home Loan Mortgage Corporation ("FHLMC") and the U.S. Postal Service. The
U.S. Treasury has no legal obligation to provide such line of credit and may
choose not to do so.
(4) Securities issued by agencies and instrumentalities which are not
backed by the full faith and credit of the United States, but which are
backed by the credit of the issuing agency or instrumentality. Among the
agencies and instrumentalities issuing such obligations are the Federal Farm
Credit System and the Federal Home Loan Banks.
Neither the value nor the yield of the U.S. Government securities which may
be invested in by the Portfolios are guaranteed by the U.S. Government. Such
values and yield will fluctuate with changes in prevailing interest rates,
economic factors and fiscal and monetary policies. Generally, as prevailing
interest rates rise, the value of any U.S. Government securities held by the
Portfolios will fall. Such securities with longer maturities generally tend to
produce higher yields and are subject to greater market fluctuation as a result
of changes in interest rates than debt securities with shorter maturities.
MORTGAGE-BACKED SECURITIES
Certain of the U.S. Government securities in which the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO and the
BALANCED PORTFOLIO may invest, e.g., certificates issued by GNMA, FNMA and
FHLMC, are "mortgage-backed securities," which 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 timely
payment of the principal and interest on mortgages underlying the certificates,
whether or not such amounts are collected by the issuer on the underlying
mortgages. (A pass-through security is formed when mortgages are pooled together
and undivided interests in the pool or pools are sold. The cash flow from the
mortgages is passed through to the holders of the securities in the form of
periodic payments of interest, principal and prepayments net of a service fee).
The average life of such certificates varies with the maturities of the
underlying mortgage instruments, which may be up to thirty years but which may
include mortgage instruments with maturities of fifteen years, adjustable rate
mortgage instruments, variable rate mortgage instruments, graduated rate
mortgage instruments and/or other types of mortgage instruments. The assumed
average life of
mort-
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gages backing the majority of GNMA and FNMA certificates is twelve years, and of
FHLMC certificates is ten years. The average life is likely to be substantially
shorter than the original maturity of the mortgage pools underlying the
certificates, as a pool's duration may be shortened by unscheduled or early
payments of principal on the underlying mortgages. (Such prepayments occur when
the holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date.) In periods of falling interest rates, the
rate of prepayment tends to increase thereby shortening the actual average life
of a pool of mortgage-related securities. Conversely, in periods of rising
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. Prepayment rates vary widely, and therefore it is not
possible to accurately predict the average life or realized yield of a
particular pool.
The occurrence of mortgage prepayments is affected by factors including the
prevailing level of interest rates, general economic conditions, the location
and age of the mortgage and other social and demographic conditions. Prepayment
rates are important because of their effect on the yield and price of the
securities. If the Portfolio has purchased securities backed by pools containing
mortgages whose yields exceed the prevailing interest rate, any premium (i.e., a
price in excess of principal amount) paid for such securities may be lost. As a
result, the net asset value of shares of the Portfolio and the Portfolio's
ability to achieve its investment objectives may be adversely affected by
mortgage prepayments.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association ("GNMA Certificates") are mortgage-backed securities, which evidence
an undivided interest in a pool or pools of mortgages insured by the Federal
Housing Administration ("FHA") or the Farmers Home Administration or guaranteed
by the Veterans Administration ("VA"). The GNMA Certificates that the Portfolios
will invest in are the "modified pass-through" type in that GNMA guarantees the
timely payment of monthly installments of principal and interest due on the
mortgage pool whether or not such amounts are collected by the issuer on the
underlying mortgages. The National Housing Act provides that the full faith and
credit of the United States is pledged to the timely payment of principal and
interest by GNMA of the amounts due on the GNMA Certificates. Additionally, GNMA
is empowered to borrow without limitation from the U.S. Treasury if necessary to
make any payments required under its guarantee.
The average life of GNMA Certificates varies with the maturities of the
underlying mortgage instruments some of which have maturities of 30 years. The
average life of the GNMA Certificate is likely to be substantially less than the
original maturity of the underlying mortgage pool because of prepayments or
refinancing of the mortgages or foreclosure. (Due to GNMA guarantee,
foreclosures impose no risk to principal investments.) Statistics indicate that
the average life of the type of mortgages backing the majority of GNMA
Certificates is approximately 12 years and for this reason it is standard
practice to treat GNMA Certificates as 30-year mortgage-backed securities which
prepay fully in the twelfth year.
Yields on pass-through securities are typically quoted by investment dealers
and vendors based on the actual maturities of the underlying instruments and the
associated average life assumption. Historically, actual average life has been
consistent with the 12-year assumption referred to above. The actual yield of
each GNMA Certificate is influenced by the prepayment experience of the mortgage
pool underlying the Certificates. Such prepayments are passed through to the
registered holder of the Certificate along with the regular monthly payments of
principal and interest, which has the effect of reducing future payments, and
consequently the yield. Reinvestment by the Portfolios of prepayments may occur
at higher or lower interest rates than the original investment.
FHLMC CERTIFICATES. FHLMC is a corporate instrumentality of the United
States created pursuant to the Emergency Home Finance Act of 1970, as amended
(the "FHLMC Act"). FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of needed housing. The
principal activity of FHLMC currently consists of the purchase of first lien,
conventional, residential mortgage loans and participation interests in such
mortgage loans and the resale of the mortgage loans so purchased in the form of
mortgage securities, primarily FHLMC Certificates.
FHLMC guarantees to each registered holder of a FHLMC Certificate the timely
payment of interest at the rate provided for by such FHLMC Certificate, whether
or not received. FHLMC also guarantees to each registered holder a FHLMC
Certificate ultimate collection of all principal of the related mortgage
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loans, without any offset or deduction, but does not, generally, guarantee the
timely payment of scheduled principal. FHLMC may remit the amount due on account
of its guarantee of collection of principal at any time after default on any
underlying mortgage loan, but not later than 30 days following (i) foreclosure
sale, (ii) payment of a claim by any mortgage insurer or (iii) the expiration of
any right of redemption, whichever occurs later, but in any event no later than
one year after demand has been made upon the mortgagor for accelerated payment
of principal. The obligations of FHLMC under its guarantee are obligations
solely of FHLMC and are not backed by the full faith and credit of the U.S.
Government. The FHLMC has the right, however, to borrow from an existing line of
credit with the U.S. Treasury in order to meet is obligations.
FHLMC Certificates represent a pro rata interest in a group of mortgage
loans (a "FHLMC Certificates group") purchased by FHLMC. The mortgage loans
underlying the FHLMC Certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one- to four-family
residential properties or multifamily projects. Each mortgage loan must meet the
applicable standards set forth in the FHLMC Act. A FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and participants comprising another FHLMC Certificate
group.
FNMA CERTIFICATES The Federal National Mortgage Association ("FNMA") is a
federally chartered and privately owned corporation organized and existing under
the Federal National Mortgage Association Charter Act. FNMA was originally
established in 1938 as a U.S. Government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholder owned
and privately managed corporation by legislation enacted in 1968. FNMA provides
funds to the mortgage market primarily by purchasing home mortgage loans form
local lenders, thereby replenishing their funds for additional lending. FNMA
acquires funds to purchase home mortgage loans from many capital market
investors that may not ordinarily invest in mortgage loans directly, thereby
expanding the total amount of funds available for housing.
Each FNMA Certificate will entitle the registered holder thereof to receive
amounts representing such holder's pro rata interest in scheduled principal
payments and interest payments (at such FNMA Certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying mortgage
loans), and any principal prepayments on the mortgage loans in the pool
represented by such FNMA Certificate and such holder's proportionate interest in
the full principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal of and interest on each
FNMA Certificate will be guaranteed by FNMA, which guarantee is not backed by
the full faith and credit of the U.S. Government.
Each FNMA Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate mortgage loans secured by multifamily
projects. FNMA Certificates have an assumed average life similar to GNMA
Certificates.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
As discussed in the Prospectus, 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 ("forward contracts") as a hedge against
fluctuations in future foreign exchange rates. Each of these Portfolios will
conduct its foreign currency exchange transactions either on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market, or
through entering into forward contracts to purchase or sell foreign currencies.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large, commercial banks) and their customers.
Such forward contracts will
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only be entered into with United States banks and their foreign branches or
foreign banks whose assets total $1 billion or more. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades.
When management of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the BALANCED PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO or the EMERGING MARKETS PORTFOLIO believes that the currency of a
particular foreign country may suffer a substantial movement against the U.S.
dollar, it may enter into a forward contract to purchase or 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 denominated
in such foreign currency. The Portfolio will also not enter into such forward
contracts or maintain a net exposure to such contracts where the consummation of
the contracts would obligate the Portfolio to deliver an amount of foreign
currency in excess of the value of the Portfolio's securities or other assets
denominated in that currency. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
However, the management of these Portfolios believes that it is important to
have the flexibility to enter into such forward contracts when it determines
that the best interests of the Portfolio will be served. The Portfolio's
custodian bank will place cash, U.S. Government securities or other liquid
portfolio securities in a segregated account of the Portfolio in an amount equal
to the value of the Portfolio's total assets committed to the consummation of
forward contracts entered into under the circumstances set forth above. If the
value of the securities placed in the segregated account declines, additional
cash or securities will be placed in the account on a daily basis so that the
value of the account will equal the amount of the Portfolio's commitments with
respect to such contracts.
Where, for example, the Portfolio is hedging a portfolio position consisting
of foreign fixed-income securities denominated in a foreign currency against
adverse exchange rate moves vis-a-vis the U.S. dollar, at the maturity of the
forward contract for delivery by the Portfolio of a foreign currency, the
Portfolio may either sell the portfolio security and make delivery of the
foreign currency, or it may retain the security and terminate its contractual
obligation to deliver the foreign currency by purchasing an "offsetting"
contract with the same currency trader obligating it to purchase, on the same
maturity date, the same amount of the foreign currency. It is impossible to
forecast the market value of portfolio securities at the expiration of the
contract. Accordingly, it may be necessary for the Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Portfolio is obligated to deliver and if a decision is made to sell
the security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio securities if its market value exceeds the amount of
foreign currency the Portfolio is obligated to deliver.
If the Portfolio retains the portfolio securities and engages in an
offsetting transaction, the Portfolio will incur a gain or loss to the extent
that there has been movement in spot or forward contract prices. If the
Portfolio engages in an offsetting transaction, it may subsequently enter into a
new forward contract to sell the foreign currency. Should forward prices decline
during the period between the Portfolio's entering into a forward contract for
the sale of a foreign currency and the date it enters into an offsetting
contract for the purchase of the foreign currency, the Portfolio will realize a
gain to the extent the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward prices increase,
the Portfolio will suffer a loss to the extent the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
If the Portfolio purchases a fixed-income security which is denominated in
U.S. dollars but which will pay out its principal based upon a formula tied to
the exchange rate between the U.S. dollar and a foreign currency, it may hedge
against a decline in the principal value of the security by entering into a
forward contract to sell an amount of the relevant foreign currency equal to
some or all of the principal value of the security.
At times when the Portfolio has written a call option on a fixed-income
security or the currency in which it is denominated, it may wish to enter into a
forward contract to purchase or sell the foreign
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currency in which the security is denominated. A forward contract would, for
example, hedge the risk of the security on which a call currency option has been
written declining in value to a greater extent than the value of the premium
received for the options. The Portfolio will maintain with its Custodian, at all
times, cash, U.S. Government securities, or other high grade debt obligations in
a segregated account equal in value to all forward contract obligations and
option contract obligations entered into in hedge situations such as this.
Although each Portfolio values its assets daily in terms of U.S. dollars,
the Portfolios do not intend to convert their holdings of foreign currencies
into U.S. dollars on a daily basis. Each Portfolio will, however, do so from
time to time, and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the spread between the prices at which they are buying
and selling various currencies. Thus, a dealer may offer to sell a foreign
currency to the Portfolio at one rate, while offering a lesser rate of exchange
should the Portfolio desire to resell that currency to the dealer.
SOVEREIGN DEBT OBLIGATIONS
As discussed in the Prospectus, the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO may invest in Canadian and Mexican Sovereign Debt and the EMERGING
MARKETS PORTFOLIO may invest in Sovereign Debt of emerging market countries.
Political conditions, in terms of a country or agency's willingness to meet the
terms of its debt obligations, are of considerable significance. Investors
should be aware that the Sovereign Debt instruments in which the EMERGING
MARKETS PORTFOLIO may invest involve great risk and are deemed to be the
equivalent in terms of quality to securities rated below investment grade by
Moody's and Standard & Poor's Corporation.
Sovereign Debt generally offers high yields, reflecting not only perceived
credit risk, but also the need to compete with other local investments in
domestic financial markets. Mexico and certain other emerging market countries
are among the largest debtors to commercial banks and foreign governments. A
foreign debtor's willingness or ability to repay principal and interest due in a
timely manner may be affected by, among other factors, its cash flow situation,
the extent of its foreign reserves, the availability of sufficient foreign
exchange on the date a payment is due, the relative size of the debt service
burden to the economy as a whole, the foreign debtor's policy towards the
International Monetary Fund and the political constraints to which a sovereign
debtor may be subject. Sovereign debtors may default on their Sovereign Debt.
Sovereign debtors may also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce principal and
interest arrearages on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a sovereign debtor's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the sovereign debtor, which may further
impair such debtor's ability or willingness to service its debts.
In recent years, some of the emerging market countries in which the EMERGING
MARKETS PORTFOLIO expects to invest have encountered difficulties in servicing
their Sovereign Debt. Some of these countries have withheld payments of interest
and/or principal of Sovereign Debt. These difficulties have also led to
agreements to restructure external debt obligations; in particular, commercial
bank loans, typically by rescheduling principal payments, reducing interest
rates and extending new credits to finance interest payments on existing debt.
In the future, holders of Sovereign Debt may be requested to participate in
similar reschedulings to such debt.
The ability or willingness of the governments of Mexico and other emerging
market countries to make timely payments on their Sovereign Debt is likely to be
influenced strongly by a country's balance of trade and its access to trade and
other international credits. A country whose exports are concentrated in a few
commodities could be vulnerable to a decline in the international prices of one
or more of such commodities. Increased protectionism on the part of a country's
trading partners could also adversely affect its exports. Such events could
extinguish a country's trade account surplus, if any. To the
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extent that a country receives payment for its exports in currencies other than
hard currencies, its ability to make hard currency payments could be affected.
The occurrence of political, social or diplomatic changes in one or more of
the countries issuing Sovereign Debt could adversely affect the Portfolio's
investments. The countries issuing such instruments are faced with social and
political issues and some of them have experienced high rates of inflation in
recent years and have extensive internal debt. Among other effects, high
inflation and internal debt service requirements may adversely affect the cost
and availability of future domestic sovereign borrowing to finance governmental
programs, and may have other adverse social, political and economic
consequences. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their Sovereign Debt. While the Sub-Adviser intends to invest the assets of the
Portfolio in a manner that will minimize the exposure to such risks, there can
be no assurance that adverse political changes will not cause the Portfolio to
suffer a loss of interest or principal on any of its holdings.
As a result of all of the foregoing, a government obligor may default on its
obligations. If such an event occurs, the Portfolio may have limited legal
recourse against the issuer and/or guarantor. Remedies must, in some cases, be
pursued in the courts of the defaulting party itself, and the ability of the
holder of foreign government debt securities to obtain recourse may be subject
to the political climate in the relevant country. Bankruptcy, moratorium and
other similar laws applicable to issuers of Sovereign Debt Obligations may be
substantially different from those applicable to issuers of private debt
obligations. In addition, no assurance can be given that the holders of
commercial bank debt will not contest payments to the holders of other foreign
government debt obligations in the event of default under their commercial bank
loan agreements.
Periods of economic uncertainty may result in the volatility of market
prices of Sovereign Debt and in turn, the Portfolio's net asset value, to a
greater extent than the volatility inherent in domestic securities. The value of
Sovereign Debt will likely vary inversely with changes in prevailing interest
rates, which are subject to considerable variance in the international market.
HIGH YIELD SECURITIES
As discussed in the Prospectus, the DIVERSIFIED INCOME PORTFOLIO and the
EMERGING MARKETS PORTFOLIO will also invest in high yield, high risk
fixed-income securities rated Baa or lower by Moody's Investors Service Inc.
("Moody's"), or BBB or lower by Standard & Poor's Corporation ("S&P"). The
ratings of fixed-income securities by Moody's and S&P are a generally accepted
barometer of credit risk. They are, however, subject to certain limitations from
an investor's standpoint.
Such limitations include the following: the rating of an issuer is heavily
weighted by past developments and does not necessarily reflect probable future
conditions; there is frequently a lag between the time a rating is assigned and
the time it is updated; and there may be varying degrees of difference in credit
risk of securities in each rating category. The Investment Manager and, for the
EMERGING MARKETS PORTFOLIO, the Sub-Adviser will attempt to reduce the overall
portfolio credit risk through diversification and selection of portfolio
securities based on considerations mentioned below.
While the ratings provide a generally useful guide to credit risks, they do
not, nor do they purport to, offer any criteria for evaluating the interest rate
risk. Changes in the general level of interest rates cause fluctuations in the
prices of fixed-income securities already outstanding and will therefore result
in fluctuation in net asset value of the Portfolio's shares. The extent of the
fluctuation is determined by a complex interaction of a number of factors. The
Investment Manager or, for the EMERGING MARKETS PORTFOLIO, the Sub-Adviser will
evaluate those factors it considers relevant and will make portfolio changes
when it deems it appropriate in seeking to reduce the risk of depreciation in
the value of the assets of the Portfolio. However, in seeking to achieve the
Portfolio's primary objective, there will be times, such as during periods of
rising interest rates, when depreciation and realization of capital losses on
securities in the portfolio will be unavoidable. Moreover, medium and
lower-rated securities and non-rated securities of comparable quality tend to be
subject to wider fluctuations in yield and market values
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than higher rated securities. Such fluctuations after a security is acquired do
not affect the cash income received from that security but are reflected in the
net asset value of the Portfolio.
REPURCHASE AGREEMENTS
As discussed in the Prospectus, when cash may be available to a Portfolio
for only a few days, it may be invested by the Portfolio in repurchase
agreements until such time as it may otherwise be invested or used for payments
of obligations of the Portfolio. These agreements, which may be viewed as a type
of secured lending by the Portfolio, 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 ("collateral"), which is held by the
Portfolio's custodian bank, at a specified price and at a fixed time in the
future, usually not more than seven days from the date of purchase. The
Portfolio will receive interest from the institution until the time when the
repurchase is to occur. Although such date is deemed by the Portfolio to be the
maturity date of a repurchase agreement, the maturities of securities subject to
repurchase agreements are not subject to any limits. While repurchase agreements
involve certain risks not associated with direct investments in debt securities,
the Portfolios follow procedures designed to minimize such risks. These
procedures include effecting repurchase transactions only with large,
well-capitalized and well-established financial institutions, whose financial
conditions will be continually monitored. In addition, the value of the
collateral underlying the repurchase agreement will always 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 a selling financial
institution, the Portfolio will seek to liquidate such collateral. However, the
exercising of the right by a Portfolio 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. The investments by a Portfolio in repurchase
agreements may at times be substantial when, in the view of the Investment
Manager, liquidity, tax or other considerations warrant.
LENDING OF PORTFOLIO SECURITIES
Consistent with applicable regulatory requirements, each Portfolio of the
Fund may lend its portfolio securities to brokers, dealers and other financial
institutions, provided that such loans are callable at any time by the Portfolio
(subject to notice provisions described below), and are at all times secured by
cash or money market instruments, which are maintained in a segregated account
pursuant to applicable regulations and that are equal to at least 100% of the
market value, determined daily, of the loaned securities. The advantage of such
loans is that the Portfolio continues to receive the income on the loaned
securities while at the same time earning interest on the cash amounts deposited
as collateral, which will be invested in short-term obligations. A Portfolio
will not lend portfolio securities having a value of more than 25% of its total
assets.
A loan may be terminated by the borrower on one business day's notice, or by
the Portfolio on four business days' notice. If the borrower fails to deliver
the loaned securities within four days after receipt of notice, the Portfolio
could use the collateral to replace the securities while holding the borrower
liable for any excess of replacement cost over collateral. As with any
extensions of credit, there are risks of delay in recovery and in some cases
even loss of rights in the collateral should the borrower of the securities fail
financially. However, these loans of portfolio securities will only be made of
firms deemed by the Fund's management to be creditworthy and when the income
which can be earned from such loans justifies the attendant risks. Upon
termination of the loan, the borrower is required to return the securities to
the Fund. Any gain or loss in the market price during the loan period would
inure to the Portfolio.
When voting or consent rights which accompany loaned securities pass to the
borrower, a Portfolio will follow the policy of calling the loaned securities,
in whole or in part as may be appropriate, to be delivered within one day after
notice, to permit the exercise of such rights if the matters involved would have
a material effect on the Portfolio's investment in such loaned securities. The
Portfolio will pay
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reasonable finder's, administrative and custodial fees in connection with a loan
of its securities. The creditworthiness of firms to which a Portfolio lends its
portfolio securities will be monitored on an ongoing basis.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS
As discussed in the Prospectus, from time to time, in the ordinary course of
business, each Portfolio of the Fund may purchase securities on a when-issued or
delayed delivery basis or may purchase or sell securities on a forward
commitment basis. When such transactions are negotiated, the price is fixed at
the time of commitment, but delivery and payment can take place a month or more
after the date of the commitment. While the Portfolio will only purchase
securities on a when-issued, delayed delivery or forward commitment basis with
the intention of acquiring the securities, the 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 or dividends
accrue to the purchaser prior to the settlement date. At the time the Portfolio
makes the commitment to purchase or sell securities on a when-issued, delayed
delivery or forward commitment basis, the Fund 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 the net asset value of the
Portfolio. At the time of delivery of the securities, the value may be more or
less than the purchase or sale price. The Portfolio will also establish a
segregated account with its custodian bank in which it will continually maintain
cash or U.S. Government securities or other liquid portfolio securities equal in
value to commitments to purchase securities on a when-issued, delayed delivery
or forward commitment basis; subject to this requirement, a Portfolio may
purchase securities on such basis without limit. An increase in the percentage
of a Portfolio's assets committed to the purchase of securities on a when-issued
or delayed delivery basis may increase the volatility of the Portfolio's net
asset value. The Investment Manager and the Board of Trustees, do not believe
that a Portfolio's net asset value or income will be adversely affected by its
purchase of securities on such basis.
WHEN, AS AND IF ISSUED SECURITIES
As discussed in the Prospectus, 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 of the Portfolio
until the Investment Manager determines that issuance of the security is
probable. At such time, the Fund will record the transaction and, in determining
the net asset value of the Portfolio, will reflect the value of the security
daily. At such time, the Portfolio will also establish a segregated account with
its custodian bank in which it will maintain cash or U.S. Government securities
or other liquid portfolio securities equal in value to recognized commitments
for such securities. The value of the Portfolio's commitments to purchase the
securities of any one issuer, together with the value of all securities of such
issuer owned by the Portfolio, may not exceed 5% of the value of the Portfolio's
total assets at the time the initial commitment to purchase such securities is
made (see "Investment Restrictions" in the Prospectus). Subject to the foregoing
restrictions, these Portfolios may purchase securities on such basis without
limit. 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. 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, and
the Board of Trustees, do not believe that the net asset value of these
Portfolios will be adversely affected by their purchase of securities on such
basis. These Portfolios may also sell securities on a "when, as and if issued"
basis provided that the issuance of the security will result automatically from
the exchange or conversion of a security owned by the Portfolio at the time of
the sale.
OPTIONS AND FUTURES TRANSACTIONS
As discussed in the Prospectus, each of the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the UTILITIES PORTFOLIO,
the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO may write covered call options
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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 series to effect closing transactions,
and may hedge against potential changes in the market value of investments (or
anticipated investments) by purchasing put and call options on portfolio (or
eligible portfolio) securities and engaging in transactions involving interest
rate futures contracts and bond index futures contracts and options on such
contracts. In addition, the UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO,
the MID-CAP GROWTH 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.
OPTIONS ON TREASURY BONDS AND NOTES. Because trading interest in options
written on Treasury bonds and notes tends to center on the most recently
auctioned issues, the exchanges on which such securities trade will not continue
indefinitely to introduce options with new expirations to replace expiring
options on particular issues. Instead, the expirations introduced at the
commencement of options trading on a particular issue will be allowed to run
their course, with the possible addition of a limited number of new expirations
as the original ones expire. Options trading on each issue of bonds or notes
will thus be phased out as new options are listed on more recent issues, and
options representing a full range of expirations will not ordinarily be
available for every issue on which options are traded.
OPTIONS ON TREASURY BILLS. Because a deliverable Treasury bill changes from
week to week, writers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if a Portfolio holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of the
option, the position may be hedged from a risk standpoint by the writing of a
call option. For so long as the call option is outstanding, the Portfolio will
hold the Treasury bills in a segregated account with its Custodian, so that they
will be treated as being covered.
OPTIONS ON GNMA CERTIFICATES. Currently, options on GNMA Certificates are
only traded over-the-counter. Since the remaining principal balance of GNMA
Certificates declines each month as a result of mortgage payments, a Portfolio,
as a writer of a GNMA call holding GNMA Certificates as "cover" to satisfy its
delivery obligation in the event of exercise, may find that the GNMA
Certificates it holds no longer have a sufficient remaining principal balance
for this purpose. Should this occur, the Portfolio will purchase additional GNMA
Certificates from the same pool (if obtainable) or replacement GNMA Certificates
in the cash market in order to maintain its cover. A GNMA Certificate held by
the Portfolio to cover an option position in any but the nearest expiration
month may cease to represent cover for the option in the event of a decline in
the GNMA coupon rate at which new pools are originated under the FHA/VA loan
ceiling in effect at any given time, as such decline may increase the
prepayments made on other mortgage pools. If this should occur, the Portfolio
will no longer be covered, and the Portfolio will either enter into a closing
purchase transaction or replace such Certificate with a Certificate which
represents cover. When the Portfolio closes out its position or replaces such
Certificate, it may realize an unanticipated loss and incur transaction costs.
OPTIONS ON FOREIGN CURRENCIES. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO may purchase and write options on foreign currencies
for purposes similar to those involved with investing in forward foreign
currency exchange contracts. For example, in order to protect against declines
in the dollar value of portfolio securities which are denominated in a foreign
currency, the Portfolio may purchase put
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options on an amount of such foreign currency equivalent to the current value of
the portfolio securities involved. As a result, the Portfolio would be enabled
to sell the foreign currency for a fixed amount of U.S. dollars, thereby
"locking in" the dollar value of the portfolio securities (less the amount of
the premiums paid for the options). Conversely, these Portfolios may purchase
call options on foreign currencies in which securities they anticipate
purchasing are denominated to secure a set U.S. dollar price for such securities
and protect against a decline in the value of the U.S. dollar against such
foreign currency. These Portfolios may also purchase call and put options to
close out written option positions.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
SECURITIES PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS
PORTFOLIO may also write call options on foreign currency to protect against
potential declines in its portfolio securities which are denominated in foreign
currencies. If the U.S. dollar value of the portfolio securities falls as a
result of a decline in the exchange rate between the foreign currency in which a
security is denominated and the U.S. dollar, then a loss to the Portfolio
occasioned by such value decline would be ameliorated by receipt of the premium
on the option sold. At the same time, however, the Portfolio gives up the
benefit of any rise in value of the relevant portfolio securities above the
exercise price of the option and, in fact, only receives a benefit from the
writing of the option to the extent that the value of the portfolio securities
falls below the price of the premium received. The NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO may also write options to close out
long call option positions. A put option on a foreign currency would be written
by the Portfolio for the same reason it would purchase a call option, namely, to
hedge against an increase in the U.S. dollar value of a foreign security which
the Portfolio anticipates purchasing. Here, the receipt of the premium would
offset, to the extent of the size of the premium, any increased cost to the
Portfolio resulting from an increase in the U.S. dollar value of the foreign
security. However, the Portfolio could not benefit from any decline in the cost
of the foreign security which is greater than the price of the premium received.
These Portfolios may also write options to close out long put and call option
positions.
The markets in foreign currency options are relatively new and the ability
of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO to
establish and close out positions on such options is subject to the maintenance
of a liquid secondary market. Although a Portfolio will not purchase or write
such options unless and until, in the opinion of the management of the
Portfolio, the market for them has developed sufficiently to ensure that the
risks in connection with such options are not greater than the risks in
connection with the underlying currency, there can be no assurance that a liquid
secondary market will exist for a particular option at any specific time. In
addition, options on foreign currencies are affected by all of those factors
which influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and have no relationship to the investment merits of a foreign security,
including foreign securities held in a "hedged" investment portfolio. Because
foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that are not reflected in the options market.
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COVERED CALL WRITING. As stated in the Prospectus, the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the UTILITIES
PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the
GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO are permitted to
write covered call options on portfolio securities, and the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, THE DIVERSIFIED INCOME PORTFOLIO, the GLOBAL
EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO are permitted to write
covered call options on the U.S. dollar and foreign currencies, in each case
without limit, in order to aid in achieving their investment objectives.
Generally, a call option is "covered" if the Portfolio owns, or has the right to
acquire, without additional cash consideration (or for additional cash
consideration held for the Portfolio by its Custodian in a segregated account)
the underlying security (currency) subject to the option except that in the case
of call options on U.S. Treasury Bills, a Portfolio might own U.S. Treasury
Bills of a different series from those underlying the call option, but with a
principal amount and value corresponding to the exercise price and a maturity
date no later than that of the securities (currency) deliverable under the call
option. A call option is also covered if the Portfolio holds a call on the same
security (currency) as the underlying security of the written option, where the
exercise price of the call used for coverage is equal to or less than the
exercise price of the call written or greater than the exercise price of the
call written if the mark-to-market difference is maintained by the Portfolio in
cash, U.S. Government securities or other liquid portfolio securities which the
Portfolio holds in a segregated account maintained with the Portfolio's
Custodian.
The Portfolio will receive from the purchaser, in return for a call it has
written, a "premium;" i.e., the price of the option. Receipt of these premiums
may better enable the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE
PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO to achieve a higher current income return than would
be realized from holding the underlying 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,
currencies) alone. Moreover, the premium received will offset a portion of the
potential loss incurred by the Portfolio if the securities (currencies)
underlying the option are ultimately sold (exchanged) by the Portfolio at a
loss. The premium received will fluctuate with varying economic market
conditions. If the market value of the portfolio 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
currencies in which they are denominated) upon which call options have been
written increases, the Portfolio may receive a lower total return from the
portion of its portfolio upon which calls have been written than it would have
had such calls not been written.
As regards listed options and certain over-the-counter ("OTC") options,
during the option period, the Portfolio may be required, at any time, to deliver
the underlying security (currency) against payment of the exercise price on any
calls it has written (exercise of certain listed and OTC options may be limited
to specific expiration dates). This obligation is terminated upon the expiration
of the option period or at such earlier time when the writer effects a closing
purchase transaction. A closing purchase transaction is accomplished by
purchasing an option of the same series as the option previously written.
However, once the Portfolio has been assigned an exercise notice, the Portfolio
will be unable to effect a closing purchase transaction.
Closing purchase transactions are ordinarily effected to realize a profit on
an outstanding call option, to prevent an underlying security (currency) from
being called, to permit the sale of an underlying security (or the exchange of
the underlying currency) or to enable the Portfolio to write another call option
on the underlying security (currency) with either a different exercise price or
expiration date or both. The Portfolio may realize a net gain or loss from a
closing purchase transaction depending upon whether the amount of the premium
received on the call option is more or less than the cost of effecting the
closing purchase transaction. Any loss incurred in a closing purchase
transaction may be wholly or partially offset by unrealized appreciation in the
market value of the underlying security (currency). Conversely, a gain resulting
from a closing purchase transaction could be offset in whole or in part or
exceeded by a decline in the market value of the underlying security (currency).
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If a call option expires unexercised, the Portfolio realizes a gain in the
amount of the premium on the option less the commission paid. Such a gain,
however, may be offset by depreciation in the market value of the underlying
security (currency) during the option period. If a call option is exercised, the
Portfolio realizes a gain or loss from the sale of the underlying security
(currency) equal to the difference between the purchase price of the underlying
security (currency) and the proceeds of the sale of the security (currency) plus
the premium received when the option was written, less the commission paid.
Options written by a Portfolio normally have expiration dates of up to to
eighteen months from the date written. The exercise price of a call option may
be below, equal to or above the current market value of the underlying security
(currency) at the time the option is written. See "Risks of Options and Futures
Transactions," below.
COVERED PUT WRITING. As stated in the Prospectus, as a writer of a covered
put option, the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
INCOME PORTFOLIO, the UTILITIES PORTFOLIO, THE AMERICAN VALUE PORTFOLIO, the
MID-CAP GROWTH 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 the Portfolio will be exercisable by the purchaser only on a specific
date). A put is "covered" if the Portfolio maintains, in a segregated account
maintained on its behalf at its Custodian, cash, U.S. Government securities or
other liquid portfolio securities in an amount equal to at least the exercise
price of the option, at all times during the option period. Similarly, a written
put position could be covered by the Portfolio by its purchase of a put option
on the same security as the underlying security of the written option, where the
exercise price of the purchased option is equal to or more than the exercise
price of the put written or less than the exercise price of the put written if
the mark-to-market difference is maintained by the Portfolio in cash, U.S.
Government securities or other liquid portfolio securities which the Portfolio
holds in a segregated account maintained at its Custodian. In writing puts, the
Portfolio assumes the risk of loss should the market value of the underlying
security decline below the exercise price of the option (any loss being
decreased by the receipt of the premium on the option written). In the case of
listed options, during the option period, the Portfolio may be required, at any
time, to make payment of the exercise price against delivery of the underlying
security. The operation of and limitations on covered put options in other
respects are substantially identical to those of call options.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP
GROWTH 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 Investment Manager (or, for
the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the EMERGING MARKETS
PORTFOLIO, the Sub-Adviser) 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
potential gain on a covered put option is limited to the premium received on the
option (less the commissions paid on the transaction) while the potential loss
equals the difference between the exercise price of the option and the current
market price of the underlying securities when the put is exercised, offset by
the premium received (less the commissions paid on the transaction).
PURCHASING CALL AND PUT OPTIONS. As stated in the Prospectus, the Emerging
Markets Portfolio may purchase listed and OTC call and put options in amounts
equalling 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, the
MID-CAP GROWTH PORTFOLIO and the GLOBAL EQUITY PORTFOLIO may purchase such call
and put options and options on stock indexes in amounts equalling 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 in order to
close out a covered call position (see "Covered Call Writing" above) or purchase
call options on securities they intend to purchase. Each of the NORTH
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AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the
GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may purchase a call
option on foreign currency to hedge against an adverse exchange rate move of the
currency in which the security it anticipates purchasing is denominated
vis-a-vis the currency in which the exercise price is denominated. The purchase
of the call option to effect a closing transaction on a call written
over-the-counter may be a listed or an OTC option. In either case, the call
purchased is likely to be on the same securities (currencies) and have the same
terms as the written option. If purchased over-the-counter, the option would
generally be acquired from the dealer or financial institution which purchased
the call written by the Portfolio.
Each of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
INCOME PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the
MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS
PORTFOLIO may purchase put options on 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, on currencies) 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 (currency). If the value of the
underlying security (currency) were to fall below the exercise price of the put
purchased in an amount greater than the premium paid for the option, the
Portfolio would incur no additional loss. These Portfolios may also purchase put
options to close out written put positions in a manner similar to call options
closing purchase transactions. In addition, a Portfolio may sell a put option
which it has previously purchased prior to the sale of the securities
(currencies) underlying such option. Such a sale would result in a net gain or
loss depending on whether the amount received on the sale is more or less than
the premium and other transaction costs paid on the put option when it was
purchased. Any such gain or loss could be offset in whole or in part by a change
in the market value of the underlying security (currency). If a put option
purchased by a Portfolio expired without being sold or exercised, the Portfolio
would realize a loss.
RISKS OF OPTIONS TRANSACTIONS. During the option period, the covered call
writer has, in return for the premium on the option, given up the opportunity
for capital appreciation above the exercise price should the market price of the
underlying security (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 value of the security's denominated currency)
increase, but has retained the risk of loss should the price of the underlying
security (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 value of the security's denominated currency) decline.
The covered put writer also retains the risk of loss should the market value of
the underlying security decline below the exercise price of the option less the
premium received on the sale of the option. In both cases, the writer has no
control over the time when it may be required to fulfill its obligation as a
writer of the option. Once an option writer has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver or receive the underlying
securities at the exercise price.
Prior to exercise or expiration, an option position can only be terminated
by entering into a closing purchase or sale transaction. If a covered call
option writer is unable to effect a closing purchase transaction or to purchase
an offsetting over-the-counter option, it cannot sell the underlying security
until the option expires or the option is exercised. Accordingly, a covered call
option writer may not be able to sell an underlying security at a time when it
might otherwise be advantageous to do so. A secured put option writer who is
unable to effect a closing purchase transaction or to purchase an offsetting
over-the-counter option would continue to bear the risk of decline in the market
price of the underlying security until the option expires or is exercised. In
addition, a covered writer would be unable to utilize the amount held in cash or
U.S. Government securities or other liquid portfolio securities as security for
the put option for other investment purposes until the exercise or expiration of
the option.
A Portfolio's ability to close out its position as a writer of an option is
dependent upon the existence of a liquid secondary market on option exchanges.
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. However, a Portfolio
may be able to purchase
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an offsetting option which does not close out its position as a writer but
constitutes an asset of equal value to the obligation under the option written.
If the Portfolio is not able to either enter into a closing purchase transaction
or purchase an offsetting position, it will be required to maintain the
securities subject to the call, or the collateral underlying the put, even
though it might not be advantageous to do so, until a closing transaction can be
entered into (or the option is exercised or expires).
Among the possible reasons for the absence of a liquid secondary market on
an Exchange are: (i) insufficient trading interest in certain options; (ii)
restrictions on transactions imposed by an Exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (iv) interruption of the normal
operations on an Exchange; (v) inadequacy of the facilities of an Exchange or
the Options Clearing Corporation ("OCC") to handle current trading volume; or
(vi) a decision by one or more Exchanges to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that Exchange (or in that class or series of options) would cease to
exist, although outstanding options on that Exchange that had been issued by the
OCC as a result of trades on that Exchange would generally continue to be
exercisable in accordance with their terms.
In the event of the bankruptcy of a broker through which a Portfolio engages
in transactions in options, the Portfolio could experience delays and/or losses
in liquidating open positions purchased or sold through the broker and/or incur
a loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by a Portfolio,
the Portfolio could experience a loss of all or part of the value of the option.
Transactions are entered into by a Portfolio only with brokers or financial
institutions deemed creditworthy by the Portfolio's management.
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different Exchanges or are held or written on
one or more accounts or through one or more brokers). An Exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. These position limits may restrict the
number of listed options which a Portfolio may write.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
STOCK INDEX OPTIONS. The UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO,
the MID-CAP GROWTH PORTFOLIO and the GLOBAL EQUITY PORTFOLIO may invest in
options on stock indexes. As stated in the Prospectus, options on stock indexes
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 less than, in the case of a put, the
exercise price of the option. This amount of cash is equal to such difference
between the closing price of the index and the exercise price of the option
expressed in dollars times a specified multiple (the "multiplier"). The
multiplier for an index option performs a function similar to the unit of
trading for a stock option. It determines the total dollar value per contract of
each point in the difference between the exercise price of an option and the
current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different indexes may have
different multipliers. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Unlike stock options, all
settlements are in cash and a gain or loss depends on price movements in the
stock market generally (or in a particular segment of the market) rather than
the price movements in individual stocks. Currently, options are traded on,
among other indexes, the S&P 100 Index and the S&P 500 Index on the Chicago
Board Options Exchange, the Major Market Index and the Computer Technology
Index, Oil Index and Institutional Index on the American Stock Exchange and the
NYSE Index and NYSE Beta Index on the New York Stock Exchange, The Financial
News Composite Index on the Pacific Stock
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Exchange and the Value Line Index, National O-T-C Index and Utilities Index on
the Philadelphia Stock Exchange, each of which and any similar index on which
options are traded in the future which include stocks that are not limited to
any particular industry or segment of the market is referred to as a "broadly
based stock market index." Options on broad-based stock indexes provide the
Portfolio with a means of protecting the Portfolio against the risk of
market-wide price movements. If the Investment Manager anticipates a market
decline, the Portfolio could purchase a stock index put option. If the expected
market decline materialized, the resulting decrease in the value of the
Portfolio's portfolio would be offset to the extent of the increase in the value
of the put option. If the Investment Manager anticipates a market rise, the
Portfolio may purchase a stock index call option to enable the Portfolio to
participate in such rise until completion of anticipated common stock purchases
by the Portfolio. Purchases and sales of stock index options also enable the
Investment Manager to more speedily achieve changes in a Portfolio's equity
positions.
The UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH
PORTFOLIO and the GLOBAL EQUITY PORTFOLIO will write put options on stock
indexes only if such positions are covered by cash, U.S. Government securities
or other liquid portfolio securities equal to the aggregate exercise price of
the puts, or by a put option on the same stock index with a strike price no
lower than the strike price of the put option sold by the Portfolio, which cover
is held for the Portfolio in a segregated account maintained for it by its
Custodian. All call options on stock indexes written by a Portfolio will be
covered either by a portfolio of stocks substantially replicating the movement
of the index underlying the call option or by holding a separate call option on
the same stock index with a strike price no higher than the strike price of the
call option sold by the Portfolio.
RISKS OF OPTIONS ON INDEXES. Because exercises of stock index options are
settled in cash, call writers such as the UTILITIES PORTFOLIO, the AMERICAN
VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO and the GLOBAL EQUITY PORTFOLIO
cannot provide in advance for their potential settlement obligations by
acquiring and holding the underlying securities. A call writer can offset some
of the risk of its writing position by holding a diversified portfolio of stocks
similar to those on which the underlying index is based. However, most investors
cannot, as a practical matter, acquire and hold a portfolio containing exactly
the same stocks as the underlying index, and, as a result, bear a risk that the
value of the securities held will vary from the value of the index. Even if an
index call writer could assemble a stock portfolio that exactly reproduced the
composition of the underlying index, the writer still would not be fully covered
from a risk standpoint because of the "timing risk" inherent in writing index
options. When an index option is exercised, the amount of cash that the holder
is entitled to receive is determined by the difference between the exercise
price and the closing index level on the date when the option is exercised. As
with other kinds of options, the writer will not learn that it has been assigned
until the next business day, at the earliest. The time lag between exercise and
notice of assignment poses no risk for the writer of a covered call on a
specific underlying security, such as a common stock, because there the writer's
obligation is to deliver the underlying security, not to pay its value as of a
fixed time in the past. So long as the writer already owns the underlying
security, it can satisfy its settlement obligations by simply delivering it, and
the risk that its value may have declined since the exercise date is borne by
the exercising holder. In contrast, even if the writer of an index call holds
stocks that exactly match the composition of the underlying index, it will not
be able to satisfy its assignment obligations by delivering those stocks against
payment of the exercise price. Instead, it will be required to pay cash in an
amount based on the closing index value on the exercise date; and by the time it
learns that it has been assigned, the index may have declined, with a
corresponding decline in the value of its stock portfolio. This "timing risk" is
an inherent limitation on the ability of index call writers to cover their risk
exposure by holding stock positions.
A holder of an index option who exercises it before the closing index value
for that day is available runs the risk that the level of the underlying index
may subsequently change. If such a change causes the exercised option to fall
out-of-the-money, the exercising holder will be required to pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
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If dissemination of the current level of an underlying index is interrupted,
or if trading is interrupted in stocks accounting for a substantial portion of
the value of an index, the trading of options on that index will ordinarily be
halted. If the trading of options on an underlying index is halted, an exchange
may impose restrictions prohibiting the exercise of such options.
FUTURES CONTRACTS. As stated in the Prospectus, the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the UTILITIES
PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the
GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may purchase and sell
interest rate futures contracts that are traded, or may in the future be traded,
on U.S. commodity exchanges on such underlying securities as U.S. Treasury
bonds, notes, bills and GNMA Certificates and bond index futures contracts that
are traded, or may in the future be 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
MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS
PORTFOLIO may also purchase and sell stock index futures contracts that are
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 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 MID-CAP
GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO
will purchase or sell interest rate 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 alter the Portfolio's asset allocation in fixed-income securities. If it is
anticipated that interest rates may rise and, concomitantly, the price of
certain of its portfolio securities fall, a Portfolio may sell an interest rate
futures contract or a bond index futures contract. If declining interest rates
are anticipated, or if the Investment Manager wishes to increase the UTILITIES
PORTFOLIO's allocation of fixed-income securities, a Portfolio may purchase an
interest rate futures contract or a bond index futures contract to protect
against a potential increase in the price of securities the Portfolio intends to
purchase. Subsequently, appropriate securities may be purchased by the Portfolio
in an orderly fashion; as securities are purchased, corresponding futures
positions would be terminated by offsetting sales of contracts.
The UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH
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. If the Investment Manager anticipates that the prices of stock held by a
Portfolio may fall or wishes to decrease the UTILITIES PORTFOLIO's asset
allocation in equity securities, the Portfolio may sell a stock index futures
contract. Conversely, if the Investment Manager wishes to increase the assets of
the UTILITIES PORTFOLIO which are invested in stocks or as a hedge against
anticipated prices rises in those stocks which the UTILITIES PORTFOLIO, the
AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO or the EMERGING MARKETS PORTFOLIO intends to purchase, the Portfolio
may purchase stock index futures contracts. This allows the Portfolio to
purchase equities, in accordance with the asset allocations of the
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Portfolio's management, in an orderly and efficacious manner. The circumstances
under which the VALUE-ADDED MARKET PORTFOLIO may purchase and sell stock index
futures are described below.
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.
These Portfolios will enter into currency futures contracts for the same reasons
as set forth under the heading "Forward Foreign Currency Exchange Contracts"
above for entering into forward foreign currency exchange contracts; namely, to
"lock-in" the value of a security purchased or sold in a given currency
vis-a-vis a different currency or to hedge against an adverse currency exchange
rate movement of a portfolio security's (or anticipated portfolio security's)
denominated currency vis-a-vis a different currency.
In addition to the above, interest rate and bond index and stock index (and
currency) futures contracts will be bought or sold in order to close out a short
or long position in a corresponding futures contract.
Although most interest rate futures contracts call for actual delivery or
acceptance of securities, the contracts usually are closed out before the
settlement date without the making or taking of delivery. Index futures
contracts provide for the delivery of an amount of cash equal to a specified
dollar amount times the difference between the index value at the open or close
of the last trading day of the contract and the futures contract price. A
futures contract sale is closed out by effecting a futures contract purchase for
the same aggregate amount of the specific type of security (or, in the case of
the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO,
currency) and the same delivery date. If the sale price exceeds the offsetting
purchase price, the seller would be paid the difference and would realize a
gain. If the offsetting purchase price exceeds the sale price, the seller would
pay the difference and would realize a loss. Similarly, a futures contract
purchase is closed out by effecting a futures contract sale for the same
aggregate amount of the specific type of security (currency) and the same
delivery date. If the offsetting sale price exceeds the purchase price, the
purchaser would realize a gain, whereas if the purchase price exceeds the
offsetting sale price, the purchaser would realize a loss. There is no assurance
that a Portfolio will be able to enter into a closing transaction.
INTEREST RATE FUTURES CONTRACTS. When The NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the UTILITIES PORTFOLIO,
the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO or the EMERGING MARKETS PORTFOLIO enters into a futures contract, it
is initially required to deposit with its Custodian, in an account in the name
of the broker performing the transaction, an "initial margin" of cash or U.S.
Government securities or other liquid portfolio securities equal to
approximately 2% of the contract amount. Initial margin requirements are
established by the Exchanges on which futures contracts trade and may, from time
to time, change. In addition, brokers may establish margin deposit requirements
in excess of those required by the Exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a brokers' client but is, rather, a good faith deposit on the futures
contract which will be returned to the Portfolio upon the proper termination of
the futures contract. The margin deposits made are marked to market daily and
the Portfolio may be required to make subsequent deposits of cash or U.S.
Government securities, called "variation margin," with the Portfolio's futures
contract clearing broker, which are reflective of price fluctuations in the
futures contract. Currently, interest rate futures contracts can be purchased on
debt securities such as U.S. Treasury Bills and Bonds, U.S. Treasury Notes with
maturities between 6 1/2 and 10 years, GNMA Certificates and Bank Certificates
of Deposit.
INDEX FUTURES CONTRACTS. As discussed in the Prospectus, the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the UTILITIES
PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the
GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may invest in bond
index futures contracts, and the UTILITIES PORTFOLIO, the AMERICAN VALUE
PORTFOLIO, the MID-CAP GROWTH
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PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may
invest in stock index futures contracts. The VALUE-ADDED MARKET PORTFOLIO may
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. An index futures
contract sale creates an obligation by the Portfolio, as seller, to deliver cash
at a specified future time. An index futures contract purchase would create an
obligation by the Portfolio, as purchaser, to take delivery of cash at a
specified future time. Futures contracts on indexes do not require the physical
delivery of securities, but provide for a final cash settlement on the
expiration date which reflects accumulated profits and losses credited or
debited to each party's account.
The Portfolio is required to maintain margin deposits with brokerage firms
through which it effects index futures contracts in a manner similar to that
described above for interest rate futures contracts. Currently, the initial
margin requirements range from 3% to 10% of the contract amount for index
futures. In addition, due to current industry practice, daily variations in
gains and losses on open contracts are required to be reflected in cash in the
form of variation margin payments. The Portfolio may be required to make
additional margin payments during the term of the contract.
At any time prior to expiration of the futures contract, the Portfolio may
elect to close the position by taking an opposite position which will operate to
terminate the Portfolio's position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Portfolio and the Portfolio realizes a loss or a
gain.
Currently, index futures contracts can be purchased or sold with respect to,
among others, the Standard & Poor's 500 Stock Price Index and the Standard &
Poor's 100 Stock Price Index on the Chicago Mercantile Exchange, the New York
Stock Exchange Composite Index on the New York Futures Exchange, the Major
Market Index on the American Stock Exchange, the Value Line Stock Index on the
Kansas City Board of Trade and the Moody's Investment-Grade Corporate Bond Index
on the Chicago Board of Trade.
CURRENCY FUTURES. As noted above, the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO may invest in foreign currency futures. Generally,
foreign currency futures provide for the delivery of a specified amount of a
given currency, on the exercise date, for a set exercise price denominated in
U.S. dollars or other currency. Foreign currency futures contracts would be
entered into for the same reason and under the same circumstances as forward
foreign currency exchange contracts. The Portfolio's management will assess such
factors as cost spreads, liquidity and transaction costs in determining whether
to utilize futures contracts or forward contracts in its foreign currency
transactions and hedging strategy. Currently, currency futures exist for, among
other foreign currencies, the Japanese yen, German mark, Canadian dollar,
British pound, Swiss franc and European currency unit.
Purchasers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the buying and selling of futures generally. In
addition, there are risks associated with foreign currency futures contracts and
their use as a hedging device similar to those associated with options on
foreign currencies described above. Further, settlement of a foreign currency
futures contract must occur within the country issuing the underlying currency.
Thus, the Portfolio must accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign restrictions or regulation
regarding the maintenance of foreign banking arrangements by U.S. residents and
may be required to pay any fees, taxes or charges associated with such delivery
which are assessed in the issuing country.
Options on foreign currency futures contracts may involve certain additional
risks. Trading options on foreign currency futures contracts is relatively new.
The ability to establish and close out positions on such options is subject to
the maintenance of a liquid secondary market. To reduce this risk, the
Portfolios will not purchase or write options on foreign currency futures
contracts unless and until, in the opinion of the Portfolio's management, the
market for such options has developed sufficiently that the risks in connection
with such options are not greater than the risks in connection with transactions
in the underlying foreign currency futures contracts.
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OPTIONS ON FUTURES CONTRACTS. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the UTILITIES PORTFOLIO, the
AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH 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. Upon the
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option is accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contract at the time of exercise
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP
GROWTH 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. If, for example, the Investment Manager
(or, in the case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the
EMERGING MARKETS PORTFOLIO, the Sub-Adviser) wished to protect against an
increase in interest rates and the resulting negative impact on the value of a
portion of a Portfolio's fixed-income portfolio, it might write a call option on
an interest rate futures contract, the underlying security of which correlates
with the portion of the portfolio the Portfolio's management seeks to hedge. Any
premiums received in the writing of options on futures contracts may, of course,
augment the income of the Portfolio and thereby provide a further hedge against
losses resulting from price declines in portions of its portfolio.
The writer of an option on a futures contract is required to deposit initial
and variation margin pursuant to requirements similar to those applicable to
futures contracts. Premiums received from the writing of an option on a futures
contract are included in initial margin deposits.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. The NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the UTILITIES
PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the
GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may not enter into
futures contracts or purchase related options thereon if, immediately
thereafter, the amount committed to margin plus the amount paid for premiums for
unexpired options on futures contracts exceeds 5% of the value of the
Portfolio's total assets, after taking into account unrealized gains and
unrealized losses on such contracts it has entered into, provided, however, that
in the case of an option that is in-the-money (the exercise price of the call
(put) option is less (more) than the market price of the underlying security) at
the time of purchase, the in-the-money amount may be excluded in calculating the
5%. The VALUE-ADDED MARKET PORTFOLIO is similarly limited in its purchase of
stock index futures contracts. However, there is no overall limitation on the
percentage of a Portfolio's assets which may be subject to a hedge position. In
addition, in accordance with the regulations of the Commodity Futures Trading
Commission ("CFTC") under which the Fund is exempted from registration as a
commodity pool operator, these Portfolios may only enter into futures contracts
and options on futures contracts transactions for purposes of hedging a part or
all of the Portfolio's portfolio. If the CFTC changes its regulations so that a
Portfolio would be permitted to write options on futures contracts for income
purposes without CFTC registration, these Portfolios may engage in such
transactions for those purposes. Except as described above, there are no other
limitations on the use of futures and options thereon by these Portfolios.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. As stated
in the Prospectus, the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE
PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO may sell a futures contract to protect against the
decline in the value of securities (or, in
45
<PAGE>
the case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the currency in which securities are denominated) held by
the Portfolio. However, it is possible that the futures market may advance and
the value of securities (or, in the case of the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO and the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the currency
in which they are denominated) held in the Portfolio may decline. If this
occurred, the Portfolio would lose money on the futures contract and also
experience a decline in value of its portfolio securities. However, while this
could occur for a very brief period or to a very small degree, over time the
value of a diversified portfolio will tend to move in the same direction as the
futures contracts.
If the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
INCOME PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the
MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS
PORTFOLIO purchases a futures contract to hedge against the increase in value of
securities the Portfolio intends to buy (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 in which they
are denominated), and the value of such securities (currency) decreases, then
the Portfolio may determine not to invest in the securities as planned and will
realize a loss on the futures contract that is not offset by a reduction in the
price of the securities.
If a Portfolio maintains a short position in a futures contract or has sold
a call option on a futures contract, it will cover this position by holding, in
a segregated account maintained at its Custodian, cash, U.S. Government
securities or other liquid portfolio securities equal in value (when added to
any initial or variation margin on deposit) to the market value of the
securities (currencies) underlying the futures contract or the exercise price of
the option. Such a position may also be covered by owning the securities
(currencies) underlying the futures contract (in the case of a stock index
futures contract a portfolio of securities substantially replicating the
relevant index), or by holding a call option permitting the Portfolio to
purchase the same contract at a price no higher than the price at which the
short position was established.
In addition, if a Portfolio holds a long position in a futures contract or
has sold a put option on a futures contract, it will hold cash, U.S. Government
securities or other liquid portfolio securities equal to the purchase price of
the contract or the exercise price of the put option (less the amount of initial
or variation margin on deposit) in a segregated account maintained for the
Portfolio by its Custodian. Alternatively, the Portfolio could cover its long
position by purchasing a put option on the same futures contract with an
exercise price as high or higher than the price of the contract held by the
Portfolio.
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. In the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin on open
futures positions. In such situations, if the Portfolio has insufficient cash,
it may have to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In addition, the
Portfolio may be required to take or make delivery of the instruments underlying
interest rate futures contracts it holds at a time when it is disadvantageous to
do so. The inability to close out options and futures positions could also have
an adverse impact on the Portfolio's ability to effectively hedge its portfolio.
With regard to the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING
MARKETS PORTFOLIO, futures contracts and options thereon which are purchased or
sold on foreign commodities exchanges may have greater price volatility than
their U.S. counterparts. Furthermore, foreign commodities exchanges may be less
regulated and under less governmental scrutiny than U.S. exchanges. Brokerage
commissions, clearing costs and other transaction costs may be higher on foreign
exchanges. Greater margin requirements may limit the ability of these Portfolios
to enter into certain commodity transactions on foreign exchanges. Moreover,
differ-
46
<PAGE>
ences in clearance and delivery requirements on foreign exchanges may occasion
delays in the settlement of the Portfolio's transactions effected on foreign
exchanges.
In the event of the bankruptcy of a broker through which the Portfolio
engages in transactions in futures or options thereon, the Portfolio could
experience delays and/or losses in liquidating open positions purchased or sold
through the broker and/or incur a loss of all or part of its margin deposits
with the broker. Similarly, in the event of the bankruptcy of the writer of an
OTC option purchased by the Portfolio, the Portfolio could experience a loss of
all or part of the value of the option. Transactions are entered into by a
Portfolio only with brokers or financial institutions deemed creditworthy by the
Portfolio's management.
While the futures contracts and options transactions to be engaged in by a
Portfolio for the purpose of hedging the Portfolio's portfolio securities are
not speculative in nature, there are risks inherent in the use of such
instruments. One such risk which may arise in employing futures contracts to
protect against the price volatility of portfolio securities (and, for the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the
GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO, the currencies in
which they are denominated) is that the prices of securities and indexes subject
to futures contracts (and thereby the futures contract prices) may correlate
imperfectly with the behavior of the cash prices of the Portfolio's portfolio
securities (and the currencies in which they are denominated). 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.
As stated in the Prospectus, there may exist an imperfect correlation
between the price movements of futures contracts purchased by a Portfolio and
the movements in the prices of the securities (currencies) which are the subject
of the hedge. If participants in the futures market elect to close out their
contracts through offsetting transactions rather than meet margin deposit
requirements, distortions in the normal relationship between the debt securities
and futures markets could result. Price distortions could also result if
investors in futures contracts opt to make or take delivery of underlying
securities rather than engage in closing transactions due to the resultant
reduction in the liquidity of the futures market. In addition, due to the fact
that, from the point of view of speculators, the deposit requirements in the
futures markets are less onerous than margin requirements in the cash market,
increased participation by speculators in the futures market could cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and because of the imperfect correlation between movements in the
prices of securities and movements in the prices of futures contracts, a correct
forecast of interest rate trends may still not result in a successful hedging
transaction.
As stated in the Prospectus, there is no assurance that a liquid secondary
market will exist for futures contracts and related options in which the
Portfolios may invest. In the event a liquid market does not exist, it may not
be possible to close out a futures position, and in the event of adverse price
movements, a Portfolio would continue to be required to make daily cash payments
of variation margin. In addition, limitations imposed by an exchange or board of
trade on which futures contracts are traded may compel or prevent a Portfolio
from closing out a contract which may result in reduced gain or increased loss
to the Portfolio. The absence of a liquid market in futures contracts might
cause the Portfolios to make or take delivery of the underlying securities
(currencies) at a time when it may be disadvantageous to do so.
Compared to the purchase or sale of futures contracts, the purchase of call
or put options on futures contracts involves less potential risk to the
Portfolio because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances when the purchase
of a call or put option on a futures contract would result in a loss to the
Portfolio notwithstanding that the purchase or sale of a futures contract would
not result in a loss, as in the instance where there is no movement in the
prices of the futures contract or underlying securities (currencies).
47
<PAGE>
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
In addition to the investment restrictions enumerated in the Prospectus, the
investment restrictions listed below have been adopted by the Fund as
fundamental policies of the Portfolios, except as otherwise indicated. Under 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. Such a majority is defined as the lesser of (a) 67% or
more of the shares of the Portfolio present at a meeting of shareholders of the
Fund, if the holders of more than 50% of the outstanding shares of the Portfolio
are present or represented by proxy or (b) more than 50% of the outstanding
shares of the Portfolio. For purposes of the following restrictions and those
contained in the Prospectus: (i) all percentage limitations apply immediately
after a purchase or initial investment; and (ii) any subsequent change in any
applicable percentage resulting from market fluctuations or other changes in the
amount of total or net assets does not require elimination of any security from
the portfolio.
Each Portfolio of the Fund may not:
1. Purchase or sell real estate or interests therein (including limited
partnership interests), although the Portfolio may purchase securities of
issuers which engage in real estate operations and securities secured by
real estate or interests therein (as such, in case of default of such
securities, a Portfolio may hold the real estate securing such security).
2. Purchase oil, gas or other mineral leases, rights or royalty
contracts or exploration or development programs, except that the Portfolio
may invest in the securities of companies which operate, invest in, or
sponsor such programs.
3. Pledge its assets or assign or otherwise encumber them except: (a)
to secure borrowings effected within the limitations set forth in
restriction (5) in the Prospectus or (b), in the case of the DEVELOPING
GROWTH PORTFOLIO, to secure borrowings effected in connection with leverage.
For the purpose of this restriction, collateral arrangements with respect to
initial or variation margin for futures are not deemed to be pledges of
assets.
4. Issue senior securities as defined in the Act except insofar as the
Portfolio may be deemed to have issued a senior security by reason of: (a)
entering into any repurchase agreement or reverse repurchase agreement; (b)
purchasing any securities on a when-issued or delayed delivery basis; (c)
purchasing or selling any financial futures contracts or options thereon;
(d) borrowing money in accordance with restrictions described above and in
the Prospectus; or (e) lending portfolio securities.
5. Make loans of money or securities, except: (a) by the purchase of
portfolio securities in which the Portfolio may invest consistent with its
investment objective and policies; (b) by investing in repurchase
agreements; or (c) by lending its portfolio securities or (d), in the case
of the EMERGING MARKETS PORTFOLIO, by investing in loan participations and
loan assignments.
6. Make short sales of securities.
7. Purchase securities on margin, except for such short-term loans as
are necessary for the clearance of portfolio securities. The deposit or
payment by the Portfolio of initial or variation margin in connection with
futures contracts or related options thereon is not considered the purchase
of a security on margin.
8. Purchase or sell commodities or commodities contracts except that
the Portfolios may purchase or sell futures contracts or options on futures.
9. Engage in the underwriting of securities, except insofar as the
Portfolio may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security. (The Portfolios may invest in restricted
securities subject to the fundamental (in the case of the MONEY MARKET
PORTFOLIO) and non-fundamental (in the case of the other Portfolios)
limitations contained in the Prospectus).
10. Invest for the purpose of exercising control or management of any
other issuer.
48
<PAGE>
In addition, as a non-fundamental policy, the Portfolios may not invest in
securities of any issuer if, to the knowledge of the Fund, any officer or
Trustee of the Fund or any officer or director 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 owns more than 1/2 of 1% of the outstanding securities of such
issuer, and such officers, Trustees and directors who own more than 1/2 of 1%
own in the aggregate more than 5% of the outstanding securities of such issuers.
PORTFOLIO TRANSACTIONS AND BROKERAGE
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER. 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.
A 100% turnover rate would occur, for example, if all the portfolio securities
of a Portfolio (other than short-term money market securities) were replaced
once during the fiscal year. Based on this definition, it is anticipated that
the MONEY MARKET PORTFOLIO's policy of investing in securities with remaining
maturities of less than one year will not result in a quantifiable portfolio
turnover rate. It is not anticipated that the portfolio turnover rates of the
Portfolios will exceed the following percentages in any one 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%; MID-CAP EQUITY PORTFOLIO: 350%; GLOBAL EQUITY PORTFOLIO:
100%; DEVELOPING GROWTH PORTFOLIO: 300%; and EMERGING MARKETS PORTFOLIO: 100%.
PORTFOLIO TRANSACTIONS AND BROKERAGE. Subject to the general supervision of
the Board of Trustees, The Investment Manager and, for the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the BALANCED PORTFOLIO, the CORE EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO, the Sub-Adviser are responsible
for decisions to buy and sell securities for each Portfolio of the Fund, the
selection of brokers and dealers to effect the transactions, and the negotiation
of brokerage commissions, if any. Purchases and sales of securities on a stock
exchange are effected through brokers who charge a commission for their
services. In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a profit
to the dealer. In underwritten offerings, securities are purchased at a fixed
price which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. When securities are
purchased or sold directly from or to an issuer, no commissions or discounts are
paid. For the period from November 9, 1994 (commencement of operations) through
December 31, 1994 and for the fiscal year ended December 31, 1995, the
Portfolios of the Fund paid brokerage commissions as follows:
<TABLE>
<CAPTION>
BROKERAGE BROKERAGE
COMMISSIONS COMMISSIONS
PAID FOR FISCAL PAID FOR FISCAL
PERIOD YEAR
NAME OF PORTFOLIO ENDED 12/31/94 ENDED 12/31/95
- --------------------------------------------------------------------- --------------------- -------------------
<S> <C> <C>
Diversified Income Portfolio......................................... -- $ 250
Balanced Portfolio................................................... -- 15,809
Utilities Portfolio.................................................. $ 435 23,207
Dividend Growth Portfolio............................................ 1,263 71,743
Value-Added Market Portfolio......................................... 258 18,694
Core Equity Portfolio................................................ -- 5,090
American Value Portfolio............................................. 608 52,029
Global Equity Portfolio.............................................. 3,724 74,761
Developing Growth Portfolio.......................................... 55 12,872
Emerging Markets Portfolio........................................... -- 21,667
</TABLE>
49
<PAGE>
Purchases of money market instruments are made from dealers, underwriters
and issuers; sales, if any, prior to maturity, are made to dealers and issuers.
The Fund does not normally incur brokerage commission expense on such
transactions. Money market instruments are generally traded on a "net" basis
with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer.
The Investment Manager and, for the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the BALANCED PORTFOLIO, the CORE EQUITY PORTFOLIO and the EMERGING
MARKETS PORTFOLIO, the Sub-Adviser currently serve as investment advisors to a
number of clients, including other investment companies, and may in the future
act as investment manager or adviser to others. It is the practice of the
Investment Manager or the Sub-Adviser to cause purchase and sale transactions to
be allocated among the Portfolios of the Fund and others whose assets it manages
in such manner as it deems equitable. In making such allocations among the
Portfolios of the Fund and other client accounts, various factors may be
considered, including the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held and the
opinions of the persons responsible for managing the portfolios of the Fund and
other client accounts. In the case of certain initial and secondary public
offerings, the Investment Manager or the Sub-Adviser may utilize a pro-rata
allocation process based on the size of the Dean Witter Funds involved and the
number of shares available from the public offering. These procedures may, under
certain circumstances, have an adverse effect on the Fund.
The policy of the Fund regarding purchases and sales of securities for the
various Portfolios is that primary consideration will be given to obtaining the
most favorable prices and efficient executions of transactions. Consistent with
this policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid in
all circumstances. The Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Investment Manager (or the Sub-Adviser) from obtaining
a high quality of brokerage and research services. In seeking to determine the
reasonableness of brokerage commissions paid in any transaction, the Investment
Manager (or the Sub-Adviser) relies upon its experience and knowledge regarding
commissions generally charged by various brokers and on its judgment in
evaluating the brokerage and research services received from the broker
effecting the transaction. Such determinations are necessarily subjective and
imprecise, as in most cases an exact dollar value for those services is not
ascertainable.
The Fund anticipates that certain of its transactions involving foreign
securities will be effected on securities exchanges. Fixed commissions on such
transactions are generally higher than negotiated commissions on domestic
transactions. There is also generally less government supervision and regulation
of foreign securities exchanges and brokers than in the United States.
In seeking to implement the policies of the Portfolios of the Fund, the
Investment Manager or the Sub-Adviser effects transactions with those brokers
and dealers who the Investment Manager or the Sub-Adviser believes provide the
most favorable prices and are capable of providing efficient executions. If the
Investment Manager or the Sub-Adviser believes such price and execution are
obtainable from more than one broker or dealer, it may give consideration to
placing portfolio transactions with those brokers and dealers who also furnish
research and other services to the Fund, the Investment Manager or the
Sub-Adviser. Such services may include, but are not limited to, any one or more
of the following: information as to the availability of securities for purchase
or sale; statistical or factual information or opinions pertaining to
investment; wire services; and appraisals or evaluations of portfolio
securities.
The information and services received by the Investment Manager and the
Sub-Adviser from brokers and dealers may be of benefit to the Investment Manager
or the Sub-Adviser in the management of accounts of some of its other clients
and may not in all cases benefit a Portfolio of the Fund directly. While the
receipt of such information and services is useful in varying degrees and would
generally reduce the amount of research or services otherwise performed by the
Investment Manager or the Sub-Adviser and thus reduce its expenses, it is of
indeterminable value and the fees paid to the Investment Manager and the
Sub-Adviser are not reduced by any amount that may be attributable to the value
of
50
<PAGE>
such services. For its fiscal year ended December 31, 1995, the Fund directed
the payment of brokerage commissions in connection with transactions in the
following aggregate amounts to brokers because of research services provided, as
follows:
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS AGGREGATE DOLLAR
DIRECTED IN CONNECTION AMOUNT OF TRANSACTIONS
WITH RESEARCH SERVICES FOR WHICH SUCH
PROVIDED COMMISSIONS WERE PAID
FOR FISCAL YEAR FOR FISCAL YEAR ENDED
NAME OF PORTFOLIO ENDED 12/31/95 12/31/95
- ----------------------------------------------------------- ------------------------ ------------------------
<S> <C> <C>
Balanced Portfolio......................................... $ 6,746 $ 5,079,194
Utilities Portfolio........................................ 252 194,437
Dividend Growth Portfolio.................................. 3,697 2,738,241
Core Equity Portfolio...................................... 4,363 3,225,594
American Value Portfolio................................... 19,584 13,365,641
Global Equity Portfolio.................................... 67,692 12,602,634
Developing Growth Portfolio................................ 2,705 1,026,256
Emerging Markets Portfolio................................. 21,667 3,422,978
</TABLE>
Pursuant to an order of the Securities and Exchange Commission, the Fund may
effect principal transactions in certain money market instruments with DWR. The
Fund will limit its transactions with DWR to U.S. Government and Government
Agency Securities, Bank Money Instruments (i.e., Certificates of Deposit and
Bankers' Acceptances) and Commercial Paper. Such transactions will be effected
with DWR only when the price available from DWR is better than that available
from other dealers. During the period from November 9, 1994 through December 31,
1994 and during its fiscal year ended December 31, 1995, the Fund did not effect
any principal transactions with DWR.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may be
effected through DWR. In order for DWR to effect any portfolio transactions for
the Fund, the commissions, fees or other remuneration received by DWR must be
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers in connection with comparable transactions involving similar
securities being purchased or sold on an exchange during a comparable period of
time. This standard would allow DWR to receive no more than the remuneration
which would be expected to be received by an unaffiliated broker in a
commensurate arm's-length transaction. Furthermore, the Trustees of the Fund,
including a majority of the Trustees who are not "interested" persons of the
Fund, as defined in the Act, have adopted procedures which are reasonably
designed to provide that any commissions, fees or other remuneration paid to DWR
are consistent with the foregoing standard. The Fund does not reduce the
management fee it pays to the Investment Manager by any amount of the brokerage
commissions it may pay to DWR. During the period from November 9, 1994 through
December 31, 1994, the Fund paid a total of $2,587 ($420 for the UTILITIES
PORTFOLIO, $1,263 for the DIVIDEND GROWTH PORTFOLIO, $469 for the AMERICAN VALUE
PORTFOLIO, $380 for the GLOBAL EQUITY PORTFOLIO and $55 for the DEVELOPING
GROWTH PORTFOLIO) in brokerage commissions to DWR. For its fiscal year ended
December 31, 1995, the Fund paid a total of $142,255 in brokerage commissions to
DWR for transactions as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF AGGREGATE
DOLLAR AMOUNT OF
EXECUTED TRADES ON
BROKERAGE COMMISSIONS PERCENTAGE OF AGGREGATE WHICH BROKERAGE
PAID TO DWR FOR BROKERAGE COMMISSIONS COMMISSIONS WERE PAID
FISCAL YEAR FOR FISCAL YEAR ENDED FOR FISCAL YEAR ENDED
NAME OF PORTFOLIO ENDED 12/31/95 12/31/95 12/31/95
- ---------------------------------- ------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
Balanced Portfolio................ $ 6,745 42.67% 50.76%
Utilities Portfolio............... 22,805 98.27 97.84
Dividend Growth Portfolio......... 67,555 94.16 95.65
Core Equity Portfolio............. 740 14.54 15.63
American Value Portfolio.......... 29,871 57.41 64.21
Global Equity Portfolio........... 6,836 9.14 31.65
Developing Growth Portfolio....... 7,703 59.84 64.40
</TABLE>
51
<PAGE>
During the fiscal year ended December 31, 1995, the BALANCED PORTFOLIO, the
VALUE-ADDED MARKET PORTFOLIO, the CORE EQUITY PORTFOLIO, the AMERICAN VALUE
PORTFOLIO and the GLOBAL EQUITY PORTFOLIO purchased common stock issued by
Merrill Lynch & Co., Inc., the VALUE-ADDED MARKET PORTFOLIO, the AMERICAN VALUE
PORTFOLIO and the GLOBAL EQUITY PORTFOLIO purchased common stock issued by
Morgan Stanley Group, Inc. and the VALUE-ADDED MARKET PORTFOLIO purchased common
stock issued by Salomon, Inc., which issuers were among the ten brokers or the
ten dealers which executed transactions for or with the Fund or the applicable
Portfolio in the largest dollar amounts during the year. At December 31, 1995,
the BALANCED PORTFOLIO, the VALUE-ADDED MARKET PORTFOLIO, the CORE EQUITY
PORTFOLIO, the AMERICAN VALUE PORTFOLIO and the GLOBAL EQUITY PORTFOLIO held
common stock issued by Merrill Lynch & Co., Inc. with market values of $178,500,
$43,350, $45,900, $229,500 and $53,550, respectively, the VALUE-ADDED MARKET
PORTFOLIO, the AMERICAN VALUE PORTFOLIO and the GLOBAL EQUITY PORTFOLIO held
common stock issued by Morgan Stanley Group, Inc. with market values of $48,375,
$241,875 and $54,825, respectively, and the VALUE-ADDED MARKET PORTFOLIO held
common stock issued by Salomon, Inc. with a market value of $46,150.
PURCHASE AND REDEMPTION OF FUND SHARES
- --------------------------------------------------------------------------------
As discussed in the Prospectus, 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 and variable life insurance policies 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 and variable life insurance policies it issues. These separate
accounts are sometimes referred to individually as an "Account" and collectively
as the "Accounts." The Fund offers the shares of each Portfolio of the Fund to
Hartford Life Insurance Company and ITT Hartford Life and Annuity Insurance
Company (the "Companies") 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 under the caption "Determination of Net
Asset Value" below and in the Prospectus. 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.
Such payment may be postponed or the right of redemption suspended at times when
normal trading is not taking place on the New York Stock Exchange, as discussed
in the Prospectus. (For information regarding charges which may be imposed upon
the Contracts by the Account, see the Prospectus for the Contracts.)
DETERMINATION OF NET ASSET VALUE
As discussed in the Prospectus, the net asset value of the shares of the
each Portfolio is determined once daily at 4:00 p.m., New York time (or, on days
when the New York Stock Exchange closes prior to 4:00 p.m., at such earlier
time), on each day that the New York Stock Exchange is open for trading. The New
York Stock Exchange currently observes the following holidays: New Year's Day;
Presidents' Day; Good Friday; Memorial Day; Independence Day; Labor Day;
Thanksgiving Day; and Christmas Day.
As discussed in the Prospectus, the MONEY MARKET PORTFOLIO utilizes the
amortized cost method in valuing its portfolio securities for purposes of
determining the net asset value of its shares. The MONEY MARKET PORTFOLIO
utilizes the amortized cost method in valuing its portfolio securities even
though the portfolio securities may increase or decrease in market value,
generally in connection with changes in interest rates. The amortized cost
method of valuation involves valuing a security at its cost at the time of
purchase 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. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the MONEY MARKET PORTFOLIO would receive if it
sold the investment. During such periods, the yield to investors in the MONEY
MARKET PORTFOLIO may differ somewhat from that obtained in a similar company
which uses mark-to-market values for all of its portfolio securities. For
example, if the use of amortized cost resulted in a lower (higher) aggregate
portfolio value on a particular day, a prospective investor in the MONEY MARKET
PORTFOLIO would be able to obtain a somewhat higher (lower) yield than would
result from investment in such a similar company and existing investors would
receive less (more) investment income. The purpose of this method of calculation
is to facilitate the maintenance of a constant net asset value per share of
$1.00.
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The use of the amortized cost method to value the portfolio securities of
the MONEY MARKET PORTFOLIO and the maintenance of the per share net asset value
of $1.00 is permitted pursuant to Rule 2a-7 of the Act (the "Rule") and is
conditioned on its compliance with various conditions contained in the Rule
including: (a) the Trustees are obligated, as a particular responsibility within
the overall duty of care owed to the Portfolio's shareholders, to establish
procedures reasonably designed, taking into account current market conditions
and the Portfolio's investment objectives, to stabilize the net asset value per
share as computed for the purpose of distribution and redemption at $1.00 per
share; (b) the procedures include (i) calculation, at such intervals as the
Trustees determine are appropriate and as are reasonable in light of current
market conditions, of the deviation, if any, between net asset value per share
using amortized cost to value portfolio securities and net asset value per share
based upon available market quotations with respect to such portfolio
securities; (ii) periodic review by the Trustees of the amount of deviation as
well as methods used to calculate it; and (iii) maintenance of written records
of the procedures, and the Trustees' considerations made pursuant to them and
any actions taken upon such consideration; (c) the Trustees should consider what
steps should be taken, if any, in the event of a difference of more than 1/2 of
1% between the two methods of valuation; and (d) the Trustees should take such
action as they deem appropriate (such as shortening the average portfolio
maturity, realizing gains or losses, withholding dividends or, as provided by
the Declaration of Trust, reducing the number of outstanding shares of the MONEY
MARKET PORTFOLIO) to eliminate or reduce to the extent reasonably practicable
material dilution or other unfair results to investors or existing shareholders
which might arise from differences between the two methods of valuation. Any
reduction of outstanding shares will be effected by having each shareholder
proportionately contribute to the MONEY MARKET PORTFOLIO's capital the necessary
shares that represent the amount of excess upon such determination. Each
Contract Owner will be deemed to have agreed to such contribution in these
circumstances by allocating investment under his or her Contract to the MONEY
MARKET PORTFOLIO.
Generally, for purposes of the procedures adopted under the Rule, the
maturity of a portfolio instrument is deemed to be the period remaining
(calculated from the trade date or such other date on which the MONEY MARKET
PORTFOLIO's interest in the instrument is subject to market action) until the
date noted on the face of the instrument as the date on which the principal
amount must be paid, or in the case of an instrument called for redemption, the
date on which the redemption payment must be made.
A variable rate obligation that is subject to a demand feature is deemed to
have a maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand. A floating rate instrument that is
subject to a demand feature is deemed to have a maturity equal to the period
remaining until the principal amount can be recovered through demand.
An Eligible Security is defined in the Rule to mean a security which: (a)
has a remaining maturity of thirteen months or less; (b)(i) is rated in the two
highest short-term rating categories by any two nationally recognized
statistical rating organizations ("NRSROs") that have issued a short-term rating
with respect to the security or class of debt obligations of the issuer; or (ii)
if only one NRSRO has issued a short-term rating with respect to the security,
then by that NRSRO; (c) was a long-term security at the time of issuance whose
issuer has outstanding a short-term debt obligation which is comparable in
priority and security and has a rating as specified in clause (b) above; or (d)
if no rating is assigned by any NRSRO as provided in clauses (b) and (c) above,
the unrated security is determined by the Board to be of comparable quality to
any such rated security. The MONEY MARKET PORTFOLIO will limit its investments
to securities that meet the requirements for Eligible Securities as set forth in
the Prospectus.
As permitted by the Rule, the Board has delegated to the Fund's Investment
Manager, subject to the Board's oversight pursuant to guidelines and procedures
adopted by the Board, the authority to determine which securities present
minimal credit risks and which unrated securities are comparable in quality to
rated securities.
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Also, as required by the Rule, the MONEY MARKET PORTFOLIO will limit its
investments in securities, other than Government securities, so that, at the
time of purchase: (a) except as further limited in (b) below with regard to
certain securities, no more than 5% of its total assets will be invested in the
securities of any one issuer; and (b) with respect to Eligible Securities that
have received a rating in less than the highest category by any one of the
NRSROs whose ratings are used to qualify the security as an Eligible
Security, or that have been determined to be of comparable quality: (i) no more
than 5% in the aggregate of the Portfolio's total assets in all such securities,
and (ii) no more than the greater of 1% of total assets, or $1 million, in the
securities of any one issuer.
Also, as required by the Rule, the MONEY MARKET PORTFOLIO will limit its
investments in securities, other than Government securities, so that, at the
time of purchase: (a) except as further limited in (b) below with regard to
certain securities, no more than 5% of its total assets will be invested in the
securities of any one issuer; and (b) with respect to Eligible Securities that
have received a rating in less than the highest category by any one of the
NRSROs whose ratings are used to qualify the security as an Eligible Security,
or that have been determined to be of comparable quality: (i) no more than 5% in
the aggregate of the Portfolio's total assets in all such securities, and (ii)
no more than the greater of 1% of total assets, or $1 million, in the securities
of any one issuer.
The presence of a line of credit or other credit facility offered by a bank
or other financial institution which guarantees the payment obligation of the
issuer, in the event of a default in the payment of principal or interest of an
obligation, may be taken into account in determining whether an investment is an
Eligible Security, provided that the guarantee itself is an Eligible Security.
The Rule further requires that the MONEY MARKET PORTFOLIO limit its
investments to U.S. dollar-denominated instruments which the Trustees determine
present minimal credit risks and which are Eligible Securities. The Rule also
requires the Portfolio to maintain a dollar-weighted average portfolio maturity
(not more than 90 days) appropriate to its objective of maintaining a stable net
asset value of $1.00 per share and precludes the purchase of any instrument with
a remaining maturity of more than 397 days. Should the disposition of a
portfolio security result in a dollar-weighted average portfolio maturity of
more than 90 days, the Portfolio will invest its available cash in such a manner
as to reduce such maturity to 90 days or less as soon as is reasonably
practicable.
If the Board determines that it is no longer in the best interests of the
MONEY MARKET PORTFOLIO and its shareholders to maintain a stable price of $1 per
share or if the Board believes that maintaining such price no longer reflects a
market-based net asset value per share, the Board has the right to change from
an amortized cost basis of valuation to valuation based on market quotations.
The Fund will notify shareholders of the Portfolio of any such change.
As stated in the Prospectus, in the calculation of the net asset value of
the Portfolios other than the MONEY MARKET PORTFOLIO, 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. Other short-term debt securities
will be valued on a mark-to-market basis until such time as they reach a
remaining maturity of sixty days, whereupon they will be valued at amortized
cost using their value on the 61st day 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. Listed options on debt
securities are valued at the latest sale price on the exchange on which they are
listed unless no sales of such options have taken place that day, in which case
they will be valued at the mean between their latest bid and asked prices.
Unlisted options on debt securities and all options on equity securities are
valued at the mean between their latest bid and asked prices. Futures are valued
at the latest sale price on the commodities exchange on which they trade unless
the Trustees determine that such price does not reflect their market value, in
which case they will be valued at their fair value as determined by the
Trustees. All other securities and other assets are valued at their fair value
as determined in good faith under procedures established by and under the
general supervision of the Trustees.
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Generally, trading in foreign securities, as well as corporate bonds, United
States government securities and money market instruments, is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of such securities used in computing the net asset value of
a Portfolio's shares are determined as of such times. Foreign currency exchange
rates are also generally determined prior to the close of the New York Stock
Exchange. Occasionally, events which affect the values of such securities and
such exchange rates may occur between the times at which they are determined and
the close of the New York Stock Exchange and will therefore not be reflected in
the computation of a Portfolio's net asset value. If events materially affecting
the value of such securities occur during such period, then these securities
will be valued at their fair value as determined in good faith under procedures
established by and under the supervision of the Trustees.
DIVIDENDS, DISTRIBUTIONS AND TAXES
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MONEY MARKET PORTFOLIO. As discussed in the Prospectus, 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. Net income will be calculated immediately prior to the
determination of net asset value per share of the MONEY MARKET PORTFOLIO (see
"Determination of Net Asset Value" above and in the Prospectus). 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. The Trustees may revise the above dividend policy, or
postpone the payment of dividends, if the MONEY MARKET PORTFOLIO should have or
anticipate any large unexpected expense, loss or fluctuation in net assets which
in the opinion of the Trustees might have a significant adverse effect on
shareholders. On occasion, in order to maintain a constant $1.00 per share net
asset value, the Trustees may direct that the number of outstanding shares of
the MONEY MARKET PORTFOLIO be reduced in each shareholder's account. Such
reduction may result in taxable income to a shareholder in excess of the net
increase (i.e., dividends, less such reductions), if any, in the shareholder's
account for a period. Furthermore, such reduction may be realized as a capital
loss when the shares are liquidated. Any net realized capital gains will be
declared and paid at least once per calendar year, except that net short-term
gains may be paid more frequently, with the distribution of dividends from net
investment income.
OTHER PORTFOLIOS. The dividend policies of 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 MID-CAP
GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO, the DEVELOPING GROWTH PORTFOLIO
and the EMERGING MARKETS PORTFOLIO are discussed in the Prospectus. In computing
interest income, these Portfolios will not accrete any discount or amortize any
premium resulting from the purchase of debt securities except those original
issue discounts for which accretion is required for federal income tax purposes.
Additionally, with respect to market discount on bonds, a portion of any capital
gain realized upon disposition may be recharacterized as taxable ordinary income
in accordance with the provisions of the Internal Revenue Code (the "Code").
Dividends, interest and capital gains received by the Portfolios on investments
in foreign issuers or which are denominated in foreign currency may give rise to
withholding and other taxes imposed by foreign countries. Realized gains and
losses on security transactions are determined on the identified cost method.
Gains or losses on sales of securities by a Portfolio will be long-term
gains or losses if the securities have been held by the Portfolio for more than
twelve months. Gains or losses on the sale of securities held for twelve months
or less will be short-term gains or losses.
OPTIONS AND FUTURES. Exchange-traded futures contracts, listed options on
futures contracts and certain listed options are classified as "Section 1256"
contracts under the Code. Unless the Portfolio makes an election as discussed
below, the character of gain or loss resulting from the sale, disposition,
closing out, expiration or other termination of Section 1256 contracts would
generally be treated as long-
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term capital gain or loss to the extent of 60 percent thereof and short-term
capital gain or loss to the extent of 40 percent thereof and such Section 1256
contracts would also be required to be marked-to-market at the end of the Fund's
fiscal year, for purposes of federal income tax calculations.
Over-the-counter options are not classified as Section 1256 contracts and
are not subject to the mark-to-market or 60 percent-40 percent taxation rules.
When call options written by a Portfolio, or put options purchased by a
Portfolio, are exercised, the gain or loss realized on the sales of the
underlying securities may be either short-term or long-term, depending upon the
holding period of the securities. In determining the amount of gain or loss, the
sales proceeds are reduced by the premium paid for over-the-counter puts or
increased by the premium received for over-the-counter calls.
If a Portfolio holds a security which is offset by a Section 1256 contract,
the Portfolio would be deemed to hold a "mixed straddle" position, as such is
defined in the Code. A Portfolio may elect to identify its mixed straddle
positions pursuant to Section 1256(d) of the Code and thereby avoid application
of both the mark-to-market and 60 percent-40 percent taxation rules. The
Portfolio may also make certain other elections with respect to mixed straddles
which could avoid or limit the application of certain rules which could, in
certain circumstances, cause deferral or disallowance of losses, change
long-term capital gains into short-term capital gains, or change short-term
capital losses into long-term capital losses.
Whether the portfolio security constituting part of the identified mixed
straddle is deemed to have been held for less than three months for purposes of
determining qualification of the Portfolio as a regulated investment company
will be determined generally by the actual holding period of the security. In
certain circumstances, entering into a mixed straddle could result in the
recognition of unrealized gain or loss which would be taken into account in
determining the amount of income available for the Portfolio's distributions,
and can result in an amount which is greater or less than the Portfolio's net
realized gains being available for distribution. If an amount which is less than
the Portfolio's net realized gains is available for distribution, the Portfolio
may elect to distribute more than such available amount, up to the full amount
of such net realized gains. Such a distribution may, in part, constitute a
return of capital to the shareholders. If the Portfolio does not elect to
identify a mixed straddle, no recognition of gain or loss on the securities in
its portfolio will result when the mixed straddle is entered into. However, any
losses realized on the straddle will be governed by a number of tax rules which
might, under certain circumstances, defer or disallow the losses in whole or in
part, change long-term gains into short-term gains, or change short-term losses
into long-term losses. A deferral or disallowance of recognition of a realized
loss may result in an amount being available for the Portfolio's distributions
which is greater than the Portfolio's net realized gains.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS (NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, DIVERSIFIED INCOME PORTFOLIO, GLOBAL EQUITY
PORTFOLIO AND EMERGING MARKETS PORTFOLIO). In general, gains from foreign
currencies and from foreign currency options, foreign currency futures and
forward foreign exchange contracts relating to investments in stock, securities
or foreign currencies are currently considered to be qualifying income for
purposes of determining whether each of the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO qualifies as a regulated investment company. It is
currently unclear, however, who will be treated as the issuer of certain foreign
currency instruments or how foreign currency options, futures, or forward
foreign currency contracts will be valued for purposes of the regulated
investment company diversification requirements applicable to the Portfolio. The
Fund may request a private letter ruling from the Internal Revenue Service on
some or all of these issues.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (I.E.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from forward contracts, from futures
contracts that are not "regulated futures contracts," and from unlisted options
will be treated as ordinary income or loss under Code Section 988. Also, certain
foreign exchange gains or losses derived with respect to foreign fixed-income
securities are also subject to Section 988 treatment. In general, therefore,
Code Section 988 gains or losses will increase or decrease the amount of the
Portfolio's investment company taxable income available to be distributed to
shareholders as ordinary income, rather than
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increasing or decreasing the amount of the Portfolio's net capital gain.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the affected Portfolio would not be able to make
any ordinary dividend distributions.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may be
subject to taxes in foreign countries in which they invest. In addition, if the
European Growth Portfolio were deemed to be a resident of the United Kingdom for
United Kingdom tax purposes or if the Portfolio were treated as being engaged in
a trading activity through an agent in the United Kingdom, there is a risk that
the United Kingdom would attempt to tax all or a portion of the Portfolio's
gains or income. In light of the terms and conditions of the Investment
Management and Sub-Advisory Agreements, it is believed that any such risk is
minimal.
If any of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING
MARKETS PORTFOLIO invests in an entity which is classified as a "passive foreign
investment company" ("PFIC") for U.S. tax purposes, the application of certain
technical tax provisions applying to such companies could result in the
imposition of federal income tax with respect to such investments at the
Portfolio level which could not be eliminated by distributions to shareholders.
The U.S. Treasury issued proposed regulation section 1.1291-8 which establishes
a mark-to-market regime which allows investment companies investing in PFIC's to
avoid most, if not all, of the difficulties posed by the PFIC rules. In any
event, it is not anticipated that any taxes on a Portfolio with respect to
investments in PFIC's would be significant.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
The annualized current yield of the MONEY MARKET PORTFOLIO, as may be quoted
from time to time in advertisements and other communications to shareholders and
potential investors, is computed by determining, for a stated seven-day period,
the net change, exclusive of capital changes and including the value of
additional shares purchased with dividends and any dividends declared therefrom,
in the value of a hypothetical pre-existing account having a balance of one
share at the beginning of the period, subtracting a hypothetical charge which
reflects deductions from shareholder accounts (such as management fees), and
dividing the difference by the value of the account at the beginning of the base
period to obtain the base period return, and then multiplying the base period
return by (365/7).
The MONEY MARKET PORTFOLIO's annualized effective yield, as may be quoted
from time to time in advertisements and other communications to shareholders and
potential investors, is computed by determining (for the same stated seven-day
period as for the current yield), the net change, exclusive of capital changes
and including the value of additional shares purchased with dividends and any
dividends declared therefrom, in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from shareholder
accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
compounding the base period return by adding 1, raising the sum to a power equal
to 365 divided by 7, and subtracting 1 from the result.
The yields quoted in any advertisement or other communication should not be
considered a representation of the yields of the MONEY MARKET PORTFOLIO in the
future since the yield is not fixed. Actual yields will depend not only on the
type, quality and maturities of the investments held by the MONEY MARKET
PORTFOLIO and changes in interest rates on such investments, but also on changes
in the Portfolio's expenses during the period.
Yield information may be useful in reviewing the performance of the MONEY
MARKET PORTFOLIO and for providing a basis for comparison with other investment
alternatives. However unlike bank deposits or other investments which typically
pay a fixed yield for a stated period of time, the MONEY MARKET PORTFOLIO's
yield fluctuates. Furthermore, the quoted yield does not reflect charges which
may be imposed on the Contracts by the applicable Account and therefore is not
equivalent to total return under a Contract (for a description of such charges,
see the Prospectus for the Contracts).
The current yield of the MONEY MARKET PORTFOLIO for the seven days ending
December 31, 1995 was 5.74%. The effective annual yield on 5.74% is 5.90%,
assuming daily compounding. The Investment
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Manager assumed all operating expenses of each Portfolio of the Fund (except for
any brokerage fees and a portion of organizational expenses) and waived the
management fee in respect of each Portfolio until December 31, 1995. Had the
MONEY MARKET PORTFOLIO borne these expenses and paid the management fee, the
current yield of the MONEY MARKET PORTFOLIO for the seven days ending December
31, 1995 would have been 4.69%. The effective annual yield on 4.69% is 4.80%,
assuming daily compounding.
As discussed in the Prospectus, from time to time the Fund may quote the
"yield" of each of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO and the BALANCED PORTFOLIO in advertising and sales
literature. Yield is calculated for any 30-day period as follows: the amount of
interest and/or dividend income for each security in the Portfolio is determined
in accordance with regulatory requirements; the total for the entire portfolio
constitutes the Portfolio's gross income for the period. Expenses accrued during
the period are subtracted to arrive at "net investment income." The resulting
amount is divided by the product of the net asset value per share on the last
day of the period multiplied by the average number of Portfolio shares
outstanding during the period that were entitled to dividends. This amount is
added to 1 and raised to the sixth power. 1 is then subtracted from the result
and the difference is multiplied by 2 to arrive at the annualized yield. For the
30-day period ended December 31, 1995, the yield of the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, calculated pursuant to this formula, was 5.06%,
the yield of the DIVERSIFIED INCOME PORTFOLIO, calculated pursuant to this
formula, was 9.39%, and the yield of the BALANCED PORTFOLIO, calculated pursuant
to this formula, was 3.29%. As noted above, the Investment Manager assumed all
operating expenses of each Portfolio of the Fund (except for any brokerage fees
and a portion of organizational expenses) and waived the management fee in
respect of each Portfolio until December 31, 1995. Had the Portfolios borne
these expenses and paid the management fee, for the 30-day period ended December
31, 1995, the yield of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO and the BALANCED PORTFOLIO would have been 3.96%,
6.71% and 2.45%, respectively, in each case calculated pursuant to the formula
stated above.
As discussed in the Prospectus, from time to time the Fund may quote the
"total return" of each Portfolio in advertising and sales literature. A
Portfolio's "average annual total return" represents an annualization of the
Portfolio's total return over a particular period and is computed by finding the
annual percentage rate which will result in the ending redeemable value of a
hypothetical $1,000 investment made at the beginning of a one, five or ten year
period, or for the period from the date of commencement of the Portfolio's
operations, if shorter than any of the foregoing. For the purpose of this
calculation, it is assumed that all dividends and distributions are reinvested.
However, average annual total return does not reflect the deduction of any
charges which may be imposed on the Contracts by the applicable Account which,
if quoted, would reduce the performance quoted. The formula for computing the
average annual total return involves a percentage obtained by dividing the
ending redeemable value by the amount of the initial investment, taking a root
of the quotient (where the root is equivalent to the number of years in the
period) and subtracting 1 from the result.
The average annual total returns for each Portfolio for the one year period
ended December 31, 1995 and for the period from November 9, 1994 (commencement
of operations) through December 31, 1995 were: 6.10% and 6.02%, respectively,
for the MONEY MARKET PORTFOLIO, 6.40% and 6.15%, respectively, for the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, 6.96% and 6.78%, respectively, for the
DIVERSIFIED INCOME PORTFOLIO, 22.86% and 20.39%, respectively, for the BALANCED
PORTFOLIO, 28.05% and 24.89%, respectively, for the UTILITIES PORTFOLIO, 40.13%
and 34.32%, respectively, for the DIVIDEND GROWTH PORTFOLIO, 27.14% and 22.58%,
respectively, for the VALUE-ADDED MARKET PORTFOLIO, 13.29% and 12.20%,
respectively, for the CORE EQUITY PORTFOLIO, 38.95% and 34.20%, respectively,
for the AMERICAN VALUE PORTFOLIO, 13.76% and 11.66%, respectively, for the
GLOBAL EQUITY PORTFOLIO, 51.26% and 45.68%, respectively, for the DEVELOPING
GROWTH PORTFOLIO, and -0.57% and 0.00%, respectively, for the EMERGING MARKETS
PORTFOLIO.
As noted above, the Investment Manager assumed all operating expenses of
each Portfolio (except for any brokerage fees and a portion of organizational
expenses) and waived the management fee in respect of each Portfolio until
December 31, 1995. Had the Portfolios borne these expenses and paid the
management fee during the period from November 9, 1994 through December 31,
1995, the average
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annual total returns for the one year period ended December 31, 1995 and for the
period from November 9, 1994 through December 31, 1995 would have been: 4.61%
and 4.02%, respectively, for the MONEY MARKET PORTFOLIO, 3.62% and 3.53%,
respectively, for the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, 4.15% and
4.08%, respectively, for the DIVERSIFIED INCOME PORTFOLIO, 19.73% and 17.49%,
respectively, for the BALANCED PORTFOLIO, 25.79% and 22.79%, respectively, for
the UTILITIES PORTFOLIO, 37.46% and 31.79%, respectively, for the DIVIDEND
GROWTH PORTFOLIO, 24.22% and 19.86%, respectively, for the VALUE-ADDED MARKET
PORTFOLIO, 10.47% and 9.60%, respectively, for the CORE EQUITY PORTFOLIO, 36.33%
and 31.76%, respectively, for the AMERICAN VALUE PORTFOLIO, 10.62% and 8.66%,
respectively, for the GLOBAL EQUITY PORTFOLIO, 48.30% and 42.83%, respectively,
for the DEVELOPING GROWTH PORTFOLIO, and -3.39% and -2.63%, respectively, for
the EMERGING MARKETS PORTFOLIO.
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 an Account. The Fund may also compute the aggregate total returns
of the Portfolios for specified periods by determining the aggregate percentage
rate which will result in the ending value of a hypothetical $1,000 investment
made at the beginning of the period. For the purpose of this calculation, it is
assumed that all dividends and distributions are reinvested. The formula for
computing aggregate total return involves a percentage obtained by dividing the
ending value (without the reduction for any charges imposed on the Contracts by
the applicable Account) by the initial $1,000 investment and subtracting 1 from
the result. Based on the foregoing calculation, the total returns for the one
year period ended December 31, 1995 and for the period from November 9, 1994
through December 31, 1995 were: 6.10% and 6.91%, respectively, for the MONEY
MARKET PORTFOLIO, 6.40% and 7.05%, respectively,, for the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, 6.96% and 7.77%, respectively, for the
DIVERSIFIED INCOME PORTFOLIO, 22.86% and 23.59%, respectively, for the BALANCED
PORTFOLIO, 28.05% and 28.88%, respectively, for the UTILITIES PORTFOLIO, 40.13%
and 40.05%, respectively, for the DIVIDEND GROWTH PORTFOLIO, 27.14% and 26.17%,
respectively, for the VALUE-ADDED MARKET PORTFOLIO, 13.29% and 14.05%,
respectively, for the CORE EQUITY PORTFOLIO, 38.95% and 39.91%, respectively,
for the AMERICAN VALUE PORTFOLIO, 13.76% and 13.42%, respectively, for the
GLOBAL EQUITY PORTFOLIO, 51.26% and 53.65%, respectively, for the DEVELOPING
GROWTH PORTFOLIO, and -0.57% and 0.00%, respectively, for the EMERGING MARKETS
PORTFOLIO.
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in shares of a Portfolio by adding 1 to the
Portfolio's aggregate total return to date (expressed as a decimal) and
multiplying by $10,000, $50,000 or $100,000, as the case may be. Investments of
$10,000, $50,000 and $100,000 in each Portfolio of the Fund at inception
(November 9, 1994) would have grown to the following respective amounts at
December 31, 1995: MONEY MARKET PORTFOLIO: $10,691, $53,455 and $106,910; NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO: $10,705, $53,525 and $107,050;
DIVERSIFIED INCOME PORTFOLIO: $10,777, $53,885 and $107,770; BALANCED PORTFOLIO:
$12,359, $61,795 and $123,590; UTILITIES PORTFOLIO: $12,888, $64,440 and
$128,880; DIVIDEND GROWTH PORTFOLIO: $14,005, $70,025 and $140,050; VALUE-ADDED
MARKET PORTFOLIO: $12,617, $63,085 and $126,170; CORE EQUITY PORTFOLIO: $11,405,
$57,025 and 114,050; AMERICAN VALUE PORTFOLIO: $13,991, $69,955 and $139,910;
GLOBAL EQUITY PORTFOLIO: $11,342, $56,710 and $113,420; DEVELOPING GROWTH
PORTFOLIO: $15,365, $76,825 and $153,650; and EMERGING MARKETS PORTFOLIO:
$10,000 $50,000 and $100,000.
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.
DESCRIPTION OF SHARES OF THE FUND
- --------------------------------------------------------------------------------
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of separate Portfolios and to divide or combine
the shares of any Portfolio into a greater or lesser number of shares of that
Portfolio without thereby changing the proportionate beneficial interests in
that Portfolio. As discussed in the Prospectus, the shares of beneficial
interest of the Fund are divided into thirteen separate Portfolios, and the
shares of each Portfolio have equal rights and privileges with all
59
<PAGE>
other shares of that Portfolio. Each share of a Portfolio represents an equal
proportional interest in that Portfolio with each other share. 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. Shares have no preemptive or conversion rights. The right of
redemption is described above and in the Prospectus. Shares of each Portfolio
are fully paid and non-assessable by the Fund. The Trustees are authorized to
classify unissued shares of the Fund by assigning them to a Portfolio for
issuance.
The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares and additional classes of shares within any series,
as described in the Prospectus. Such additional offerings would not affect the
interests of the current shareholders in the existing Portfolios. All
consideration received by the Fund for shares of any additional Portfolios, and
all assets in which such consideration is invested, would belong to that
Portfolio (subject only to the rights of creditors of the Fund) and would be
subject to the liabilities related thereto. Pursuant to the Act, shareholders of
any additional Portfolio would normally have to approve the adoption of any
management contract relating to such Portfolio and of any changes in the
investment policies related thereto.
Shares of each Portfolio entitle their holders to one vote per share (with
proportionate voting for fractional shares). Shareholders have the right to vote
on the election of Trustees of the Fund and on any and all matters on which by
law or the provisions of the Fund's By-Laws they may be entitled to vote. 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 the Account in accordance with instructions
from Contract Owners, as more fully described under the caption "Voting Rights"
in the Prospectus for the Contracts. Shareholders of all Portfolios vote for a
single set of Trustees. The Trustees themselves have the power to alter the
number and the terms of office of the Trustees, and they may at any time
lengthen their own terms or make their terms of unlimited duration and appoint
their own successors, provided that always at least a majority of the Trustees
has been elected by the shareholders of the Fund. Under certain circumstances
the Trustees may be removed by action of the Trustees. Under certain
circumstances the shareholders may call a meeting to remove Trustees and the
Fund is required to provide assistance in communicating with shareholders about
such a meeting.
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.
With respect to the submission to shareholder vote of a matter requiring
separate voting by Portfolio, the matter shall have been effectively acted upon
with respect to any Portfolio if a majority of the outstanding voting securities
of that Portfolio votes for the approval of the matter, notwithstanding that:
(1) the matter has not been approved by a majority of the outstanding voting
securities of any other Portfolio; or (2) the matter has not been approved by a
majority of the outstanding voting securities of the Fund. The voting rights of
shareholders are not cumulative, so that holders of more than 50 percent of the
shares voting can, if they choose, elect all Trustees being selected, while the
holders of the remaining shares would be unable to elect any Trustees.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his/her or
its own bad faith, willful misfeasance, gross negligence, or reckless disregard
of his/her or its duties. It also provides that all third persons shall look
solely to the Fund's property for satisfaction of claims arising in connection
with the affairs of the Fund. With the exceptions stated, the Declaration of
Trust provides that a Trustee, officer, employee or agent is entitled to be
indemnified against all liability in connection with the affairs of the Fund.
The Trust shall be of unlimited duration subject to the provisions in the
Declaration of Trust concerning termination by action of the shareholders.
60
<PAGE>
CUSTODIANS AND TRANSFER AGENT
- --------------------------------------------------------------------------------
The Bank of New York, 90 Washington Street, New York, New York 10286 is the
Custodian of the assets of each Portfolio of the Fund other than the EMERGING
MARKETS PORTFOLIO and grouping (1) of the DIVERSIFIED INCOME PORTFOLIO. The
Chase Manhattan Bank, One Chase Plaza, New York, New York 10005 is the Custodian
of the assets of the EMERGING MARKETS PORTFOLIO and grouping (1) of the
DIVERSIFIED INCOME PORTFOLIO. The Custodians have contracted with various
foreign banks and depositories to hold portfolio securities of non-U.S. issuers
on behalf of various Portfolios. All of a Portfolio's cash balances with the
Custodian in excess of $100,000 are unprotected by Federal deposit insurance.
Such balances may, at times, be substantial.
Dean Witter Trust Company, Harborside Financial Center, Plaza Two, Jersey
City, New Jersey 07311 is the Transfer Agent of the Fund's shares and Dividend
Disbursing Agent for payment of dividends and distributions on Fund shares. Dean
Witter Trust Company is an affiliate of Dean Witter InterCapital Inc., the
Fund's Investment Manager. As Transfer Agent and Dividend Disbursing Agent, Dean
Witter Trust Company's responsibilities include maintaining shareholder
accounts; reinvesting dividends; processing account registration changes;
handling purchase and redemption transactions; tabulating proxies; and
maintaining shareholder records and lists. For these services Dean Witter Trust
Company receives a fee from each Portfolio of the Fund.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036
serves as the independent accountants of the Fund. The independent accountants
are responsible for auditing the annual financial statements of the Fund.
REPORTS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Statements showing the portfolio of each Portfolio and other information
will be furnished, at least semi-annually, to Contract Owners, and annually such
statements will be audited by independent accountants whose selection must be
approved annually by the Fund's Trustees. The Fund's fiscal year ends on
December 31.
LEGAL COUNSEL
- --------------------------------------------------------------------------------
Sheldon Curtis, Esq., who is an officer and the General Counsel of the
Investment Manager, is an officer and the General Counsel of the Fund.
EXPERTS
- --------------------------------------------------------------------------------
The annual financial statements of the Fund for the year ended December 31,
1995, which are included in this Statement of Additional Information and
incorporated by reference in the Prospectus, have been so included and
incorporated in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
61
<PAGE>
Money Market
Portfolio of Investments DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT ANNUALIZED YIELD
(IN ON DATE OF MATURITY
THOUSANDS) PURCHASE DATE VALUE
- ------- -------------------- -------------------- ----------
<C> <S> <C> <C> <C>
COMMERCIAL PAPER (79.0%)
AUTOMOTIVE - FINANCE (6.9%)
$ 950 Ford Motor Credit Co.................... 5.78-5.79% 01/10/96-02/09/96 $ 945,983
1,950 General Motors Acceptance Corp.......... 5.70-5.81 01/19/96-03/12/96 1,936,270
----------
2,882,253
----------
BANK HOLDING COMPANIES (6.8%)
1,600 Chemical Banking Corp................... 5.69-5.77 03/07/96-03/28/96 1,580,740
800 NationsBank Corp........................ 5.78-5.79 01/18/96-02/07/96 796,350
500 Norwest Corp............................ 5.80 02/22/96 495,747
----------
2,872,837
----------
BANKS - COMMERCIAL (15.2%)
1,500 Abbey National North America Corp....... 5.77-5.80 01/12/96-02/01/96 1,495,335
500 Canadian Imperial Holdings Inc.......... 5.81 01/08/96 499,285
1,000 Internationale Nederlanden (U.S.)
Funding Corp.......................... 5.43 06/21/96 974,431
2,039 National Australia Funding (DE) Inc..... 5.53-6.11 01/04/96-06/14/96 2,019,982
1,415 Societe Generale N.A., Inc.............. 5.73-5.80 02/20/96-03/08/96 1,402,131
----------
6,391,164
----------
BROKERAGE (8.0%)
2,000 Goldman Sachs Group L.P................. 5.70-6.11 01/03/96-03/14/96 1,986,998
1,400 Morgan Stanley Group Inc................ 5.80-5.81 01/09/96-01/11/96 1,397,614
----------
3,384,612
----------
DRUGS (1.1%)
500 Lilly (Eli) & Co........................ 5.75 01/12/96 498,989
----------
FINANCE - COMMERCIAL (2.6%)
1,095 CIT Group Holdings, Inc................. 5.62 04/10/96 1,077,874
----------
FINANCE - CONSUMER (14.2%)
2,050 American Express Credit Corp............ 5.44-5.79 01/25/96-06/21/96 2,014,468
1,110 Beneficial Corp......................... 5.80 01/17/96 1,106,803
1,500 Household Finance Corp.................. 5.78 01/04/96 1,498,802
1,350 Norwest Financial, Inc.................. 5.72-5.79 02/05/96-02/21/96 1,341,010
----------
5,961,083
----------
FINANCE - CORPORATE (1.7%)
700 Ciesco, L.P............................. 5.79 01/05/96 699,332
----------
FINANCE - DIVERSIFIED (4.7%)
750 Associates Corp. of North America....... 5.76 02/13/96 744,675
1,250 General Electric Capital Corp........... 5.52-5.75 02/02/96-05/15/96 1,231,934
----------
1,976,609
----------
INDUSTRIALS (4.8%)
2,014 Raytheon Co............................. 5.76-5.81 01/04/96-01/05/96 2,012,307
----------
</TABLE>
62
<PAGE>
Money Market
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT ANNUALIZED YIELD
(IN ON DATE OF MATURITY
THOUSANDS) PURCHASE DATE VALUE
- ------- -------------------- -------------------- ----------
<C> <S> <C> <C> <C>
OFFICE EQUIPMENT (2.6%)
$ 615 IBM Credit Corp......................... 5.81% 01/26/96 $ 612,339
500 Xerox Credit Corp....................... 5.81 01/26/96 497,855
----------
1,110,194
----------
RETAIL (4.2%)
1,775 Sears Roebuck Acceptance Corp........... 5.73-5.81 02/06/96-03/07/96 1,760,238
----------
TELEPHONES (3.8%)
1,600 AT&T Corp............................... 5.78 01/16/96-01/29/96 1,594,453
----------
UTILITIES - FINANCE (2.4%)
1,025 National Rural Utilities Cooperative
Finance Corp.......................... 5.71 03/06/96 1,014,279
----------
TOTAL COMMERCIAL PAPER (AMORTIZED COST $33,236,224)................................. 33,236,224
----------
BANKERS' ACCEPTANCES (14.9%)
700 First Bank National Assoc............... 5.83 02/26/96 693,583
492 First Union National Bank............... 5.84 01/23/96 489,758
1,000 First Union National Bank of Florida.... 5.64 05/13/96 979,412
2,000 Mellon Bank, N.A........................ 5.52-5.69 04/12/96-05/16/96 1,963,267
430 NationsBank of Georgia.................. 5.82 01/02/96 429,296
1,728 PNC Bank, N.A........................... 5.68-5.82 01/18/96-03/05/96 1,717,023
----------
TOTAL BANKERS' ACCEPTANCES (AMORTIZED COST $6,272,339).............................. 6,272,339
----------
SHORT-TERM BANK NOTES (3.5%)
500 F.C.C. National Bank.................... 5.74 03/11/96 500,000
1,000 Fleet National Bank..................... 5.75 02/23/96 1,000,000
----------
TOTAL SHORT-TERM BANK NOTES (AMORTIZED COST $1,500,000)............................. 1,500,000
----------
CERTIFICATE OF DEPOSIT (1.2%)
500 Union Bank (Amortized Cost $500,000).... 5.65 02/28/96 500,000
----------
U.S. GOVERNMENT AGENCY (1.1%)
480 Federal National Mortgage Assoc.
(Amortized Cost $473,620)............. 5.61 03/26/96 473,620
----------
TOTAL INVESTMENTS (AMORTIZED COST $41,982,183) (A).............. 99.7% 41,982,183
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES.................. 0.3 106,854
------- ----------
NET ASSETS...................................................... 100.0% $42,089,037
------- ----------
------- ----------
<FN>
- ----------------
(A) COST IS THE SAME FOR FEDERAL INCOME TAX PURPOSES.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
63
<PAGE>
North American Government Securities
Portfolio of Investments DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATE VALUE
- ------------- -------------- --------- -----------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT & AGENCIES OBLIGATIONS (42.5%)
$ 65 Federal Farm Credit Bank......................................... 5.08% 01/15/96 $ 65,010
35 Federal Home Loan Banks.......................................... 6.78 04/04/97 35,591
40 Federal Home Loan Mortgage Corp.................................. 7.69 12/16/96 40,877
75 Federal National Mortgage Association............................ 7.60 01/10/97 76,676
210 U.S. Treasury Note............................................... 5.50 11/15/98 211,542
115 U.S. Treasury Note............................................... 6.125 05/15/98 117,282
-----------
TOTAL U.S. GOVERNMENT & AGENCIES OBLIGATIONS (IDENTIFIED COST $544,055)..................... 546,978
-----------
MORTGAGE-BACKED SECURITIES (38.3%)
100 Federal Home Loan Mortgage Corp. PC Gold......................... 5.50 11/01/00 99,189
96 Federal Home Loan Mortgage Corp. PC Gold......................... 6.00 11/01/99 95,983
95 Federal Home Loan Mortgage Corp. PC Gold......................... 7.00 08/01/00 95,745
100 Federal National Mortgage Association............................ 7.00 10/01/02 101,730
99 Government National Mortgage Association......................... 6.00 08/20/25 100,487
-----------
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $488,977)................................. 493,134
-----------
</TABLE>
<TABLE>
<CAPTION>
ANNUALIZED
YIELD
ON DATE OF
PURCHASE
--------------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS (A) (15.5%)
MEXICAN GOVERNMENT OBLIGATION (7.7%)
100 Tesobonos........................................................ 8.37% 01/18/96 99,564
-----------
U.S. GOVERNMENT AGENCY (7.8%)
100 Federal Home Loan Banks.......................................... 5.50 01/08/96 99,893
-----------
TOTAL SHORT-TERM INVESTMENTS (AMORTIZED COST $199,475)...................................... 199,457
-----------
TOTAL INVESTMENTS (IDENTIFIED COST $1,232,507) (B)............................ 96.3% 1,239,569
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES................................ 3.7 48,111
---------- -----------
NET ASSETS.................................................................... 100.0% $ 1,287,680
---------- -----------
---------- -----------
<FN>
- ----------------
(A) SECURITIES WERE PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATES SHOWN
HAVE BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED
COST.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
64
<PAGE>
Diversified Income
Portfolio of Investments DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATE VALUE
- ---------- ---------- ---------- -----------
<C> <S> <C> <C> <C>
GOVERNMENT & CORPORATE BONDS (93.6%)
AUSTRALIA (3.3%)
GOVERNMENT OBLIGATION
Au$ 400 Queensland Treasury Corp.......................................... 8.00% 05/14/97 $ 299,830
-----------
CANADA (6.3%)
GOVERNMENT OBLIGATION
Ca$ 740 Canada Treasury Bond.............................................. 8.00 11/01/98 568,555
-----------
DENMARK (3.2%)
GOVERNMENT OBLIGATION
DKr 1,450 Denmark Treasury Note............................................. 9.00 11/15/98 283,955
-----------
ITALY (5.3%)
GOVERNMENT OBLIGATION
ITL 750,000 Italy Treasury Bond (b)........................................... 10.50 04/15/98 475,985
-----------
NEW ZEALAND (3.0%)
GOVERNMENT OBLIGATION
NZ$ 415 New Zealand Treasury Bond (b)..................................... 8.00 07/15/98 272,023
-----------
SPAIN (5.4%)
GOVERNMENT OBLIGATIONS
ESP 14,000 Spain Treasury Bond (b)........................................... 11.45 08/30/98 120,960
43,000 Spain Treasury Bond............................................... 9.90 10/31/98 359,783
-----------
TOTAL SPAIN............................................................................... 480,743
-----------
SWEDEN (4.8%)
GOVERNMENT OBLIGATION
SEK 2,800 Sweden Treasury Bond.............................................. 10.75 01/23/97 431,973
-----------
UNITED STATES (62.3%)
AEROSPACE (1.1%)
$ 100 Sabreliner Corp. (Series B)....................................... 12.50 04/15/03 94,750
-----------
AIRLINES (1.0%)
100 GPA Delaware, Inc................................................. 8.75 12/15/98 93,750
-----------
AUTOMOTIVE (0.8%)
100 Envirotest Systems, Inc........................................... 9.625 04/01/03 73,000
-----------
CABLE & TELECOMMUNICATIONS (4.9%)
100 Adelphia Communications Corp. (Series B).......................... 9.50+ 02/15/04 82,500
100 AT&T Capital Corp................................................. 15.00 05/05/97 111,915
100 Echostar Communications........................................... 12.875++ 06/01/04 68,000
200 In-Flight Phone Corp. (Series B).................................. 14.00++ 05/15/02 73,500
100 Paxson Communications - 144A*..................................... 11.625 10/01/02 102,500
-----------
438,415
-----------
COMPUTER EQUIPMENT (2.0%)
100 Unisys Corp....................................................... 13.50 07/01/97 96,000
100 Integrated Device Technology (Conv.).............................. 5.50 06/01/02 81,560
-----------
177,560
-----------
CONTAINERS (0.6%)
100 Ivex Holdings Corp. (Series B).................................... 13.25++ 03/15/05 56,500
-----------
ELECTRICAL & ALARM SYSTEMS (0.9%)
100 Mosler, Inc....................................................... 11.00 04/15/03 78,750
-----------
</TABLE>
65
<PAGE>
Diversified Income
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATE VALUE
- ---------- ---------- ---------- -----------
<C> <S> <C> <C> <C>
ENTERTAINMENT/GAMING & LODGING (3.2%)
$ 100 Fitzgeralds Gaming Corp. (Units)++................................ 13.00% 12/31/02 $ 93,500
100 Motels of America, Inc. (Series B)................................ 12.00 04/15/04 99,125
100 Trump Taj Mahal (Series A)........................................ 11.35+ 11/15/99 96,250
-----------
288,875
-----------
FOODS & BEVERAGES (3.1%)
100 Envirodyne Industries, Inc........................................ 10.25 12/01/01 76,000
100 SC International Services, Inc.................................... 13.00 10/01/05 105,500
200 Specialty Foods Acquisition Corp. (Series B)...................... 13.00++ 08/15/05 98,000
-----------
279,500
-----------
MANUFACTURING (3.4%)
100 Alpine Group, Inc. - 144A*........................................ 12.25 07/15/03 98,000
100 Berry Plastics Corp............................................... 12.25 04/15/04 107,000
100 Uniroyal Technology Corp.......................................... 11.75 06/01/03 96,000
-----------
301,000
-----------
MANUFACTURING - DIVERSIFIED (2.4%)
100 Interlake Corp.................................................... 12.125 03/01/02 95,500
200 Jordan Industries, Inc............................................ 11.75++ 08/01/05 120,000
-----------
215,500
-----------
OIL & GAS (1.0%)
100 Empire Gas Corp................................................... 7.00 07/15/04 88,500
-----------
PUBLISHING (2.2%)
200 Affiliated Newspapers Investments, Inc............................ 13.25++ 07/01/06 125,500
100 United States Banknote Corp....................................... 10.375 06/01/02 74,000
-----------
199,500
-----------
RESTAURANTS (1.9%)
100 Carrols Corp...................................................... 11.50 08/15/03 101,250
100 Flagstar Corp..................................................... 11.25 11/01/04 71,000
-----------
172,250
-----------
RETAIL (1.0%)
100 Thrifty Payless, Inc. - 144A*..................................... 11.625+ 04/15/06 90,000
-----------
TEXTILES - APPAREL MANUFACTURERS (0.4%)
50 U.S. Leather, Inc................................................. 10.25 07/31/03 37,000
-----------
U.S. GOVERNMENT & AGENCIES OBLIGATIONS (32.4%)
Federal National Mortgage Assoc.
1,000 .................................................................. 7.00 ** 1,006,875
980 .................................................................. 7.00 07/01/25-
11/01/25 986,720
-----------
1,993,595
-----------
500 U.S. Treasury Note Principal Strip................................ 0.00 02/15/00 401,871
-----------
500 U.S. Treasury Note................................................ 5.75 10/31/00 507,500
-----------
2,902,966
-----------
TOTAL UNITED STATES....................................................................... 5,587,816
-----------
TOTAL GOVERNMENT & CORPORATE BONDS (IDENTIFIED COST $8,346,334)........................... 8,400,880
-----------
</TABLE>
66
<PAGE>
Diversified Income
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
- ---------- ---------- ----------
WARRANTS (A) (0.0%)
<C> <S> <C> <C> <C>
CABLE & TELECOMMUNICATIONS (0.0%)
200 In-Flight Phone Corp. - 144A*............................................. 05/15/02 $ 2,000
-----------
ENTERTAINMENT/GAMING & LODGING (0.0%)
100 Fitzgeralds Gaming Corp. - 144A*.......................................... 03/15/99 1,000
-----------
TOTAL WARRANTS (IDENTIFIED COST $12,198).............................................. 3,000
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATE
- ---------- ---------- ----------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS (21.0%)
GERMANY (2.0%)
TIME DEPOSIT (c)
BANKING
DEM 251 Chase Manhattan Bank............................................... 3.00% 01/03/96 174,862
-----------
UNITED STATES (D) (19.0%)
U.S. GOVERNMENT AGENCY
$ 1,700 Federal Home Loan Mortgage Corp.................................... 5.75 01/02/96 1,699,728
-----------
TOTAL SHORT-TERM INVESTMENTS (IDENTIFIED COST $1,879,258).................................. 1,874,590
-----------
TOTAL INVESTMENTS (IDENTIFIED COST $10,237,790) (E)........................ 114.6% 10,278,470
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS............................. (14.6) (1,306,477)
---------- -------------
NET ASSETS................................................................. 100.0% $ 8,971,993
---------- -------------
---------- -------------
<FN>
- ----------------
* RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
** SECURITY WAS PURCHASED ON A FORWARD COMMITMENT BASIS WITH AN APPROXIMATE
PRINCIPAL AMOUNT AND NO DEFINITE MATURITY DATE; THE ACTUAL PRINCIPAL
AMOUNT AND MATURITY DATE WILL BE DETERMINED UPON SETTLEMENT.
++ CONSISTS OF ONE OR MORE CLASS OF SECURITIES TRADED TOGETHER AS A UNIT;
GENERALLY BONDS WITH ATTACHED STOCKS/WARRANTS.
+ PAYMENT-IN-KIND SECURITY.
++ CURRENTLY A ZERO COUPON BOND AND WILL PAY INTEREST AT THE RATE SHOWN AT A
FUTURE SPECIFIED DATE.
(A) NON-INCOME PRODUCING SECURITIES.
(B) SOME OR ALL OF THESE SECURITIES ARE SEGREGATED IN CONNECTION WITH OPEN
FORWARD FOREIGN CURRENCY CONTRACTS.
(C) SUBJECT TO WITHDRAWAL RESTRICTIONS UNTIL MATURITY.
(D) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS
BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(E) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED
COST.
</TABLE>
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT DECEMBER 31, 1995:
<TABLE>
<CAPTION>
IN
CONTRACTS EXCHANGE DELIVERY UNREALIZED
TO RECEIVE FOR DATE DEPRECIATION
- ---------- ---------- -------- ------------
<S> <C> <C> <C>
AUD 204,238 $ 152,055 01/03/96 ($408)
NZ$ 229,509 $ 150,076 01/03/96 (207)
DKK 1,641,000 $ 295,043 01/05/96 (164)
$ 113,336 DEM 167,500 09/11/96 (2,765)
------------
Total unrealized
depreciation ............... (3,$544)
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
67
<PAGE>
Balanced
Portfolio of Investments DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMMON STOCKS (58.5%)
AEROSPACE (1.6%)
3,400 Boeing Co.................... $ 266,475
-------------
AIR TRANSPORT (1.0%)
2,200 AMR Corp.*................... 163,350
-------------
AUTO PARTS - ORIGINAL EQUIPMENT (0.7%)
3,700 Lear Seating Corp.*.......... 107,300
-------------
AUTOMOTIVE (2.8%)
4,700 Chrysler Corp................ 260,262
6,800 Ford Motor Co................ 197,200
-------------
457,462
-------------
BANKS - INTERNATIONAL (1.3%)
3,100 Citicorp..................... 208,475
-------------
BANKS - REGIONAL (1.6%)
6,600 Fleet Financial Group,
Inc........................ 268,950
-------------
BIOTECHNOLOGY (1.9%)
7,439 Guidant Corp................. 314,298
-------------
BROKERAGE (1.1%)
3,500 Merrill Lynch & Co., Inc..... 178,500
-------------
BUSINESS SYSTEMS (1.5%)
4,700 General Motors Corp. (Class
E)......................... 244,400
-------------
COMMUNICATIONS - EQUIPMENT & SOFTWARE (1.1%)
2,500 Cisco Systems, Inc.*......... 186,562
-------------
COMMUNICATIONS - EQUIPMENT/MANUFACTURERS
(1.2%)
4,500 Northern Telecom Ltd.
(Canada)................... 193,500
-------------
COMPUTER SERVICES (1.8%)
4,500 First Data Corp.............. 300,938
-------------
COMPUTER SOFTWARE (1.5%)
2,700 Microsoft Corp.*............. 236,925
-------------
COMPUTERS - SYSTEMS (0.6%)
2,200 Tandy Corp................... 91,300
-------------
CRUDE PRODUCTS (0.4%)
3,200 Occidental Petroleum Corp.... 68,400
-------------
ELECTRIC - MAJOR (1.2%)
2,700 General Electric Co.......... 194,400
-------------
ELECTRONICS - DEFENSE (1.6%)
3,200 Hewlett-Packard Co........... 268,000
-------------
ELECTRONICS - SEMICONDUCTORS/COMPONENTS
(5.3%)
3,500 Intel Corp................... 198,625
3,600 Motorola, Inc................ 205,200
8,800 National Semiconductor
Corp.*..................... 195,800
5,200 Texas Instruments Inc........ 269,100
-------------
868,725
-------------
ENTERTAINMENT (3.5%)
9,700 Circus Circus Enterprises,
Inc.*...................... 270,387
5,000 Walt Disney Co............... 295,000
-------------
565,387
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
HEALTH EQUIPMENT & SERVICES (1.6%)
5,100 Columbia/HCA Healthcare
Corp....................... $ 258,825
-------------
HEALTHCARE - DRUGS (1.4%)
3,860 Lilly (Eli) & Co............. 217,125
-------------
HOUSEHOLD APPLIANCES (1.1%)
6,400 American Standard Companies,
Inc.*...................... 179,200
-------------
MACHINERY (0.6%)
2,200 Case Corp.................... 100,650
-------------
METALS - MISCELLANEOUS (0.7%)
1,800 Phelps Dodge Corp............ 112,050
-------------
MULTI-LINE INSURANCE (1.4%)
2,450 American International Group,
Inc........................ 226,625
-------------
NATURAL RESOURCES (1.9%)
3,900 Texaco, Inc.................. 306,150
-------------
OFFICE EQUIPMENT & SUPPLIES (1.3%)
1,500 Xerox Corp................... 205,500
-------------
OIL WELL - MACHINERY (1.2%)
2,900 Schlumberger Ltd.
(Netherlands Antilles)..... 200,825
-------------
PAPER & FOREST PRODUCTS (1.2%)
4,600 Weyerhaeuser Co.............. 198,950
-------------
PHARMACEUTICALS (3.1%)
10,400 Ivax Corp.................... 296,400
3,000 Merck & Co., Inc............. 197,250
-------------
493,650
-------------
RAILROADS (1.2%)
2,534 Burlington Northern Santa Fe
Corp....................... 197,652
-------------
RESTAURANTS (1.3%)
4,600 McDonald's Corp.............. 207,575
-------------
RETAIL - FOOD CHAINS (1.2%)
3,900 Safeway, Inc.*............... 200,850
-------------
SOAP & HOUSEHOLD PRODUCTS (1.1%)
2,100 Procter & Gamble Co.......... 174,300
-------------
TELECOMMUNICATION EQUIPMENT (1.2%)
8,500 General Instrument Corp.*.... 198,688
-------------
TELECOMMUNICATIONS (2.6%)
3,600 AT&T Corp.................... 233,100
4,500 GTE Corp..................... 198,000
-------------
431,100
-------------
TOBACCO (1.4%)
2,600 Philip Morris Companies,
Inc........................ 235,300
-------------
TRANSPORTATION - MISCELLANEOUS (1.3%)
2,800 Delta Airlines, Inc.......... 206,850
-------------
TOTAL COMMON STOCKS
(IDENTIFIED COST
$8,913,727)................ 9,535,212
-------------
</TABLE>
68
<PAGE>
Balanced
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS) VALUE
- ----------- -------------
<C> <S> <C>
CORPORATE BONDS (2.6%)
BANKS (0.5%)
$ 75 Mellon Bank Corp.
6.50% due 08/01/05......... $ 76,211
-------------
FINANCIAL (0.6%)
100 Abbey National PLC
6.69% due 10/17/05 (United
Kingdom)................... 103,525
-------------
GAS TRANSMISSION (0.2%)
25 ANR Pipeline Co.
9.625% due 11/01/21........ 32,703
-------------
HEALTHCARE - DRUGS (0.3%)
45 Lilly (Eli) & Co.
8.375% due 12/01/06........ 53,293
-------------
INDUSTRIALS (0.7%)
25 Dayton-Hudson Co.
7.875% due 06/15/23........ 25,119
15 Mead Corp.
7.125% due 08/01/25........ 15,228
40 Monsanto Co.
8.875% due 12/15/09........ 49,581
15 Texas Utilities Electric Co.
7.875% due 04/01/24........ 15,833
-------------
105,761
-------------
TELECOMMUNICATIONS (0.3%)
50 AT&T Corp. 7.75% due
03/01/07................... 56,374
-------------
TOTAL CORPORATE BONDS
(IDENTIFIED COST
$404,517).................. 427,867
-------------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
MORTGAGE-BACKED SECURITIES (7.6%)
202 Federal Home Loan Mortgage
Corp. PC Gold
6.50% due 07/01/25......... 199,895
598 Federal Home Loan Mortgage
Corp. PC Gold
7.00% due
12/01/10-12/01/25.......... 605,910
199 Government National Mortgage
Association
6.00% due 08/20/25......... 200,836
227 Government National Mortgage
Association
7.50% due 10/15/25......... 233,772
-------------
TOTAL MORTGAGE-BACKED
SECURITIES (IDENTIFIED COST
$1,222,260)................ 1,240,413
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS) VALUE
- ----------- -------------
<C> <S> <C>
U.S. GOVERNMENT OBLIGATIONS (21.1%)
$ 175 U.S. Treasury Bond
8.00% due 11/15/21......... $ 218,887
395 U.S. Treasury Bond
7.50% due 11/15/24......... 474,802
600 U.S. Treasury Note
5.125% due 04/30/98........ 598,688
195 U.S. Treasury Note
5.50% due 11/15/98......... 196,432
175 U.S. Treasury Note
7.75% due 11/30/99......... 189,656
235 U.S. Treasury Note
7.75% due 01/31/00......... 255,269
95 U.S. Treasury Note
6.25% due 08/31/00......... 98,310
370 U.S. Treasury Note
7.50% due 05/15/02......... 410,411
225 U.S. Treasury Note
6.375% due 08/15/02........ 236,039
750 U.S. Treasury Note
5.875% due 11/15/05........ 766,875
-------------
TOTAL U.S. GOVERNMENT
OBLIGATIONS (IDENTIFIED
COST $3,338,130)........... 3,445,369
-------------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
SHORT-TERM INVESTMENTS (11.9%)
U.S. GOVERNMENT AGENCY (a) (8.6%)
1,400 Federal Home Loan Banks 5.50%
due 01/08/96............... 1,398,503
-------------
REPURCHASE AGREEMENT (3.3%)
542 The Bank of New York 3.00%
due 01/02/96 (dated
12/29/95; proceeds
$542,680; collateralized by
$541,124 U.S. Treasury Note
5.75% due 09/30/97 valued
at $553,349) (Identified
Cost $542,499)............. 542,499
-------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST
$1,941,002)................ 1,941,002
-------------
TOTAL INVESTMENTS (IDENTIFIED
COST
$15,819,636) (B)............ 101.7% 16,589,863
LIABILITIES IN EXCESS OF OTHER
ASSETS...................... (1.7) (278,471)
---------- -------------
NET ASSETS.................... 100.0% $ 16,311,392
---------- -------------
---------- -------------
<FN>
- ----------------
* NON-INCOME PRODUCING SECURITY.
(A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS
BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED
COST.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
69
<PAGE>
Utilities
Portfolio of Investments DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS) VALUE
- ----------- -----------
<C> <S> <C>
CORPORATE BOND (0.6%)
TELECOMMUNICATIONS
$ 100 Century Telephone Enterprises,
Inc. 7.20% due 12/01/25
(Identified Cost $99,779)... $ 103,353
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES
- -----------
<C> <S> <C>
PREFERRED STOCKS (1.4%)
U.S. GOVERNMENT AGENCY (0.2%)
1,000 Tennessee Valley Authority
(Series 95-A) $2.00......... 26,500
-----------
UTILITIES - ELECTRIC (1.2%)
1,000 Connecticut Light & Power
Capital (Series A) $2.325... 27,125
2,500 Public Service Electric & Gas
Company $1.9992............. 64,375
5,000 Virginia Power Capital
$2.0125..................... 130,000
-----------
221,500
-----------
TOTAL PREFERRED STOCKS
(IDENTIFIED COST
$238,812)................... 248,000
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
COMMON STOCKS (91.7%)
NATURAL GAS (16.4%)
6,000 Anadarko Petroleum Corp....... 324,750
11,000 Atlanta Gas Light Company..... 217,250
6,000 Brooklyn Union Gas Co......... 175,500
4,500 Consolidated Natural Gas
Co.......................... 204,187
3,800 El Paso Natural Gas Company... 107,825
5,000 Enron Corp.................... 190,625
6,500 Indiana Energy Inc............ 155,187
7,000 MCN Corp...................... 162,750
3,500 Mitchell Energy & Development
Corp. (Class B)............. 65,625
5,500 New Jersey Resources Corp..... 165,687
8,500 NorAm Energy Corp............. 75,438
5,000 Northwest Natural Gas Co...... 162,500
5,500 Panhandle Eastern Corp........ 153,313
6,500 Questar Corp.................. 217,750
2,000 Seagull Energy Corp.*......... 44,500
4,500 Sonat, Inc.................... 160,313
4,000 Southwest Gas Corp............ 70,500
6,000 Tenneco Inc................... 297,750
-----------
2,951,450
-----------
TELECOMMUNICATIONS (38.7%)
5,500 Airtouch Communications,
Inc.*....................... 155,375
5,000 Alcatel Alsthom (ADR)
(France).................... 87,500
7,000 Alltel Corp................... 206,500
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -----------
<C> <S> <C>
3,000 Ameritech Corp................ $ 177,000
6,000 Arch Communications Group,
Inc.*....................... 144,000
3,500 AT&T Corp..................... 226,625
7,500 BCE, Inc. (Canada)............ 258,750
2,500 Bell Atlantic Corp............ 167,187
4,500 BellSouth Corp................ 195,750
5,500 Century Telephone Enterprises,
Inc......................... 174,625
3,000 Ericsson (L.M.) Telephone Co.
AB (ADR) (Sweden)........... 58,125
7,000 Frontier Corp................. 210,000
4,000 General Instrument Corp.*..... 93,500
6,500 Grupo Iusacell S.A. de C.V.
(Series L) (ADR)
(Mexico)*................... 65,813
4,500 GTE Corp...................... 198,000
7,000 Liberty Media Group (Class
A)*......................... 187,250
6,500 MCI Communications Corp....... 169,813
4,700 MFS Communication Co.,
Inc.*....................... 250,275
6,000 Midcom Communications
Corp.*...................... 103,500
6,500 News Corp. Ltd. (ADR)
(Australia)................. 138,938
4,000 Nippon Telegraph & Telephone
Corp. (ADR) (Japan)......... 164,000
4,000 Northern Telecom Ltd.
(Canada).................... 172,000
4,000 NYNEX Corp.................... 216,000
3,000 Pacific Telesis Group......... 100,875
4,500 Paging Network, Inc.*......... 106,875
4,500 Philips Electronics NV (ADR)
(Netherlands)............... 161,437
5,000 Portugal Telecom S.A. (ADR)
(Portugal)*................. 95,000
3,000 SBC Communications, Inc....... 172,500
7,000 Scientific-Atlanta, Inc....... 105,000
4,500 Southern New England
Telecommunications Corp..... 178,875
6,000 Sprint Corp................... 239,250
5,500 Tele Danmark AS (ADR)
(Denmark)................... 151,937
6,000 Tele-Communications, Inc.*.... 119,250
3,000 Telecom Argentina S.A. (ADR)
(Argentina)................. 142,875
4,000 Telefonica Espana S.A. (ADR)
(Spain)..................... 167,500
3,000 Telefonos de Mexico S.A. de
C.V. (Series L) (ADR)
(Mexico).................... 95,625
6,500 Telephone & Data Systems,
Inc......................... 256,750
3,000 U.S. West, Inc................ 107,250
5,000 U.S. West Media Group*........ 95,000
4,500 United States Cellular
Corp.*...................... 151,875
4,500 Vanguard Cellular Systems,
Inc. (Class A)*............. 90,000
5,000 Viacom, Inc. (Class A)*....... 229,375
5,500 Vodafone Group PLC (ADR)
(United Kingdom)............ 193,875
5,000 WorldCom, Inc.*............... 176,250
-----------
6,957,900
-----------
</TABLE>
70
<PAGE>
Utilities
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -----------
<C> <S> <C>
UTILITIES - ELECTRIC (36.6%)
6,000 Allegheny Power System,
Inc......................... $ 171,750
5,500 American Electric Power Co.,
Inc......................... 222,750
7,000 Bangor Hydro-Electric Co...... 80,500
6,000 California Energy Co.,
Inc.*....................... 117,000
7,000 Carolina Power & Light Co..... 241,500
6,000 Central & South West Corp..... 167,250
3,500 CINergy Corp.................. 107,188
5,000 CMS Energy Corp............... 149,375
5,500 Consolidated Edison Co. of New
York, Inc................... 176,000
5,500 DQE, Inc...................... 169,125
3,000 Duke Power Co................. 142,125
3,000 Eastern Utilities
Association................. 70,875
4,500 FPL Group, Inc................ 208,687
6,000 General Public Utilities
Corp........................ 204,000
10,000 Houston Industries, Inc....... 242,500
6,000 Illinova Corp................. 180,000
7,000 IPALCO Enterprises, Inc....... 266,875
7,000 Kansas City Power & Light
Company..................... 182,875
5,000 National Power PLC (ADR)
(United Kingdom)............ 140,000
3,000 New England Electric System... 118,875
4,500 NIPSCO Industries, Inc........ 172,125
6,500 Northwestern Public Service
Co.......................... 182,000
4,000 Oklahoma Gas & Electric
Company..................... 172,000
4,000 Pacific Gas & Electric Co..... 113,500
7,500 PacifiCorp.................... 159,375
7,000 Peco Energy Co................ 210,875
6,500 Pinnacle West Capital Corp.... 186,875
4,000 Public Service Company of
Colorado.................... 141,500
7,500 Public Service Company of
New Mexico*................. 132,187
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -----------
<C> <S> <C>
6,000 Public Service Enterprise
Group, Inc.................. $ 183,750
6,500 SCANA Corp.................... 186,063
4,500 SCE Corp...................... 79,875
6,500 Southern Co................... 160,062
7,000 TECO Energy, Inc.............. 179,375
7,000 TNP Enterprises, Inc.......... 131,250
5,000 Unicom Corp................... 163,750
7,500 Utilicorp United, Inc......... 220,313
6,000 Western Resources, Inc........ 200,250
7,500 Wisconsin Energy Corp......... 229,688
-----------
6,564,063
-----------
TOTAL COMMON STOCKS
(IDENTIFIED COST
$15,177,545)................ 16,473,413
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS)
- -----------
SHORT-TERM INVESTMENT (A) (7.2%)
<C> <S> <C>
U.S. GOVERNMENT AGENCY
$ 1,300 Federal Home Loan Mortgage
Corp. 5.75% due 01/02/96
(Amortized Cost
$1,299,792)................. 1,299,792
-----------
TOTAL INVESTMENTS (IDENTIFIED
COST
$16,815,928) (B)............ 100.9% 18,124,558
LIABILITIES IN EXCESS OF CASH
AND OTHER ASSETS............ (0.9) (165,327)
---------- -------------
NET ASSETS.................... 100.0% $ 17,959,231
---------- -------------
---------- -------------
<FN>
- ----------------
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS
BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED
COST.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
71
<PAGE>
Dividend Growth
Portfolio of Investments DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMMON STOCKS (97.5%)
AEROSPACE (4.8%)
40,200 United Technologies Corp.... $ 3,813,975
-------------
AUTOMOTIVE (4.9%)
69,200 Chrysler Corp............... 3,831,950
-------------
BANKS (4.8%)
57,900 BankAmerica Corp............ 3,749,025
-------------
BEVERAGES - SOFT DRINKS (4.8%)
67,200 PepsiCo Inc................. 3,754,800
-------------
CHEMICALS (4.7%)
30,400 Monsanto Co................. 3,724,000
-------------
COMPUTERS (4.8%)
41,500 International Business
Machines Corp............. 3,807,625
-------------
COMPUTERS - PERIPHERAL EQUIPMENT (5.1%)
83,000 Honeywell, Inc.............. 4,035,875
-------------
CONGLOMERATES (5.0%)
79,100 Tenneco Inc................. 3,925,337
-------------
DRUGS (5.0%)
93,800 Abbott Laboratories......... 3,916,150
-------------
FOODS (4.9%)
111,900 Quaker Oats Company (The)... 3,860,550
-------------
MACHINERY - AGRICULTURAL (5.0%)
111,200 Deere & Co.................. 3,919,800
-------------
METALS & MINING (5.0%)
62,800 Phelps Dodge Corp........... 3,909,300
-------------
NATURAL GAS (5.0%)
102,600 Enron Corp.................. 3,911,625
-------------
OFFICE EQUIPMENT (4.9%)
82,000 Pitney Bowes, Inc........... 3,854,000
-------------
OIL INTEGRATED - INTERNATIONAL (4.7%)
33,200 Mobil Corp.................. 3,718,400
-------------
PHOTOGRAPHY (4.8%)
56,000 Eastman Kodak Co............ 3,752,000
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
RETAIL - DEPARTMENT STORES (4.8%)
89,300 May Department Stores Co.... $ 3,772,925
-------------
TELEPHONES (4.8%)
94,900 Sprint Corp................. 3,784,137
-------------
TOBACCO (4.8%)
41,900 Philip Morris Companies,
Inc....................... 3,791,950
-------------
UTILITIES - ELECTRIC (4.9%)
137,700 Pacific Gas & Electric
Co........................ 3,907,238
-------------
TOTAL COMMON STOCKS
(IDENTIFIED COST
$70,443,930).............. 76,740,662
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS)
- -----------
<C> <S> <C>
SHORT-TERM INVESTMENTS (3.6%)
U.S. GOVERNMENT AGENCY (a) (1.9%)
$ 1,500 Federal Home Loan Mortgage
Corp.
5.45% due 01/03/96........ 1,499,546
-------------
REPURCHASE AGREEMENT (1.7%)
1,324 The Bank of New York 3.00%
due 01/02/96 (dated
12/29/95; proceeds
$1,324,005; collateralized
by $1,320,219 U.S.
Treasury Note 5.75% due
09/30/97 valued at
$1,350,035) (Identified
Cost $1,323,564).......... 1,323,564
-------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST
$2,823,110)............... 2,823,110
-------------
TOTAL INVESTMENTS (IDENTIFIED
COST $73,267,040) (B)....... 101.1% 79,563,772
LIABILITIES IN EXCESS OF OTHER
ASSETS...................... (1.1) (869,544)
---------- -------------
NET ASSETS.................... 100.0% $ 78,694,228
---------- -------------
---------- -------------
<FN>
- ----------------
(A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS
BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED
COST.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
72
<PAGE>
Value-Added Market
Portfolio of Investments DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMMON STOCKS (92.9%)
AEROSPACE & DEFENSE (1.5%)
600 Boeing Co.................... $ 47,023
700 General Dynamics Corp........ 41,388
600 Lockheed Martin Corp......... 47,400
500 McDonnell Douglas Corp....... 46,000
650 Northrop Grumman Corp........ 41,600
950 Raytheon Co.................. 44,888
850 Rockwell International
Corp....................... 44,943
475 United Technologies Corp..... 45,065
-------------
358,307
-------------
AIRLINES (0.7%)
550 AMR Corp.*................... 40,837
550 Delta Air Lines, Inc......... 40,631
1,900 Southwest Airlines Co........ 44,175
3,700 USAir Group, Inc.*........... 49,025
-------------
174,668
-------------
ALUMINUM (0.5%)
1,400 Alcan Aluminum Ltd.
(Canada)................... 43,574
900 Aluminum Co. of America...... 47,588
800 Reynolds Metals Co........... 45,300
-------------
136,462
-------------
AUTO PARTS - AFTER MARKET (0.7%)
1,850 Cooper Tire & Rubber Co...... 45,556
1,220 Echlin, Inc.................. 44,530
1,100 Genuine Parts Co............. 45,100
900 Goodyear Tire & Rubber Co.... 40,838
-------------
176,024
-------------
AUTOMOBILES (0.5%)
850 Chrysler Corp................ 47,069
1,450 Ford Motor Co................ 42,050
800 General Motors Corp.......... 42,300
-------------
131,419
-------------
BANKS - MONEY CENTER (1.3%)
700 BankAmerica Corp............. 45,325
700 Bankers Trust New York
Corp....................... 46,550
660 Chase Manhattan Corp......... 40,013
675 Chemical Banking Corp........ 39,656
700 Citicorp..................... 47,075
1,250 First Chicago NBD Corp....... 49,375
500 Morgan (J.P.) & Co., Inc..... 40,124
-------------
308,118
-------------
BANKS - REGIONAL (4.3%)
1,200 Banc One Corp................ 45,300
1,050 Bank of Boston Corp.......... 48,563
920 Bank of New York Co., Inc.... 44,850
750 Barnett Banks, Inc........... 44,250
1,000 Boatmen's Bancshares, Inc.... 40,875
1,200 Comerica, Inc................ 48,150
1,190 Corestates Financial Corp.... 45,071
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
850 First Bank System, Inc....... $ 42,181
550 First Fidelity Bancorp,
Inc........................ 41,456
330 First Interstate Bancorp..... 45,045
800 First Union Corp............. 44,500
1,150 Fleet Financial Group,
Inc........................ 46,863
1,300 KeyCorp...................... 47,125
850 Mellon Bank Corp............. 45,688
1,400 National City Corp........... 46,375
655 NationsBank Corp............. 45,604
1,345 Norwest Corp................. 44,385
1,350 PNC Bank Corp................ 43,538
650 Republic New York Corp....... 40,381
600 SunTrust Banks, Inc.......... 41,100
1,250 U.S. Bancorp................. 41,874
1,000 Wachovia Corp................ 45,750
210 Wells Fargo & Co............. 45,360
-------------
1,024,284
-------------
BEVERAGES - ALCOHOLIC (0.7%)
700 Anheuser-Busch Companies,
Inc........................ 46,813
1,150 Brown-Forman Corp. (Class
B)......................... 41,975
2,150 Coors (Adolph) Co............ 47,569
1,300 Seagram Co. Ltd. (Canada).... 45,012
-------------
181,369
-------------
BEVERAGES - SOFT DRINKS (0.4%)
550 Coca Cola Co................. 40,838
850 PepsiCo Inc.................. 47,493
-------------
88,331
-------------
BROADCAST MEDIA (0.7%)
365 Capital Cities/ABC, Inc...... 45,032
2,400 Comcast Corp. (Class A)...... 43,500
2,200 Tele-Communications, Inc.*... 43,725
2,350 U.S. West Media Group........ 44,650
-------------
176,907
-------------
BUILDING MATERIALS (0.6%)
1,350 Masco Corp................... 42,355
1,100 Owens-Corning Fiberglas
Corp.*..................... 49,363
1,200 Sherwin-Williams Co.......... 48,900
-------------
140,618
-------------
CHEMICALS (1.9%)
860 Air Products & Chemicals,
Inc........................ 45,365
650 Dow Chemical Co.............. 45,744
590 Du Pont (E.I.) de Nemours &
Co., Inc................... 41,226
750 Eastman Chemical Company..... 46,969
650 Goodrich (B.F.) Co........... 44,281
800 Hercules, Inc................ 45,100
350 Monsanto Co.................. 42,875
1,400 Praxair, Inc................. 47,075
750 Rohm & Haas Co............... 48,281
1,050 Union Carbide Corp........... 39,375
-------------
446,291
-------------
</TABLE>
73
<PAGE>
Value-Added Market
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
CHEMICALS - DIVERSIFIED (0.7%)
850 Avery Dennison Corp.......... $ 42,606
1,900 Engelhard Corp............... 41,325
700 FMC Corp.*................... 47,338
1,050 PPG Industries, Inc.......... 48,037
-------------
179,306
-------------
CHEMICALS - SPECIALTY (0.9%)
750 Grace (W.R.) & Co............ 44,344
650 Great Lakes Chemical Corp.... 46,800
1,290 Morton International, Inc.... 46,278
1,550 Nalco Chemical Co............ 46,694
800 Sigma-Aldrich Corp........... 39,600
-------------
223,716
-------------
COMMUNICATIONS - EQUIPMENT/MANUFACTURERS
(1.3%)
1,190 Andrew Corp.................. 45,518
600 Cabletron Systems, Inc.*..... 48,600
600 Cisco Systems, Inc........... 44,775
1,200 DSC Communications Corp.*.... 44,250
1,000 Northern Telecom Ltd.
(Canada)................... 43,000
3,100 Scientific-Atlanta, Inc...... 46,500
1,150 Tellabs, Inc.*............... 42,550
-------------
315,193
-------------
COMPUTER SOFTWARE & SERVICES (1.9%)
1,200 Autodesk, Inc................ 40,800
600 Automatic Data Processing,
Inc........................ 44,550
1,200 Ceridian Corp.*.............. 49,500
800 Computer Associates
International, Inc......... 45,500
600 Computer Sciences Corp.*..... 42,150
700 First Data Corp.............. 46,813
500 Microsoft Corp.*............. 43,876
3,100 Novell, Inc.*................ 43,788
1,050 Oracle Systems Corp.*........ 44,362
950 Shared Medical Systems
Corp....................... 51,300
-------------
452,639
-------------
COMPUTERS - SYSTEMS (2.4%)
4,900 Amdahl Corp.*................ 41,650
1,400 Apple Computer, Inc.......... 44,450
950 COMPAQ Computer Corp.*....... 45,600
1,850 Cray Research, Inc.*......... 45,787
3,600 Data General Corp.*.......... 49,500
700 Digital Equipment Corp.*..... 44,888
600 Hewlett-Packard Co........... 50,250
2,800 Intergraph Corp.*............ 44,100
450 International Business
Machines Corp.............. 41,288
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
1,550 Silicon Graphics, Inc.*...... $ 42,624
950 Sun Microsystems, Inc.*...... 43,343
3,700 Tandem Computers Inc.*....... 39,312
7,830 Unisys Corp.*................ 44,046
-------------
576,838
-------------
CONGLOMERATES (0.5%)
1,650 Teledyne, Inc................ 42,281
920 Tenneco Inc.................. 45,655
600 Textron Inc.................. 40,500
-------------
128,436
-------------
CONTAINERS - METAL & GLASS (0.4%)
1,450 Ball Corp.................... 39,875
1,100 Crown Cork & Seal Co.,
Inc.*...................... 45,925
-------------
85,800
-------------
CONTAINERS - PAPER (0.6%)
1,700 Bemis Company, Inc........... 43,563
3,400 Stone Container Corp......... 48,875
1,050 Temple-Inland Inc............ 46,331
-------------
138,769
-------------
COSMETICS (0.7%)
1,300 Alberto-Culver Co............ 44,688
550 Avon Products, Inc........... 41,456
900 Gillette Co.................. 46,912
930 International Flavors &
Fragrances Inc............. 44,640
-------------
177,696
-------------
DISTRIBUTORS - CONSUMER PRODUCTS (0.5%)
2,200 Fleming Cos., Inc............ 45,375
1,450 Super Valu Stores, Inc....... 45,675
1,350 Sysco Corp................... 43,875
-------------
134,925
-------------
ELECTRICAL EQUIPMENT (1.7%)
1,100 AMP, Inc..................... 42,213
550 Emerson Electric Co.......... 44,963
650 General Electric Co.......... 46,800
1,350 General Signal Corp.......... 43,706
700 Grainger (W.W.), Inc......... 46,375
850 Honeywell, Inc............... 41,331
750 Raychem Corp................. 42,656
550 Thomas & Betts Corp.......... 40,562
2,900 Westinghouse Electric
Corp....................... 47,850
-------------
396,456
-------------
ELECTRONICS - DEFENSE (0.4%)
1,780 EG & G, Inc.................. 43,165
1,300 Loral Corp................... 45,988
-------------
89,153
-------------
</TABLE>
74
<PAGE>
Value-Added Market
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
ELECTRONICS - INSTRUMENTATION (0.4%)
1,200 Perkin-Elmer Corp............ $ 45,300
800 Tektronix, Inc............... 39,300
-------------
84,600
-------------
ELECTRONICS - SEMICONDUCTORS (1.4%)
2,700 Advanced Micro Devices,
Inc.*...................... 44,550
1,000 Applied Materials, Inc.*..... 39,250
700 Intel Corp................... 39,725
1,400 LSI Logic Corp............... 45,850
1,100 Micron Technology, Inc....... 43,588
700 Motorola, Inc................ 39,900
1,800 National Semiconductor
Corp.*..................... 40,050
850 Texas Instruments Inc........ 43,987
-------------
336,900
-------------
ENGINEERING & CONSTRUCTION (0.6%)
700 Fluor Corp................... 46,200
1,050 Foster Wheeler Corp.......... 44,625
4,960 Morrison Knudsen Co., Inc.... 21,080
1,165 Zurn Industries, Inc......... 24,902
-------------
136,807
-------------
ENTERTAINMENT (0.7%)
1,150 King World Productions
Inc.*...................... 44,705
1,200 Time Warner, Inc............. 45,450
900 Viacom, Inc.*................ 42,638
750 Walt Disney Co............... 44,250
-------------
177,043
-------------
FINANCIAL - MISCELLANEOUS (1.1%)
1,090 American Express Co.......... 45,099
1,400 American General Corp........ 48,825
550 Federal Home Loan Mortgage
Corp....................... 45,925
370 Federal National Mortgage
Association................ 45,926
1,150 MBNA Corp.................... 42,406
550 Transamerica Corp............ 40,080
-------------
268,261
-------------
FOODS (2.4%)
2,500 Archer-Daniels-Midland Co.... 45,000
600 C P C International Inc...... 41,175
800 Campbell Soup Co............. 48,000
1,000 ConAgra, Inc................. 41,250
800 General Mills, Inc........... 46,200
1,400 Heinz (H.J.) Co.............. 46,375
700 Hershey Foods Corp........... 45,500
550 Kellogg Co................... 42,488
1,200 Quaker Oats Company (The).... 41,400
750 Ralston-Ralston Purina
Group...................... 46,781
1,400 Sara Lee Corp................ 44,625
325 Unilever NV (ADR)
(Netherlands).............. 45,744
870 Wrigley (Wm.) Jr. Co. (Class
A)......................... 45,675
-------------
580,213
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
GOLD MINING (1.1%)
1,700 Barrick Gold Corp.
(Canada)................... $ 44,838
4,300 Echo Bay Mines Ltd.
(Canada)................... 44,613
2,850 Homestake Mining Co.......... 44,531
1,000 Newmont Mining Corp.......... 45,250
1,645 Placer Dome Inc.............. 39,686
3,350 Santa Fe Pacific Gold
Corp....................... 40,618
-------------
259,536
-------------
HARDWARE & TOOLS (0.6%)
1,300 Black & Decker Corp.......... 45,824
1,000 Snap-On, Inc................. 45,250
900 Stanley Works................ 46,350
-------------
137,424
-------------
HEALTHCARE - DIVERSIFIED (1.3%)
1,000 Abbott Laboratories.......... 41,750
1,450 Allergan, Inc................ 47,125
450 American Home Products
Corp....................... 43,650
550 Bristol-Myers Squibb Co...... 47,231
500 Johnson & Johnson............ 42,813
1,200 Mallinckrodt Group, Inc...... 43,650
440 Warner-Lambert Co............ 42,735
-------------
308,954
-------------
HEALTHCARE - DRUGS (0.9%)
730 Lilly (Eli) & Co............. 41,063
700 Merck & Co., Inc............. 46,025
700 Pfizer, Inc.................. 44,100
1,150 Pharmacia & Upjohn, Inc...... 44,562
800 Schering-Plough Corp......... 43,800
-------------
219,550
-------------
HEALTHCARE - MISCELLANEOUS (0.8%)
1,900 Alza Corp.*.................. 47,025
900 Amgen Inc.................... 53,324
4,000 Beverly Enterprises, Inc.*... 42,500
1,300 Manor Care, Inc.............. 45,500
-------------
188,349
-------------
HEALTHCARE HMOS (0.5%)
1,600 Humana, Inc.................. 43,800
900 U.S. Healthcare, Inc......... 41,738
650 United Healthcare Corp....... 42,575
-------------
128,113
-------------
HEAVY DUTY TRUCKS & PARTS (1.1%)
1,050 Cummins Engine Co., Inc...... 38,850
1,540 Dana Corp.................... 45,045
800 Eaton Corp................... 42,900
1,910 ITT Industries, Inc.......... 45,840
3,800 Navistar International
Corp.*..................... 39,900
1,000 PACCAR, Inc.................. 42,000
-------------
254,535
-------------
</TABLE>
75
<PAGE>
Value-Added Market
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
HOME BUILDING (0.6%)
1,300 Centex Corp.................. $ 45,175
3,200 Kaufman & Broad Home Corp.... 47,600
1,200 Pulte Corp................... 40,350
-------------
133,125
-------------
HOSPITAL MANAGEMENT (0.5%)
800 Columbia/HCA Healthcare
Corp....................... 40,600
3,700 Community Psychiatric
Centers*................... 45,325
2,150 Tenet Healthcare Corp.*...... 44,613
-------------
130,538
-------------
HOTELS/MOTELS (0.8%)
1,800 Harrah's Entertainment,
Inc.*...................... 43,650
750 Hilton Hotels Corp........... 46,125
850 ITT Corporation.............. 45,050
1,200 Marriot International Inc.... 45,900
-------------
180,725
-------------
HOUSEHOLD FURNISHINGS & APPLIANCES (0.5%)
650 Armstrong World Industries
Inc........................ 40,300
2,250 Maytag Corp.................. 45,563
800 Whirlpool Corp............... 42,600
-------------
128,463
-------------
HOUSEHOLD PRODUCTS (0.8%)
600 Clorox Co.................... 42,975
600 Colgate-Palmolive Co......... 42,150
600 Kimberly-Clark Corp.......... 49,716
550 Procter & Gamble Co.......... 45,650
-------------
180,491
-------------
HOUSEWARES (0.5%)
1,600 Newell Co.................... 41,400
900 Premark International,
Inc........................ 45,563
1,650 Rubbermaid, Inc.............. 42,075
-------------
129,038
-------------
INSURANCE BROKERS (0.4%)
2,350 Alexander & Alexander
Services, Inc.............. 44,650
500 Marsh & McLennan Cos.,
Inc........................ 44,375
-------------
89,025
-------------
INVESTMENT BANKING/BROKERAGE (0.9%)
900 Dean Witter, Discover & Co.
(Note 3)................... 42,300
850 Merrill Lynch & Co., Inc..... 43,350
600 Morgan Stanley Group, Inc.... 48,375
1,300 Salomon, Inc................. 46,150
700 Travelers Group, Inc......... 44,013
-------------
224,188
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
LEISURE TIME (0.7%)
3,300 Bally Entertainment Corp.*... $ 46,200
2,000 Brunswick Corp............... 48,000
6,800 Handleman Co................. 39,100
2,200 Outboard Marine Corp......... 44,825
-------------
178,125
-------------
LIFE INSURANCE (1.1%)
975 Jefferson-Pilot Corp......... 45,338
785 Lincoln National Corp........ 42,194
1,050 Providian Corp............... 42,788
1,000 Torchmark Corp............... 45,250
800 UNUM Corp.................... 44,000
1,447 USLIFE Corp.................. 43,228
-------------
262,798
-------------
MACHINE TOOLS (0.4%)
1,750 Cincinnati Milacron, Inc..... 45,938
2,550 Giddings & Lewis, Inc........ 41,437
-------------
87,375
-------------
MACHINERY - DIVERSIFIED (1.7%)
1,050 Briggs & Stratton Corp....... 45,544
750 Caterpillar, Inc............. 44,063
1,100 Cooper Industries, Inc....... 40,425
1,350 Deere & Co................... 47,588
1,460 Harnischfeger Industries,
Inc........................ 48,545
1,300 Ingersoll-Rand Co............ 45,663
700 NACCO Industries, Inc. (Class
A)......................... 38,850
1,150 Timken Co.................... 43,986
1,200 Varity Corp.*................ 44,550
-------------
399,214
-------------
MANUFACTURED HOUSING (0.2%)
1,655 Fleetwood Enterprises,
Inc........................ 42,616
-------------
MANUFACTURING - DIVERSIFIED (1.9%)
950 AlliedSignal, Inc............ 45,125
1,200 Crane Co..................... 44,250
1,200 Dover Corp................... 44,250
750 Illinois Tool Works Inc...... 44,250
700 Johnson Controls, Inc........ 48,125
1,000 Millipore Corp............... 41,125
1,700 Pall Corp.................... 45,688
1,300 Parker-Hannifin Corp......... 44,525
1,600 Trinova Corp................. 45,800
1,250 Tyco International Ltd....... 44,531
-------------
447,669
-------------
</TABLE>
76
<PAGE>
Value-Added Market
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
MEDICAL PRODUCTS & SUPPLIES (1.7%)
1,450 Bard (C.R.), Inc............. $ 46,763
1,150 Bausch & Lomb, Inc........... 45,569
1,000 Baxter International, Inc.... 41,875
650 Becton, Dickinson & Co....... 48,750
2,500 Biomet, Inc.*................ 44,375
960 Boston Scientific Corp.*..... 47,040
750 Medtronic Inc................ 41,906
1,097 St. Jude Medical, Inc........ 46,897
1,750 United States Surgical
Corp....................... 37,406
-------------
400,581
-------------
METALS - MISCELLANEOUS (0.9%)
1,400 ASARCO, Inc.................. 44,800
1,580 Cyprus Amax Minerals Co...... 41,278
1,440 Freeport-McMoran Copper &
Gold, Inc.................. 40,500
1,350 Inco Ltd. (Canada)........... 44,887
700 Phelps Dodge Corp............ 43,575
-------------
215,040
-------------
MISCELLANEOUS (2.1%)
1,600 Airtouch Communications,
Inc.*...................... 45,200
1,650 American Greetings Corp...... 45,581
1,330 Corning, Inc................. 42,560
1,600 Dial Corp.................... 47,400
1,100 Harcourt General, Inc........ 46,063
850 Harris Corp.................. 46,431
1,800 Jostens, Inc................. 43,650
700 Minnesota Mining &
Manufacturing Co........... 46,375
800 Pioneer Hi-Bred
International, Inc......... 44,500
600 TRW, Inc..................... 46,500
1,900 Whitman Corp................. 44,175
-------------
498,435
-------------
MULTI-LINE INSURANCE (0.7%)
600 Aetna Life & Casualty Co..... 41,550
470 American International Group,
Inc........................ 43,475
430 CIGNA Corp................... 44,398
850 ITT Hartford Group, Inc.*+... 41,118
-------------
170,541
-------------
OFFICE EQUIPMENT & SUPPLIES (0.8%)
1,000 Alco Standard Corp........... 45,625
2,500 Moore Corp. Ltd. (Canada).... 46,563
1,000 Pitney Bowes, Inc............ 47,000
350 Xerox Corp................... 47,950
-------------
187,138
-------------
OIL & GAS DRILLING (0.4%)
1,500 Helmerich & Payne, Inc....... 44,625
4,620 Rowan Cos., Inc.*............ 45,623
-------------
90,248
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
OIL - DOMESTIC INTEGRATED (2.0%)
875 Amerada Hess Corp............ $ 46,375
1,260 Ashland Oil, Inc............. 44,258
400 Atlantic Richfield Co........ 44,300
655 Kerr-McGee Corp.............. 41,593
965 Louisiana Land & Exploration
Co......................... 41,374
2,100 Occidental Petroleum Corp.... 44,888
1,050 Pennzoil Co.................. 44,363
1,400 Phillips Petroleum Co........ 47,775
1,500 Sun Co., Inc................. 41,062
1,350 Unocal Corp.................. 39,318
2,300 USX-Marathon Group........... 44,850
-------------
480,156
-------------
OIL - EXPLORATION & PRODUCTION (0.5%)
1,150 Burlington Resources, Inc.... 45,138
3,400 Oryx Energy Co.*............. 45,475
4,200 Santa Fe Energy Resources,
Inc.*...................... 40,425
-------------
131,038
-------------
OIL - INTERNATIONAL INTEGRATED (1.1%)
650 Amoco Corp................... 46,719
860 Chevron Corp................. 45,150
550 Exxon Corp................... 44,069
400 Mobil Corp................... 44,800
325 Royal Dutch Petroleum Co.
(ADR)
(Netherlands).............. 45,865
530 Texaco, Inc.................. 41,605
-------------
268,208
-------------
OIL WELL EQUIPMENT & SERVICE (1.1%)
1,850 Baker Hughes Inc............. 45,094
1,850 Dresser Industries, Inc...... 45,094
855 Halliburton Co............... 43,283
1,925 McDermott International,
Inc........................ 42,350
650 Schlumberger Ltd. (ADR)
(Netherlands Antilles)..... 45,013
805 Western Atlas Inc.*.......... 40,653
-------------
261,487
-------------
PAPER & FOREST PRODUCTS (2.4%)
1,350 Boise Cascade Corp........... 46,744
1,100 Champion International
Corp....................... 46,200
900 Federal Paper Board Co.,
Inc........................ 46,688
600 Georgia-Pacific Corp......... 41,175
1,150 International Paper Co....... 43,556
1,800 James River Corp. of
Virginia................... 43,425
1,650 Louisiana-Pacific Corp....... 40,013
900 Mead Corp.................... 47,025
1,100 Potlatch Corp................ 44,000
1,000 Union Camp Corp.............. 47,624
1,700 Westvaco Corp................ 47,175
1,040 Weyerhaeuser Co.............. 44,980
800 Willamette Industries,
Inc........................ 44,800
-------------
583,405
-------------
</TABLE>
77
<PAGE>
Value-Added Market
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
PERSONAL LOANS (0.4%)
950 Beneficial Corp.............. $ 44,294
750 Household International,
Inc........................ 44,344
-------------
88,638
-------------
PHOTOGRAPHY/IMAGING (0.4%)
650 Eastman Kodak Co............. 43,550
900 Polaroid Corp................ 42,638
-------------
86,188
-------------
POLLUTION CONTROL (0.5%)
1,560 Browning-Ferris Industries,
Inc........................ 46,020
4,000 Laidlaw Inc.................. 41,000
1,400 WMX Technologies, Inc........ 41,825
-------------
128,845
-------------
PROPERTY - CASUALTY INSURANCE (1.3%)
1,050 Allstate Corp. (The)......... 43,181
450 Chubb Corp................... 43,538
280 General Re Corp.............. 43,400
570 Loews Corp................... 44,674
1,300 SAFECO Corp.................. 44,850
800 St. Paul Companies, Inc...... 44,500
2,600 USF&G Corp................... 43,875
-------------
308,018
-------------
PUBLISHING (0.5%)
700 Dun & Bradstreet Corp........ 45,325
500 McGraw-Hill, Inc............. 43,563
1,000 Meredith Corp................ 41,875
-------------
130,763
-------------
PUBLISHING - NEWSPAPER (1.1%)
1,100 Dow Jones & Co., Inc......... 43,863
700 Gannett Co., Inc............. 42,963
700 Knight-Ridder Newspapers,
Inc........................ 43,750
1,550 New York Times Co. (Class
A)......................... 45,919
1,215 Times Mirror Co. (Class A)... 41,157
700 Tribune Co................... 42,787
-------------
260,439
-------------
RAILROADS (0.9%)
600 Burlington Northern Santa Fe
Corp....................... 46,800
600 Conrail, Inc................. 42,000
900 CSX Corp..................... 41,063
600 Norfolk Southern Corp........ 47,625
700 Union Pacific Corp........... 46,200
-------------
223,688
-------------
RESTAURANTS (1.1%)
3,870 Darden Restaurants, Inc...... 45,956
2,000 Luby's Cafeterias, Inc....... 44,500
1,000 McDonald's Corp.............. 45,125
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
6,100 Ryan's Family Steak Houses,
Inc.*...................... $ 41,938
4,500 Shoney's Inc.*............... 46,125
2,240 Wendy's International,
Inc........................ 47,600
-------------
271,244
-------------
RETAIL - DEPARTMENT STORES (1.1%)
1,600 Dillard Department Stores,
Inc. (Class A)............. 45,600
1,600 Federated Department Stores,
Inc........................ 44,000
1,100 May Department Stores Co..... 46,475
900 Mercantile Stores Co.,
Inc........................ 41,625
1,110 Nordstrom, Inc............... 44,677
900 Penney (J.C.) Co., Inc....... 42,863
-------------
265,240
-------------
RETAIL - DRUG STORES (0.5%)
950 Longs Drug Stores Corp....... 45,481
1,300 Rite Aid Corp................ 44,525
1,400 Walgreen Co.................. 41,825
-------------
131,831
-------------
RETAIL - FOOD CHAINS (1.1%)
1,400 Albertson's Inc.............. 46,025
1,700 American Stores Co........... 45,475
1,400 Giant Food, Inc. (Class A)... 44,100
2,000 Great Atlantic & Pacific Tea
Co., Inc................... 46,000
1,200 Kroger Co.*.................. 45,000
1,220 Winn-Dixie Stores, Inc....... 44,988
-------------
271,588
-------------
RETAIL - GENERAL MERCHANDISE (0.8%)
650 Dayton-Hudson Corp........... 48,750
6,200 Kmart Corp................... 44,950
1,100 Sears, Roebuck & Co.......... 42,900
1,950 Wal-Mart Stores, Inc......... 43,631
-------------
180,231
-------------
RETAIL - SPECIALTY (1.6%)
1,450 Circuit City Stores, Inc..... 40,056
1,000 Home Depot, Inc.............. 47,875
1,350 Lowe's Companies, Inc........ 45,225
1,350 Melville Corp................ 41,513
1,700 Pep Boys-Manny Moe & Jack.... 43,563
2,900 Price/Costco, Inc.*.......... 44,225
1,000 Tandy Corp................... 41,500
1,900 Toys 'R' Us, Inc.*........... 41,324
3,000 Woolworth Corp............... 39,000
-------------
384,281
-------------
RETAIL - SPECIALTY APPAREL (0.7%)
15,000 Charming Shoppes, Inc........ 42,187
1,000 Gap, Inc..................... 42,000
2,500 Limited (The), Inc........... 43,438
2,550 TJX Companies, Inc........... 48,131
-------------
175,756
-------------
</TABLE>
78
<PAGE>
Value-Added Market
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
SAVINGS & LOAN COMPANIES (0.5%)
1,700 Ahmanson (H.F.) & Co......... $ 45,050
790 Golden West Financial
Corp....................... 43,648
1,600 Great Western Financial
Corp....................... 40,800
-------------
129,498
-------------
SHOES (0.8%)
3,100 Brown Group Inc.............. 44,175
700 Nike, Inc.................... 48,738
1,500 Reebok International Ltd.
(United Kingdom)........... 42,375
6,320 Stride Rite Corp............. 47,400
-------------
182,688
-------------
SPECIALIZED SERVICES (1.5%)
1,100 Block (H.&R.), Inc........... 44,550
1,300 C U C International, Inc.*... 44,362
1,350 Ecolab, Inc.................. 40,500
1,100 Interpublic Group of
Companies, Inc............. 47,713
1,400 National Service Industries,
Inc........................ 45,325
2,000 Ogden Corp................... 42,750
2,980 Safety-Kleen Corp............ 46,563
1,050 Service Corp.
International.............. 46,200
-------------
357,963
-------------
SPECIALTY PRINTING (0.6%)
1,600 Deluxe Corp.................. 46,400
1,150 Donnelley (R.R.) & Sons
Co......................... 45,281
2,200 Harland (John H.) Co......... 45,925
-------------
137,606
-------------
STEEL (1.1%)
7,300 Armco, Inc.*................. 42,888
3,200 Bethlehem Steel Corp.*....... 44,800
1,800 Inland Steel Industries,
Inc........................ 45,225
865 Nucor Corp................... 49,413
1,300 USX-U.S. Steel Group......... 39,975
2,100 Worthington Industries,
Inc........................ 43,575
-------------
265,876
-------------
TELECOMMUNICATIONS - LONG DISTANCE (0.6%)
700 AT&T Corp.................... 45,325
1,710 MCI Communications Corp...... 44,674
1,100 Sprint Corp.................. 43,862
-------------
133,861
-------------
TEXTILES (1.0%)
2,200 Fruit of the Loom, Inc.*..... 53,625
1,600 Liz Claiborne, Inc........... 44,400
1,700 Russell Corp................. 47,175
1,080 Springs Industries, Inc...... 44,685
850 VF Corp...................... 44,838
-------------
234,723
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
TOBACCO (0.6%)
1,000 American Brands, Inc......... $ 44,625
495 Philip Morris Companies,
Inc........................ 44,798
1,300 UST, Inc..................... 43,387
-------------
132,810
-------------
TOYS (0.4%)
1,500 Hasbro Inc................... 46,500
1,500 Mattel, Inc.................. 46,125
-------------
92,625
-------------
TRANSPORTATION - MISCELLANEOUS (0.6%)
650 Federal Express Corp.*....... 48,019
1,425 Pittston Services Group...... 44,709
2,000 Ryder System, Inc............ 49,500
-------------
142,228
-------------
TRUCKERS (0.6%)
1,750 Consolidated Freightways,
Inc........................ 46,375
900 Roadway Service, Inc......... 43,988
3,400 Yellow Corporation........... 42,075
-------------
132,438
-------------
UTILITIES - ELECTRIC (4.9%)
1,150 American Electric Power Co.,
Inc........................ 46,575
1,500 Baltimore Gas & Electric
Co......................... 42,750
1,300 Carolina Power & Light Co.... 44,850
1,600 Central & South West Corp.... 44,600
1,400 CINergy Corp................. 42,875
1,300 Consolidated Edison Co. of
New York, Inc.............. 41,600
1,150 Detroit Edison Co............ 39,675
1,000 Dominion Resources, Inc...... 41,250
950 Duke Power Co................ 45,006
1,600 Entergy Corp................. 46,800
1,000 FPL Group, Inc............... 46,375
1,400 General Public Utilities
Corp....................... 47,600
1,900 Houston Industries, Inc...... 46,075
4,400 Niagara Mohawk Power Corp.... 42,350
900 Northern States Power Co..... 44,213
1,900 Ohio Edison Co............... 44,650
1,600 Pacific Gas & Electric Co.... 45,400
2,000 PacifiCorp................... 42,500
1,600 Peco Energy Co............... 48,200
1,800 PP&L Resources, Inc.......... 45,000
1,550 Public Service Enterprise
Group, Inc................. 47,469
2,800 SCE Corp..................... 49,700
1,750 Southern Co.................. 43,094
1,150 Texas Utilities Co........... 47,293
1,380 Unicom Corp.................. 45,195
1,000 Union Electric Co............ 41,750
-------------
1,162,845
-------------
</TABLE>
79
<PAGE>
Value-Added Market
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
UTILITIES - NATURAL GAS (2.6%)
1,200 Coastal Corp................. $ 44,700
1,030 Columbia Gas System, Inc..... 45,191
1,000 Consolidated Natural Gas
Co......................... 45,375
1,160 Eastern Enterprises.......... 40,890
1,100 Enron Corp................... 41,938
2,800 ENSERCH Corp................. 45,500
1,700 NICOR, Inc................... 46,750
5,000 NorAm Energy Corp............ 44,375
1,950 ONEOK, Inc................... 44,606
1,450 Pacific Enterprises.......... 40,963
1,600 Panhandle Eastern Corp....... 44,600
1,400 Peoples Energy Corp.......... 44,450
1,285 Sonat, Inc................... 45,777
1,000 Williams Companies, Inc...... 43,874
-------------
618,989
-------------
UTILITIES - TELEPHONE (1.7%)
1,600 Alltel Corp.................. 47,200
750 Ameritech Corp............... 44,250
700 Bell Atlantic Corp........... 46,812
1,140 BellSouth Corp............... 49,590
1,020 GTE Corp..................... 44,880
800 NYNEX Corp................... 43,200
1,300 Pacific Telesis Group........ 43,712
800 SBC Communications, Inc...... 46,000
1,350 U.S. West, Inc............... 48,262
-------------
413,906
-------------
TOTAL COMMON STOCKS
(IDENTIFIED COST
$21,087,132)............... 22,266,483
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS) VALUE
- ----------- -------------
<C> <S> <C>
SHORT-TERM INVESTMENTS (8.8%)
U.S. GOVERNMENT AGENCY (a) (8.3%)
$ 2,000 Federal Home Loan Mortgage
Corp. 5.75% due 01/02/96... $ 1,999,681
-------------
REPURCHASE AGREEMENT (0.5%)
118 The Bank of New York 3.00%
due 01/02/96 (dated
12/29/95; proceeds 118,543;
collateralized by $118,203
U.S. Treasury Note 5.75%
due 9/30/97 valued at
$120,873) (Identified Cost
$118,503).................. 118,503
-------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST
$2,118,184)................ 2,118,184
-------------
TOTAL INVESTMENTS (IDENTIFIED
COST $23,205,316) (B)....... 101.7% 24,384,667
LIABILITIES IN EXCESS OF OTHER
ASSETS...................... (1.7) (415,040)
---------- -------------
NET ASSETS.................... 100.0% $ 23,969,627
---------- -------------
---------- -------------
<FN>
- ----------------
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
+ PARENT COMPANY OF HARTFORD LIFE INSURANCE COMPANY AND ITT HARTFORD LIFE
AND ANNUITY INSURANCE COMPANY, AFFILIATES OF THE FUND.
(A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS
BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED
COST.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
80
<PAGE>
Core Equity
Portfolio of Investments DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -----------
<C> <S> <C>
COMMON STOCKS (93.1%)
AEROSPACE (2.8%)
1,400 Boeing Co...................... $ 109,725
-----------
AIR TRANSPORT (4.0%)
1,400 AMR Corp.*..................... 103,950
300 UAL Corp.*..................... 53,550
-----------
157,500
-----------
AIRCRAFT & AEROSPACE (2.6%)
1,100 United Technologies Corp....... 104,362
-----------
AUTO PARTS - ORIGINAL EQUIPMENT (2.3%)
3,100 Lear Seating Corp.*............ 89,900
-----------
AUTOMOBILES (1.7%)
1,600 Magna International, Inc.
(Class A) (Canada)........... 69,200
-----------
AUTOMOTIVE (4.6%)
2,000 Chrysler Corp.................. 110,750
2,479 Ford Motor Co.................. 71,891
-----------
182,641
-----------
BANKS - INTERNATIONAL (3.4%)
2,000 Citicorp....................... 134,500
-----------
BROKERAGE (1.2%)
900 Merrill Lynch & Co., Inc....... 45,900
-----------
BUILDING MATERIALS (1.5%)
1,400 Champion International Corp.... 58,800
-----------
BUSINESS SYSTEMS (2.5%)
1,900 General Motors Corp. (Class
E)........................... 98,800
-----------
COMMERCIAL SERVICES (0.8%)
800 America Online, Inc.*.......... 29,800
-----------
COMMUNICATIONS - EQUIPMENT & SOFTWARE (1.5%)
800 Cisco Systems, Inc.*........... 59,700
-----------
COMMUNICATIONS - EQUIPMENT/MANUFACTURERS
(2.3%)
2,100 Northern Telecom Ltd.
(Canada)..................... 90,300
-----------
COMPUTER SERVICES (6.1%)
1,700 Computer Sciences Corp.*....... 119,425
1,800 First Data Corp................ 120,375
-----------
239,800
-----------
COMPUTER SOFTWARE (5.0%)
1,200 Microsoft Corp.*............... 105,300
2,200 Oracle Systems Corp.*.......... 92,950
-----------
198,250
-----------
COMPUTERS - SYSTEMS (3.0%)
1,400 Hewlett-Packard Co............. 117,250
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -----------
<C> <S> <C>
DRUGS (2.1%)
1,400 Amgen Inc.*.................... $ 82,950
-----------
ELECTRONICS - SEMICONDUCTORS/
COMPONENTS (11.5%)
2,300 Intel Corp..................... 130,525
2,300 Motorola, Inc.................. 131,100
5,700 National Semiconductor
Corp.*....................... 126,825
1,300 Texas Instruments Inc.......... 67,275
-----------
455,725
-----------
ENTERTAINMENT (2.7%)
2,300 Viacom, Inc. (Class B)*........ 108,963
-----------
FINANCIAL - MISCELLANEOUS (2.6%)
4,000 Green Tree Financial Corp...... 105,500
-----------
HEALTH EQUIPMENT & SERVICES (2.6%)
2,000 Columbia/HCA Healthcare
Corp......................... 101,500
-----------
HOUSEHOLD APPLIANCES (2.1%)
2,900 American Standard Companies,
Inc.*........................ 81,200
-----------
MACHINERY - CONSTRUCTION & MATERIALS (2.1%)
1,400 Caterpillar, Inc............... 82,250
-----------
NATURAL RESOURCES (1.2%)
600 Texaco, Inc.................... 47,100
-----------
OFFICE EQUIPMENT & SUPPLIES (3.4%)
1,800 Unisys Corp.*.................. 10,125
900 Xerox Corp..................... 123,300
-----------
133,425
-----------
OIL - DOMESTIC (0.4%)
600 Unocal Corp.................... 17,475
-----------
OIL - EXPLORATION & PRODUCTION (1.6%)
4,400 Canadian Natural Resources Ltd.
(Canada)*.................... 64,540
-----------
PHARMACEUTICALS (2.8%)
3,900 Ivax Corp...................... 111,150
-----------
PUBLISHING - NEWSPAPER (1.8%)
3,300 News Corp. Ltd. (ADR)
(Australia).................. 70,537
-----------
RAILROADS (2.4%)
1,240 Burlington Northern Santa Fe
Corp......................... 96,720
-----------
RESTAURANTS (1.1%)
1,400 Boston Chicken, Inc.*.......... 44,800
-----------
RETAIL - SPECIALTY (1.9%)
1,600 Home Depot, Inc................ 76,600
-----------
</TABLE>
81
<PAGE>
Core Equity
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------- -----------
<C> <S> <C>
SOAP & HOUSEHOLD PRODUCTS (2.5%)
1,200 Procter & Gamble Co........... $ 99,600
-----------
TRANSPORTATION - MISCELLANEOUS (3.0%)
1,600 Delta Airlines, Inc........... 118,200
-----------
TOTAL COMMON STOCKS
(IDENTIFIED COST
$3,599,929)................. 3,684,663
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS)
- -------------
<C> <S> <C>
SHORT-TERM INVESTMENTS (6.8%)
U.S. GOVERNMENT AGENCY (a) (3.2%)
$ 125 Federal Home Loan Banks 5.70%
due 01/02/96................ 124,980
-----------
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS) VALUE
- ------------- -----------
<C> <S> <C>
REPURCHASE AGREEMENT (3.6%)
$ 144 The Bank of New York 3.00% due
01/02/96 (dated 12/29/95;
proceeds $144,092;
collateralized by $143,676
U.S. Treasury Note 5.75% due
09/30/97 valued at $146,925)
(Identified Cost
$144,044)................... $ 144,044
-----------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST
$269,024)................... 269,024
-----------
TOTAL INVESTMENTS (IDENTIFIED
COST $3,868,953) (B)......... 99.9% 3,953,687
OTHER ASSETS IN EXCESS OF
LIABILITIES.................. 0.1 2,725
---------- -----------
NET ASSETS..................... 100.0% $ 3,956,412
---------- -----------
---------- -----------
<FN>
- ----------------
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS
BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED
COST.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
82
<PAGE>
American Value
Portfolio of Investments DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMMON STOCKS (85.3%)
AEROSPACE (1.7%)
4,700 Boeing Co.................... $ 368,363
3,000 United Technologies Corp..... 284,625
-------------
652,988
-------------
AGRICULTURE RELATED (3.3%)
7,000 Case Corp.................... 320,250
10,000 IMC Global, Inc.............. 408,749
6,700 Pioneer Hi-Bred
International, Inc......... 372,688
2,000 Potash Corp. of Saskatchewan,
Inc. (Canada).............. 141,750
-------------
1,243,437
-------------
BANKS (3.0%)
4,300 Bank of Boston Corp.......... 198,875
5,000 BankAmerica Corp............. 323,750
3,200 Chase Manhattan Corp......... 194,000
4,000 Crestar Financial Corp....... 236,500
4,000 Mercantile Bancorporation,
Inc........................ 184,000
-------------
1,137,125
-------------
BEVERAGES - SOFT DRINKS (0.9%)
6,000 PepsiCo Inc.................. 335,250
-------------
BIOTECHNOLOGY (4.1%)
5,500 Amgen Inc.*.................. 325,875
3,500 Biochem Pharma, Inc.*........ 140,000
3,800 Biogen Inc.*................. 231,800
4,000 Centocor, Inc.*.............. 123,500
6,000 Cephalon Inc.*............... 244,500
1,000 Chiron Corp.*................ 110,500
6,000 Gilead Sciences, Inc.*....... 192,000
10,000 IDEC Pharmaceuticals
Corp.*..................... 192,500
-------------
1,560,675
-------------
CABLE/CELLULAR (0.3%)
4,950 Ericsson (L.M.) Telephone Co.
AB
(ADR) (Sweden)............. 95,906
-------------
CAPITAL GOODS (2.6%)
4,000 AlliedSignal, Inc............ 190,000
4,400 Lockheed Martin Corp......... 347,600
6,800 Loral Corp................... 240,550
3,000 Sunstrand Corp............... 211,125
-------------
989,275
-------------
CHEMICALS (0.8%)
2,500 Monsanto Co.................. 306,250
-------------
COMMUNICATIONS - EQUIPMENT & SOFTWARE (1.1%)
3,000 Ascend Communications,
Inc.*...................... 243,375
2,500 Cisco Systems, Inc.*......... 186,563
-------------
429,938
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMMUNICATIONS - SOFTWARE & SERVICES (0.5%)
3,000 America Online, Inc.*........ $ 111,750
2,100 CKS Group, Inc.*............. 81,375
-------------
193,125
-------------
COMMUNICATIONS PRODUCTS & SERVICES (1.3%)
1,500 Adobe Systems, Inc........... 93,000
1,300 Intuit, Inc.*................ 101,400
2,000 Spyglass, Inc.*.............. 112,000
4,500 Sun Microsystems, Inc.*...... 205,313
-------------
511,713
-------------
COMPUTER EQUIPMENT (0.3%)
3,000 Diamond Multimedia Systems
Inc.*...................... 107,625
-------------
COMPUTER SERVICES (1.0%)
2,800 Computer Sciences Corp.*..... 196,700
2,860 First Data Corp.............. 191,263
-------------
387,963
-------------
COMPUTER SOFTWARE (0.7%)
500 Macromedia, Inc.*............ 25,938
3,000 Medic Computer Systems,
Inc.*...................... 180,750
1,000 PeopleSoft, Inc.*............ 42,500
-------------
249,188
-------------
CONSUMER BUSINESS SERVICES (2.6%)
6,000 Accustaff, Inc.*............. 259,500
4,000 Alternative Resources
Corp.*..................... 118,000
2,500 Automatic Data Processing,
Inc........................ 185,625
2,000 DST Systems, Inc.*........... 57,000
4,000 General Motors Corp. (Class
E)......................... 208,000
3,000 Reuters Holdings PLC (ADR)
(United Kingdom)........... 165,750
-------------
993,875
-------------
CONSUMER PRODUCTS (7.5%)
3,500 Clorox Co.................... 250,688
4,000 Coca Cola Co................. 297,000
11,000 Coca-Cola Enterprises,
Inc........................ 294,250
9,000 Estee Lauder Companies (Class
A)*........................ 313,875
9,000 Interstate Bakeries Corp..... 201,375
3,000 Kimberly-Clark Corp.......... 248,250
4,000 Mondavi (Robert) Corp. (The)
(Class A)*................. 110,000
3,500 Procter & Gamble Co.......... 290,500
8,000 Ralston-Ralston Purina
Group...................... 498,999
6,000 Sara Lee Corp................ 191,250
6,000 Sysco Corp................... 195,000
-------------
2,891,187
-------------
</TABLE>
83
<PAGE>
American Value
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
CONSUMER PRODUCTS & SERVICES (1.9%)
2,000 Duracell International,
Inc........................ $ 103,500
3,000 Luxottica Group SpA (ADR)
(Italy).................... 175,500
3,000 Oakley, Inc.*................ 102,000
8,000 Service Corp.
International.............. 352,000
-------------
733,000
-------------
DRUGS (4.9%)
4,000 American Home Products
Corp.*..................... 388,000
5,000 Bristol-Myers Squibb Co...... 429,375
9,000 Pfizer, Inc.................. 566,999
7,000 SmithKline Beecham PLC (ADR)
(United Kingdom)........... 388,500
2,000 Teva Pharmaceutical
Industries Ltd. (ADR)
(Israel)................... 92,500
-------------
1,865,374
-------------
ENERGY (1.2%)
4,000 Apache Corp.................. 118,000
7,000 Enron Corp................... 266,875
3,000 Enron Oil & Gas Co........... 72,000
-------------
456,875
-------------
ENTERTAINMENT (2.3%)
7,400 C U C International, Inc.*... 252,525
2,000 Extended Stay America,
Inc.*...................... 53,500
3,000 Scholastic Corp.*............ 233,250
6,000 Walt Disney Co............... 354,000
-------------
893,275
-------------
FINANCIAL - MISCELLANEOUS (5.9%)
4,000 Ahmanson (H.F.) & Co......... 106,000
9,000 Bear Stearns Companies,
Inc........................ 178,875
8,000 Countrywide Credit
Industries, Inc............ 174,000
5,000 Federal Home Loan Mortgage
Corp....................... 417,500
4,250 Federal National Mortgage
Association................ 527,530
3,900 Golden West Financial
Corp....................... 215,475
3,000 Green Tree Financial Corp.... 79,125
4,500 Merrill Lynch & Co., Inc..... 229,500
2,000 MGIC Investment Corp......... 108,500
3,000 Morgan Stanley Group, Inc.... 241,875
-------------
2,278,380
-------------
HEALTH MAINTENANCE ORGANIZATIONS (3.4%)
11,000 Healthsource, Inc.*.......... 396,000
4,500 Pacificare Health Systems,
Inc.*...................... 391,500
3,500 U.S. Healthcare, Inc......... 162,313
5,500 United Healthcare Corp....... 360,250
-------------
1,310,063
-------------
HEALTHCARE - DRUGS (1.3%)
6,000 Lilly (Eli) & Co............. 337,500
4,000 Pharmacia & Upjohn, Inc...... 155,000
-------------
492,500
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
HEALTHCARE PRODUCTS & SERVICES (2.1%)
4,700 HBO & Co..................... $ 358,375
3,000 Health Management Associates,
Inc. (Class A)*............ 78,375
3,000 Medaphis Corp.*.............. 111,000
4,500 Shared Medical Systems
Corp....................... 243,000
-------------
790,750
-------------
HOME BUILDING (0.6%)
11,250 Clayton Homes, Inc........... 240,469
-------------
HOSPITAL MANAGEMENT & HEALTH MAINTENANCE
ORGANIZATIONS (0.4%)
4,000 Compdent Corporation*........ 166,000
-------------
HOUSING RELATED (1.3%)
6,000 American Standard
Companies*................. 168,000
4,000 Lennar Corp.................. 100,500
5,600 Oakwood Homes Corp........... 214,900
-------------
483,400
-------------
INSURANCE (7.6%)
2,000 Ace Ltd...................... 79,500
4,000 Aetna Life & Casualty Co..... 277,000
2,500 Chubb Corp................... 241,875
4,000 CIGNA Corp................... 412,999
2,000 CNA Financial Corp.*......... 227,000
4,000 Exel, Ltd.................... 244,000
2,000 General Re Corp.............. 310,000
14,000 Prudential Reinsurance
Holdings, Inc.............. 327,250
4,000 SunAmerica Inc............... 190,000
5,500 Travelers Group, Inc......... 345,813
5,000 Vesta Insurance Group,
Inc........................ 272,500
-------------
2,927,937
-------------
MEDIA GROUP (1.7%)
6,400 Clear Channel Communications,
Inc.*...................... 282,400
10,000 Infinity Broadcasting
Corp.*..................... 372,500
-------------
654,900
-------------
MEDICAL PRODUCTS & SUPPLIES (4.6%)
3,000 Becton, Dickinson & Co....... 225,000
4,000 Boston Scientific Corp.*..... 196,000
9,000 Guidant Corp................. 380,250
5,000 IDEXX Laboratories, Inc.*.... 232,500
4,000 Medtronic Inc................ 223,500
5,700 St. Jude Medical, Inc.*...... 243,675
6,000 Target Therapeutics, Inc.*... 256,500
-------------
1,757,425
-------------
MEDICAL SERVICES (0.2%)
3,000 Healthsouth Corp.*........... 87,375
-------------
MISCELLANEOUS (0.9%)
6,300 Thermo Electron Corp.*....... 327,600
-------------
MULTI-LINE INSURANCE (0.9%)
3,700 American International Group,
Inc........................ 342,250
-------------
</TABLE>
84
<PAGE>
American Value
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
PHARMACEUTICALS (1.7%)
<C> <S> <C>
3,100 Johnson & Johnson............ $ 265,438
6,000 Merck & Co., Inc............. 394,500
-------------
659,938
-------------
RESTAURANTS (0.9%)
5,000 Boston Chicken, Inc.*........ 160,000
8,000 Starbucks Corp.*............. 167,000
-------------
327,000
-------------
RETAIL (4.1%)
6,000 Eckerd Corp.*................ 267,750
10,000 General Nutrition Companies,
Inc.*...................... 230,000
8,500 Gucci Group NV (ADR)
(Italy)*................... 330,438
3,000 Safeway, Inc.*............... 154,500
5,000 St. John Knits, Inc.......... 265,625
4,000 Tiffany & Co................. 201,500
4,000 Walgreen Co.................. 119,500
-------------
1,569,313
-------------
RETAIL - SPECIALTY (0.1%)
2,000 Staples, Inc.*............... 48,750
-------------
SHOES (0.7%)
8,000 Wolverine World Wide, Inc.... 252,000
-------------
TELECOMMUNICATION EQUIPMENT (0.7%)
6,400 Picturetel Corp.*............ 274,400
-------------
TELECOMMUNICATIONS (2.9%)
4,000 ADC Telecommunications,
Inc.*...................... 145,000
4,000 AT&T Corp.................... 259,000
2,500 Cascade Communications
Corp.*..................... 212,500
1,500 Shiva Corp.*................. 109,125
2,000 Stratacom, Inc.*............. 146,000
6,900 WorldCom Inc.*............... 243,225
-------------
1,114,850
-------------
TRANSPORTATION (0.5%)
2,600 Burlington Northern Santa Fe
Corp....................... 202,800
-------------
UTILITIES - ELECTRIC (0.8%)
5,000 Portland General Corp........ 145,625
5,000 Scana Corp................... 143,125
-------------
288,750
-------------
TOTAL COMMON STOCKS
(IDENTIFIED COST
$30,209,869)............... 32,630,894
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS) VALUE
- ----------- -------------
U.S. GOVERNMENT OBLIGATIONS (12.3%)
<C> <S> <C>
$ 2,175 U.S. Treasury Note Principal
Strip 0.00% due 05/15/18... $ 538,061
2,900 U.S. Treasury Note Principal
Strip 0.00% due 08/15/18... 706,249
1,880 U.S. Treasury Note Principal
Strip 0.00% due 02/15/19... 443,777
4,840 U.S. Treasury Note Principal
Strip 0.00% due 05/15/19... 1,124,892
5,540 U.S. Treasury Note Principal
Strip 0.00% due 08/15/19... 1,267,544
2,820 U.S. Treasury Note Principal
Strip 0.00% due 11/15/19... 635,274
-------------
TOTAL U.S. GOVERNMENT
OBLIGATIONS (IDENTIFIED
COST $4,254,615)........... 4,715,797
-------------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
SHORT-TERM INVESTMENT (A) (3.7%)
U.S. GOVERNMENT AGENCY
1,400 Federal Home Loan Mortgage
Corp. 5.75% due 01/02/96
(Amortized Cost
$1,399,776)................ 1,399,776
-------------
TOTAL INVESTMENTS (IDENTIFIED
COST
$35,864,260) (B)............ 101.3% 38,746,467
LIABILITIES IN EXCESS OF CASH
AND OTHER ASSETS............ (1.3) (511,681)
---------- -------------
NET ASSETS.................... 100.0% $ 38,234,786
---------- -------------
---------- -------------
<FN>
- ----------------
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS
BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED
COST.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
85
<PAGE>
Global Equity
Portfolio of Investments DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMMON AND PREFERRED STOCKS (87.8%)
ARGENTINA (0.5%)
AUTOMOTIVE
4,000 Ciadea S.A.*................. $ 20,517
-------------
FOODS & BEVERAGES
2,800 Quilmes Industrial S.A....... 43,680
-------------
TELECOMMUNICATIONS
800 Telefonica de Argentina S.A.
(ADR)...................... 21,800
-------------
TOTAL ARGENTINA.............. 85,997
-------------
BRAZIL (0.5%)
SUPERMARKETS
5,000 Companhia Brasileiras de
Distribuicao (ADR) - 144A*
**......................... 51,250
-------------
TELECOMMUNICATIONS
300 Telecomunicacoes Brasileiras
S.A. (ADR)................. 14,213
-------------
UTILITIES - ELECTRIC
550 Companhia Energetica de Minas
Gerais (ADR) - 144A* **.... 12,100
-------------
TOTAL BRAZIL................. 77,563
-------------
CANADA (0.5%)
METALS & MINING
1,400 Barrick Gold Corp............ 36,964
-------------
OIL
1,500 Suncor, Inc.................. 47,030
-------------
TOTAL CANADA................. 83,994
-------------
CHILE (0.9%)
BANKS
3,000 Banco de A. Edwards (ADR)*... 58,875
-------------
CONGLOMERATES
2,200 Madeco S.A. (ADR)............ 59,400
-------------
FOODS & BEVERAGES
500 Embotelladora Andina S.A.
(ADR)...................... 18,063
-------------
TELECOMMUNICATIONS
300 Compania de
Telecommunicaciones de
Chile S.A. (ADR)........... 24,863
-------------
TOTAL CHILE.................. 161,201
-------------
FRANCE (2.5%)
APPAREL
200 Hermes International......... 37,509
-------------
BANKING
700 Credit Commercial de
France..................... 35,660
350 Credit Local de France....... 27,969
300 Societe Generale............. 36,999
-------------
100,628
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
BUILDING MATERIALS
300 Compagnie de Saint-Gobain.... $ 33,146
-------------
BUSINESS & PUBLIC SERVICES
200 Compagnie Generale des
Eaux....................... 19,933
-------------
ENGINEERING & CONSTRUCTION
200 Bouygues S.A................. 20,112
-------------
FOODS & BEVERAGES
160 LVMH Moet-Hennessy Louis
Vuitton.................... 33,269
-------------
HEALTH & PERSONAL CARE
100 L'Oreal...................... 26,725
-------------
INSURANCE
400 AXA.......................... 26,909
-------------
MACHINERY - DIVERSIFIED
110 Sidel S.A.................... 34,219
-------------
PHARMACEUTICALS
550 Sanofi S.A................... 35,194
-------------
RETAIL
50 Carrefour Supermarche........ 30,282
180 Castorama Dubois............. 29,428
-------------
59,710
-------------
TOTAL FRANCE................. 427,354
-------------
GERMANY (2.0%)
AUTO RELATED
300 Kiekert AG*.................. 17,781
-------------
AUTOMOTIVE
30 Bayerische Motoren Werke
(BMW) AG................... 15,339
100 Volkswagen AG................ 33,363
-------------
48,702
-------------
BUSINESS SERVICES
600 SAP AG (Pref.)............... 90,574
-------------
CHEMICALS
140 Bayer AG..................... 36,863
-------------
MACHINERY - DIVERSIFIED
200 Jungheinrich AG (Pref.)...... 28,383
200 Mannesmann AG................ 63,541
-------------
91,924
-------------
PHARMACEUTICALS
100 Gehe AG...................... 50,783
-------------
TOTAL GERMANY................ 336,627
-------------
HONG KONG (4.2%)
BANKING
10,000 Guoco Group Ltd.............. 48,241
6,000 Hang Seng Bank Ltd........... 53,738
5,270 HSBC Holdings PLC............ 79,745
-------------
181,724
-------------
</TABLE>
86
<PAGE>
Global Equity
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
BUSINESS SERVICES
40,000 First Pacific Co. Ltd........ $ 44,490
-------------
CONGLOMERATES
35,000 Hutchison Whampoa, Ltd....... 213,204
6,500 Swire Pacific Ltd. (Class
A)......................... 50,440
-------------
263,644
-------------
HOTELS
14,000 Harbour Centre Development... 16,205
-------------
REAL ESTATE
17,000 Cheung Kong (Holdings)
Ltd........................ 103,557
11,000 New World Development Co.
Ltd........................ 47,944
6,000 Sun Hung Kai Properties
Ltd........................ 49,082
-------------
200,583
-------------
TRANSPORTATION
10,000 Cathay Pacific Airways....... 15,261
-------------
TOTAL HONG KONG.............. 721,907
-------------
INDONESIA (0.3%)
TELECOMMUNICATIONS
1,500 PT Indosat (ADR)............. 54,750
-------------
ITALY (1.3%)
CONSUMER PRODUCTS
2,000 De Rigo SpA (ADR)*........... 45,500
1,000 Gucci Group NV (ADR)*........ 38,875
-------------
84,375
-------------
OIL & GAS
2,500 Ente Nazionale Idrocarburi
SpA
(ADR)*..................... 85,625
-------------
TELECOMMUNICATIONS
15,000 Telecom Italia Mobile SpA*... 26,409
15,000 Telecom Italia SpA........... 23,339
-------------
49,748
-------------
TOTAL ITALY.................. 219,748
-------------
JAPAN (26.4%)
AUTO PARTS
1,000 Autobacs Seven Co............ 83,019
-------------
AUTOMOTIVE
11,000 Mitsubishi Motors Corp....... 89,511
6,000 Suzuki Motor Co. Ltd......... 66,763
-------------
156,274
-------------
BANKING
10,000 Asahi Bank, Ltd.............. 125,785
5,000 Sanwa Bank, Ltd.............. 101,597
5,000 Sumitomo Bank................ 105,951
4,000 Sumitomo Trust & Banking..... 56,507
-------------
389,840
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
BUILDING & CONSTRUCTION
1,000 Chudenko Corp................ $ 34,253
1,000 Mitsui Home Co., Ltd......... 15,965
10,000 Nishimatsu Construction
Co......................... 117,077
7,000 Sekisui House Ltd............ 89,405
-------------
256,700
-------------
BUILDING MATERIALS
3,000 Tostem Corp.................. 99,565
-------------
BUSINESS SERVICES
5,000 Dai Nippon Printing Co.
Ltd........................ 84,664
2,000 Secom Co..................... 138,944
-------------
223,608
-------------
CHEMICALS
7,000 Asahi Chemical Industry Co.
Ltd........................ 53,508
9,000 Kaneka Corp.................. 56,691
10,000 Nippon Shokubai K.K. Co...... 97,726
2,000 Shin-Etsu Chemical Co........ 41,413
-------------
249,338
-------------
CONSUMER PRODUCTS
6,000 Kao Corp..................... 74,311
-------------
ELECTRONICS
1,000 Alpine Electronics Inc....... 16,836
5,000 Canon, Inc................... 90,469
5,000 Hitachi, Ltd................. 50,314
4,000 Matsushita Electric
Industrial Co. Ltd......... 65,022
1,000 Mitsui High-Tec.............. 26,125
1,000 Mitsumi Electric Co. Ltd..... 24,093
7,000 NEC Corp..................... 85,341
2,000 Nitto Denko Corp............. 30,963
-------------
389,163
-------------
ELECTRONICS - SEMICONDUCTORS/COMPONENTS
1,000 Kyocera Corp................. 74,214
2,000 Rohm Co., Ltd................ 112,821
4,000 Ryoyo Electro Corp........... 91,340
-------------
278,375
-------------
FINANCIAL SERVICES
3,000 Nomura Securities Co.,
Ltd........................ 65,312
3,000 Orix Corp.................... 123,366
2,000 Promise Co., Ltd............. 96,178
-------------
284,856
-------------
FOOD PROCESSING
1,000 Stamina Foods................ 13,643
-------------
HEALTH & PERSONAL CARE
1,000 Yamanouchi Pharmaceutical
Co......................... 21,480
-------------
</TABLE>
87
<PAGE>
Global Equity
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
INSURANCE
5,000 Dai-Tokyo Fire & Marine
Insurance Co. Ltd.......... $ 38,123
7,000 Tokio Marine & Fire Insurance
Co......................... 91,437
-------------
129,560
-------------
INTERNATIONAL TRADE
5,000 Mitsubishi Corp.............. 61,442
13,000 Mitsui & Co.................. 113,962
-------------
175,404
-------------
MACHINE TOOLS
7,000 Asahi Diamond Industries Co.
Ltd........................ 98,210
-------------
MACHINERY
1,000 Aichi Corp................... 8,863
5,000 Daifuku Co. Ltd.............. 70,634
1,000 Fanuc, Ltd................... 43,251
9,000 Komatsu Ltd.................. 74,020
1,000 Mabuchi Motor Co............. 62,119
5,000 Minebea Co., Ltd............. 41,896
11,000 Mitsubishi Heavy Industries,
Ltd........................ 87,596
1,000 Nippon Thompson Co........... 8,805
1,000 Nitto Electric Works......... 14,320
7,000 NSK Ltd...................... 50,798
-------------
462,302
-------------
MANUFACTURING
1,000 Bridgestone Metalpha Corp.... 11,321
9,000 Hitachi Cable................ 63,657
2,000 Nippon Electric Glass Co.,
Ltd........................ 37,929
-------------
112,907
-------------
METALS & MINING
25,000 Nippon Steel Co.............. 85,631
-------------
NATURAL GAS
11,000 Osaka Gas Co................. 37,997
-------------
PHARMACEUTICALS
6,000 Eisai Co. Ltd................ 105,080
-------------
REAL ESTATE
1,000 Cesar Co..................... 7,828
4,000 Mitsui Fudosan Co............ 49,153
10,000 Sumitomo Realty &
Development................ 70,634
-------------
127,615
-------------
RETAIL
1,000 Honma Golf Co. Ltd.*......... 22,835
1,000 Ito-Yokado Co. Ltd........... 61,538
4,000 Izumiya Co. Ltd.............. 64,635
1,000 Xebio Co. Ltd................ 35,317
-------------
184,325
-------------
TELECOMMUNICATIONS
10 Nippon Telegraph & Telephone
(ADR)...................... 80,793
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
TEXTILES - APPAREL
5,000 Kuraray Co. Ltd.............. $ 54,669
4,000 Tokyo Style.................. 68,505
-------------
123,174
-------------
TRANSPORTATION
12 East Japan Railway Co........ 58,287
12,000 Yamato Transport Co. Ltd..... 142,815
-------------
201,102
-------------
UTILITIES - ELECTRIC
3,020 Kyushu Electric Power........ 71,299
-------------
TOTAL JAPAN.................. 4,515,571
-------------
MALAYSIA (1.8%)
BANKING
11,000 DCB Holdings Berhad.......... 32,066
4,000 Malayan Banking Berhad....... 33,721
17,000 Public Bank Berhad........... 32,547
-------------
98,334
-------------
BUILDING & CONSTRUCTION
5,000 United Engineers Malaysia
Berhad..................... 31,909
-------------
ENTERTAINMENT
4,000 Genting Berhad............... 33,406
-------------
MACHINERY
6,000 UMW Holdings Berhad.......... 16,072
-------------
NATURAL GAS
10,000 Petronas Gas Berhad*......... 34,075
-------------
TELECOMMUNICATIONS
12,000 Technology Resources
Industries Berhad*......... 35,454
-------------
TOBACCO
15,000 RJ Reynolds Berhad........... 34,568
-------------
UTILITIES - ELECTRIC
8,000 Tenaga Nasional Berhad....... 31,515
-------------
TOTAL MALAYSIA............... 315,333
-------------
MEXICO (0.5%)
BANKING
70,000 Grupo Financiero Bancomer
S.A. de C.V. (B Shares)*... 19,779
-------------
BUILDING & CONSTRUCTION
1,000 Empresas ICA Sociedad
Controladora S.A. de C.V.
(ADR)...................... 10,250
-------------
BUILDING MATERIALS
4,000 Apasco S.A. de C.V........... 16,432
600 Cemex S.A. de C.V. (B
Shares).................... 2,160
-------------
18,592
-------------
METALS & MINING
2,100 Tubos de Acero de Mexico S.A.
(ADR)*..................... 14,700
-------------
RETAIL
15,000 Cifra S.A. de C.V. (C
Shares)*................... 15,234
-------------
TOTAL MEXICO................. 78,555
-------------
</TABLE>
88
<PAGE>
Global Equity
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
NETHERLANDS (0.4%)
INSURANCE
800 Aegon NV..................... $ 35,345
-------------
PUBLISHING
300 Ver Ned Uitgev NV............ 41,126
-------------
TOTAL NETHERLANDS............ 76,471
-------------
SINGAPORE (2.5%)
BANKING
4,500 Development Bank of
Singapore, Ltd............. 56,019
5,000 United Overseas Bank, Ltd.... 48,097
-------------
104,116
-------------
FOODS & BEVERAGES
4,000 Fraser & Neave Ltd........... 50,927
-------------
MACHINERY - DIVERSIFIED
5,000 Keppel Corp., Ltd............ 44,561
-------------
PUBLISHING
4,000 Singapore Press Holdings
Ltd........................ 70,731
-------------
REAL ESTATE
17,000 DBS Land Ltd................. 57,476
9,000 Singapore Land Ltd........... 58,247
-------------
115,723
-------------
TRANSPORTATION
4,000 Singapore Airlines Ltd....... 37,346
-------------
TOTAL SINGAPORE.............. 423,404
-------------
SOUTH KOREA (0.1%)
ELECTRONICS
400 Samsung Electronics Co. (GDS)
- 144A* **................. 24,000
-------------
SPAIN (1.6%)
BANKS
1,600 Banco Bilbao Vizcaya......... 57,491
-------------
ENGINEERING & CONSTRUCTION
5,000 Uralita S.A.................. 45,223
-------------
OIL - FOREIGN
2,000 Repsol S.A................... 65,750
-------------
TELECOMMUNICATIONS
1,300 Telefonica de Espana S.A.
(ADR)...................... 54,438
-------------
UTILITIES - ELECTRIC
1,000 Empresa Nacional de
Electricidad S.A........... 56,487
-------------
TOTAL SPAIN.................. 279,389
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
SWEDEN (0.7%)
AUTOMOTIVE
700 Autoliv AB................... $ 40,891
-------------
MACHINERY
2,300 Kalmar Industries AB......... 38,091
-------------
TELECOMMUNICATION EQUIPMENT
2,200 Ericsson (L.M.) Telephone Co.
AB (Series "B" Free)....... 43,059
-------------
TOTAL SWEDEN................. 122,041
-------------
SWITZERLAND (0.5%)
CONGLOMERATES
20 BBC Brown Boveri AG.......... 23,234
-------------
PHARMACEUTICALS
30 Ciba-Geigy AG................ 26,398
30 Sandoz AG (Series B)......... 27,620
-------------
54,018
-------------
TOTAL SWITZERLAND............ 77,252
-------------
UNITED KINGDOM (5.7%)
AEROSPACE & DEFENSE
2,315 British Aerospace PLC........ 28,555
2,600 Smiths Industries PLC........ 25,631
-------------
54,186
-------------
AUTO PARTS
5,535 BBA Group PLC................ 24,837
-------------
BANKING
2,800 National Westminster Bank
PLC........................ 28,145
-------------
BEVERAGES
2,300 Bass PLC..................... 25,615
3,100 Guinness PLC................. 22,752
-------------
48,367
-------------
BROADCAST MEDIA
3,300 Flextech PLC*................ 23,887
8,500 General Cable PLC*........... 25,296
-------------
49,183
-------------
BUILDING & CONSTRUCTION
5,267 Blue Circle Industries PLC... 27,961
-------------
BUSINESS SERVICES
3,400 Reuters Holdings PLC......... 31,067
1,100 Securicor Group PLC (A
Shares).................... 15,089
-------------
46,156
-------------
CHEMICALS
8,000 Albright & Wilson PLC........ 19,592
-------------
CONGLOMERATES
3,600 BTR PLC...................... 18,358
-------------
CONSUMER PRODUCTS
3,400 Vendome Luxury Group PLC
(Units)++.................. 30,935
-------------
FOOD PROCESSING
4,200 Associated British Foods
PLC........................ 24,022
-------------
</TABLE>
89
<PAGE>
Global Equity
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
INSURANCE
2,400 General Accident PLC......... $ 24,199
4,869 Prudential Corp. PLC......... 31,282
4,700 Royal Insurance Holdings
PLC........................ 27,792
-------------
83,273
-------------
LEISURE
3,500 Granada Group PLC............ 34,991
7,500 Tomkins PLC.................. 32,724
-------------
67,715
-------------
MANUFACTURING
2,500 IMI PLC...................... 12,729
-------------
METALS & MINING
2,200 Antofagasta Holdings PLC..... 9,719
-------------
NATURAL GAS
4,000 British Gas PLC.............. 15,748
-------------
OIL
13,500 British Petroleum Co. PLC.... 112,681
-------------
PHARMACEUTICALS
4,100 Glaxo Wellcome PLC........... 58,148
6,500 Medeva PLC................... 27,203
-------------
85,351
-------------
RETAIL
3,600 Boots Co. PLC................ 32,671
5,500 Next PLC..................... 38,874
-------------
71,545
-------------
TELECOMMUNICATIONS
11,300 British Telecommunications
PLC........................ 62,003
10,000 Vodafone Group PLC........... 35,805
-------------
97,808
-------------
TRANSPORTATION
2,500 British Airways PLC.......... 18,058
-------------
UTILITIES
2,700 Thames Water PLC............. 23,499
-------------
TOTAL UNITED KINGDOM......... 969,868
-------------
UNITED STATES (34.8%)
ALUMINUM
1,650 Aluminum Co. of America...... 87,244
-------------
AUTOMOTIVE
1,050 Chrysler Corp................ 58,144
1,200 General Motors Corp.......... 63,450
-------------
121,594
-------------
BANKS
1,600 BankAmerica Corp............. 103,600
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
BANKS - MONEY CENTER
980 Chemical Banking Corp........ $ 57,575
830 Citicorp..................... 55,818
-------------
113,393
-------------
BANKS - THRIFT INSTITUTIONS
3,900 California Federal Bank*..... 61,425
-------------
BEVERAGES - SOFT DRINKS
2,000 PepsiCo Inc.................. 111,750
-------------
BIOTECHNOLOGY
4,000 Autoimmune, Inc.*............ 44,000
1,100 Biochem Pharma, Inc.*........ 44,000
1,000 Chiron Corp.*................ 110,500
2,300 Regeneron Pharmaceutical,
Inc.*...................... 29,038
-------------
227,538
-------------
BROKERAGE
1,050 Merrill Lynch & Co., Inc..... 53,550
680 Morgan Stanley Group, Inc.... 54,825
-------------
108,375
-------------
BUSINESS SYSTEMS
1,200 General Motors Corp. (Class
E)......................... 62,400
-------------
CHEMICALS
1,500 Dow Chemical Co.............. 105,563
1,300 Georgia Gulf Corp............ 39,975
900 Monsanto Co.................. 110,250
1,700 Praxair, Inc................. 57,163
2,700 Williams Companies, Inc...... 118,463
-------------
431,414
-------------
COMMUNICATIONS - EQUIPMENT & SOFTWARE
1,150 Cisco Systems, Inc.*......... 85,819
-------------
COMPUTER SOFTWARE
1,590 Computer Associates
International, Inc......... 90,431
-------------
COMPUTERS - PERIPHERAL EQUIPMENT
1,100 Seagate Technology, Inc.*.... 52,250
-------------
COMPUTERS - SYSTEMS
1,050 Hewlett-Packard Co........... 87,938
600 International Business
Machines Corp.............. 55,050
1,600 Silicon Graphics, Inc.*...... 44,000
-------------
186,988
-------------
CONSUMER PRODUCTS
1,200 Tambrands, Inc.*............. 57,300
-------------
DRUGS
3,100 Abbott Laboratories.......... 129,424
660 American Home Products
Corp....................... 64,020
-------------
193,444
-------------
ELECTRONIC COMPONENTS
1,200 Komag Inc.*.................. 54,750
-------------
</TABLE>
90
<PAGE>
Global Equity
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
ELECTRONICS - SEMICONDUCTORS/COMPONENTS
1,500 Intel Corp................... $ 85,125
1,500 Motorola, Inc................ 85,500
1,600 Texas Instruments Inc........ 82,800
-------------
253,425
-------------
FINANCE - CONSUMER
1,940 Beneficial Corp.............. 90,453
-------------
FINANCIAL - MISCELLANEOUS
1,650 Federal Home Loan Mortgage
Corp....................... 137,774
1,050 Federal National Mortgage
Association................ 130,331
1,100 Golden West Financial
Corp....................... 60,775
-------------
328,880
-------------
FINANCIAL SERVICES
1,500 SunAmerica Inc............... 71,250
960 Travelers Group, Inc......... 60,360
-------------
131,610
-------------
FOODS & BEVERAGES
1,130 General Mills, Inc........... 65,258
-------------
HOSPITAL MANAGEMENT
1,450 U.S. Healthcare, Inc......... 67,244
-------------
HOUSEHOLD APPLIANCES
1,500 Whirlpool Corp............... 79,875
-------------
HOUSEHOLD PRODUCTS
1,350 Colgate-Palmolive Co......... 94,838
1,100 Procter & Gamble Co.......... 91,300
-------------
186,138
-------------
INSURANCE
900 American International Group,
Inc........................ 83,250
540 CIGNA Corp................... 55,755
-------------
139,005
-------------
MEDICAL PRODUCTS & SUPPLIES
2,000 Medtronic, Inc............... 111,750
-------------
METALS & BASIC MATERIALS
1,700 Phelps Dodge Corp............ 105,825
-------------
NATURAL GAS
3,000 Pacific Enterprises.......... 84,750
-------------
OFFICE EQUIPMENT
1,900 Alco Standard Corp........... 86,688
-------------
OIL DRILLING & SERVICES
1,600 Schlumberger Ltd. (ADR)
(Netherlands Antilles)..... 110,800
-------------
OIL INTEGRATED - INTERNATIONAL
1,150 Chevron Corp................. 60,375
780 Exxon Corp................... 62,498
1,000 Mobil Corp................... 111,999
870 Texaco, Inc.................. 68,295
-------------
303,167
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
PHARMACEUTICALS
1,300 Johnson & Johnson............ $ 111,313
-------------
RETAIL - DEPARTMENT STORES
1,350 Dayton-Hudson Corp........... 101,250
-------------
RETAIL - SPECIALTY
3,000 Bed, Bath & Beyond, Inc.*.... 115,874
5,000 Price/Costco, Inc.*.......... 76,250
-------------
192,124
-------------
RETAIL - SPECIALTY APPAREL
1,300 Gap, Inc..................... 54,600
-------------
SHOES
950 Nike, Inc.................... 66,144
-------------
STEEL & IRON
5,400 Bethlehem Steel Corp.*....... 75,600
-------------
TELECOMMUNICATIONS
1,550 Bell Atlantic Corp........... 103,656
1,300 GTE Corp..................... 57,200
3,500 Pacific Telesis Group........ 117,687
-------------
278,543
-------------
TOBACCO
7,000 Dimon, Inc................... 123,375
-------------
UTILITIES - ELECTRIC
3,300 Baltimore Gas & Electric
Co......................... 94,050
3,000 CINergy Corp................. 91,875
3,000 Consolidated Edison Co. of
New York, Inc.............. 96,000
2,500 Florida Progress Corp........ 88,438
2,700 General Public Utilities
Corp....................... 91,800
3,700 Houston Industries, Inc...... 89,725
3,500 Kansas City Power & Light
Co......................... 91,438
-------------
643,326
-------------
TOTAL UNITED STATES.......... 5,940,858
-------------
VENEZUELA (0.1%)
CHEMICALS
2,000 Corimon S.A.C.A. (ADR)*...... 7,500
-------------
TOTAL COMMON AND PREFERRED
STOCKS (IDENTIFIED COST
$14,413,833)............... 14,999,383
-------------
</TABLE>
91
<PAGE>
Global Equity
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS)
- -----------
SHORT-TERM INVESTMENT (A) (11.3%)
<C> <S> <C>
U.S. GOVERNMENT AGENCY
$ 1,930 Federal Home Loan Mortgage
Corp. 5.75% due 01/02/96
(Amortized Cost
$1,929,692)................ $ 1,929,692
-------------
TOTAL INVESTMENTS (IDENTIFIED
COST
$16,343,525) (B)............ 99.1% 16,929,075
CASH AND OTHER ASSETS IN
EXCESS OF LIABILITIES....... 0.9 145,228
---------- -------------
NET ASSETS.................... 100.0% $ 17,074,303
---------- -------------
---------- -------------
<FN>
- ----------------
ADR AMERICAN DEPOSITORY RECEIPT.
GDS GLOBAL DEPOSITORY SHARES.
* NON-INCOME PRODUCING SECURITY.
** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
++ CONSISTS OF MORE THAN ONE CLASS OF SECURITIES TRADED TOGETHER AS A UNIT;
GENERALLY STOCKS WITH ATTACHED WARRANTS.
(A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS
BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED
COST.
</TABLE>
FORWARD FOREIGN CURRENCY CONTRACT OPEN AT DECEMBER 31, 1995:
<TABLE>
<CAPTION>
IN
CONTRACTS EXCHANGE DELIVERY UNREALIZED
TO DELIVER FOR DATE APPRECIATION
- ---------- ---------- -------- ------------
<S> <C> <C> <C>
Y 114,654 $ 1,111 01/05/96 $ 2
--
--
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
92
<PAGE>
Global Equity
Summary of Investments
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ---------------------------- ---------- -------------
<S> <C> <C>
Aerospace & Defense......... $ 54,186 0.3%
Aluminum.................... 87,244 0.5
Apparel..................... 37,509 0.2
Auto Parts.................. 107,856 0.6
Auto Related................ 17,781 0.1
Automotive.................. 387,978 2.3
Banking..................... 922,566 5.4
Banks....................... 219,966 1.3
Banks - Money Center........ 113,393 0.7
Banks - Thrift
Institutions............... 61,425 0.4
Beverages................... 48,367 0.3
Beverages - Soft Drinks..... 111,750 0.7
Biotechnology............... 227,538 1.3
Broadcast Media............. 49,183 0.3
Brokerage................... 108,375 0.6
Building & Construction..... 326,820 1.9
Building Materials.......... 151,303 0.9
Business & Public
Services................... 19,933 0.1
Business Services........... 404,828 2.4
Business Systems............ 62,400 0.4
Chemicals................... 744,707 4.4
Communications - Equipment &
Software................... 85,819 0.5
Computer Software........... 90,431 0.5
Computers - Peripheral
Equipment.................. 52,250 0.3
Computers - Systems......... 186,988 1.1
Conglomerates............... 364,636 2.1
Consumer Products........... 246,921 1.5
Drugs....................... 193,444 1.1
Electronic Components....... 54,750 0.3
Electronics................. 413,163 2.4
Electronics -
Semiconductors/Components... 531,800 3.1
Engineering &
Construction............... 65,335 0.4
Entertainment............... 33,406 0.2
Finance - Consumer.......... 90,453 0.5
Financial - Miscellaneous... 328,880 1.9
Financial Services.......... 416,466 2.4
Food Processing............. 102,923 0.6
Foods & Beverages........... 145,939 0.9
Health & Personal Care...... 48,205 0.3
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ---------------------------- ---------- -------------
<S> <C> <C>
Hospital Management......... $ 67,244 0.4%
Hotels...................... 16,205 0.1
Household Appliances........ 79,875 0.5
Household Products.......... 186,138 1.1
Insurance................... 414,092 2.4
International Trade......... 175,404 1.0
Leisure..................... 67,715 0.4
Machine Tools............... 98,210 0.6
Machinery................... 516,465 3.0
Machinery - Diversified..... 170,704 1.0
Manufacturing............... 125,636 0.7
Medical Products &
Supplies................... 111,750 0.7
Metals & Basic Materials.... 105,825 0.6
Metals & Mining............. 147,014 0.9
Natural Gas................. 172,570 1.0
Office Equipment............ 86,688 0.5
Oil......................... 159,711 0.9
Oil & Gas................... 85,625 0.5
Oil - Foreign............... 65,750 0.4
Oil Drilling & Services..... 110,800 0.6
Oil Integrated -
International.............. 303,167 1.8
Pharmaceuticals............. 441,739 2.6
Publishing.................. 111,857 0.7
Real Estate................. 443,921 2.6
Retail...................... 330,814 1.9
Retail - Department
Stores..................... 101,250 0.6
Retail - Specialty.......... 192,124 1.1
Retail - Specialty
Apparel.................... 54,600 0.3
Shoes....................... 66,144 0.4
Steel & Iron................ 75,600 0.4
Supermarkets................ 51,250 0.3
Telecommunication
Equipment.................. 43,059 0.3
Telecommunications.......... 712,410 4.2
Textiles - Apparel.......... 123,174 0.7
Tobacco..................... 157,943 0.9
Transportation.............. 271,767 1.6
U.S. Government Agency...... 1,929,692 11.3
Utilities................... 23,499 0.1
Utilities - Electric........ 814,727 4.8
---------- ---
$16,929,075 99.1%
---------- ---
---------- ---
</TABLE>
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
TYPE OF INVESTMENT VALUE NET ASSETS
- ------------------------------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Common Stocks....................................................................... $14,880,426 87.1%
Preferred Stocks.................................................................... 118,957 0.7
Short-Term Investment............................................................... 1,929,692 11.3
---------- ---
$16,929,075 99.1%
---------- ---
---------- ---
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
93
<PAGE>
Developing Growth
Portfolio of Investments DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMMON STOCKS (76.7%)
AEROSPACE & DEFENSE (0.4%)
6,400 Base Ten Systems, Inc. (Class
A)*........................ $ 70,400
-------------
BANKS (1.0%)
1,600 Firstar Corp................. 63,400
2,000 TR Financial Corp............ 51,000
2,600 Trustmark Corp............... 57,200
-------------
171,600
-------------
BANKS - COMMERCIAL (0.3%)
1,500 U.S. Bancorp................. 50,250
-------------
BIOTECHNOLOGY (1.9%)
2,700 Cephalon Inc.*............... 110,024
10,400 Creative Biomolecules,
Inc.*...................... 71,500
1,200 Genetics Institute, Inc.*.... 64,200
1,210 Gilead Sciences, Inc.*....... 38,720
4,500 OEC Medical Systems, Inc.*... 43,875
-------------
328,319
-------------
BREWERY (0.3%)
2,500 Boston Beer Company, Inc.*... 59,375
-------------
BROADCAST MEDIA (1.3%)
2,920 Heftel Broadcasting Corp.*... 51,100
2,000 Infinity Broadcasting
Corp.*..................... 74,500
1,200 SFX Broadcasting, Inc. (Class
A)*........................ 35,700
3,500 Tele-Communications, Inc.*... 69,563
-------------
230,863
-------------
BROKERAGE (0.4%)
2,900 Edwards (A.G.), Inc.......... 69,238
-------------
BUILDING MATERIALS (0.3%)
2,000 NCI Building Systems,
Inc.*...................... 48,750
-------------
BUSINESS EQUIPMENT (0.5%)
2,400 Checkpoint Systems, Inc.*.... 89,699
-------------
BUSINESS SERVICES (0.3%)
1,270 Gartner Group Inc. (Class
A)*........................ 60,643
-------------
BUSINESS SYSTEMS (1.0%)
2,620 American Management Systems,
Inc.*...................... 78,273
1,600 DST Systems, Inc.*........... 45,600
1,600 Zebra Technologies Corp.
(Class A)*................. 54,400
-------------
178,273
-------------
COMMERCIAL SERVICES (3.2%)
1,600 Alternative Resources
Corp.*..................... 47,200
1,450 America Online, Inc.*........ 54,013
2,400 APAC Teleservices, Inc.*..... 79,800
2,800 Career Horizons, Inc.*....... 92,399
2,190 Danka Business Systems PLC
(ADR) (United Kingdom)..... 80,755
1,650 Norrell Corp................. 48,469
1,630 On Assignment, Inc.*......... 53,383
6,100 Protection One, Inc.*........ 61,000
1,500 Sitel Corp.*................. 45,375
-------------
562,394
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMMUNICATIONS - EQUIPMENT & SOFTWARE (3.2%)
600 3Com Corp.*.................. $ 27,975
1,100 Ascend Communications,
Inc.*...................... 89,237
1,680 Bay Networks, Inc.*.......... 68,880
900 Cabletron Systems, Inc.*..... 72,900
905 Cisco Systems, Inc.*......... 67,536
1,620 Madge Networks NV
(Netherlands)* ............ 71,888
1,000 Newbridge Networks Corp.*.... 41,375
1,220 Premisys Communications,
Inc.*...................... 68,320
600 Stratacom, Inc............... 43,800
-------------
551,911
-------------
COMMUNICATIONS - EQUIPMENT/MANUFACTURERS
(2.2%)
1,800 Adaptec, Inc.*............... 73,574
1,690 ADC Telecommunictions,
Inc.*...................... 61,263
1,500 Andrew Corp.*................ 57,375
4,970 Boston Technology, Inc.*..... 63,368
3,200 Comverse Technology, Inc.*... 64,000
660 U.S. Robotics Corp.*......... 57,750
-------------
377,330
-------------
COMPUTER EQUIPMENT (1.0%)
2,500 3D Systems Corp.*............ 59,375
2,300 International Rectifier
Corp.*..................... 57,500
2,100 Storage Technology Corp.*.... 50,138
-------------
167,013
-------------
COMPUTER SOFTWARE (7.1%)
1,100 Adobe Systems, Inc........... 68,200
3,000 Borland International,
Inc.*...................... 49,500
1,500 Business Objects S.A. (ADR)
(France)*.................. 72,000
3,150 Cheyenne Software, Inc.*..... 82,293
1,300 Ciber, Inc.*................. 29,900
2,400 Computron Software, Inc.*.... 42,600
4,800 Consilium, Inc.*............. 57,000
2,000 Dialogic Corp.*.............. 77,000
2,400 Discreet Logic, Inc.*........ 60,000
2,000 FTP Software, Inc.*.......... 58,000
1,300 Fulcrum Technologies,
Inc.*...................... 40,300
2,460 Informix Corp.*.............. 73,800
980 Kronos, Inc.*................ 46,550
840 Macromedia, Inc.*............ 43,575
760 Medic Computer Systems,
Inc.*...................... 45,790
4,000 Micrografx, Inc.*............ 52,500
900 Pairgrain Technologies,
Inc.*...................... 48,825
2,410 Progress Software Corp.*..... 89,169
1,640 Project Software &
Development, Inc.*......... 57,195
1,900 Softkey International,
Inc.*...................... 43,463
2,000 Sybase, Inc.*................ 71,500
1,000 Triple P NV (Netherlands)*... 10,000
-------------
1,219,160
-------------
</TABLE>
94
<PAGE>
Developing Growth
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMPUTER SOFTWARE & SERVICES (5.0%)
2,500 Analysts International
Corp....................... $ 75,000
2,600 Checkfree Corp.*............. 55,250
500 Citrix Systems, Inc.*........ 16,250
2,800 Clarify, Inc.*............... 83,300
2,500 Computer Task Group, Inc..... 49,375
5,500 Cooper & Chyan Technology,
Inc.*...................... 85,249
3,750 Dendrite International,
Inc.*...................... 67,500
4,000 Elcom International, Inc.*... 60,000
500 Insignia Solutions, Inc.
(ADR) (United Kingdom)*.... 5,875
1,600 Legato Systems, Inc.*........ 48,800
500 Netscape Communications
Corp.*..................... 69,500
2,700 Novadigm, Inc.*.............. 75,600
400 Objective Systems
Integrators, Inc.*......... 21,800
1,000 Premenos Technology Corp.*... 26,250
3,000 Saville Systems Ireland PLC
(ADR) (Ireland)*........... 42,375
1,200 Sterling Software Inc.*...... 74,850
-------------
856,974
-------------
COMPUTERS (1.3%)
1,000 Micros Systems, Inc.*........ 49,250
1,900 Mylex Corp.*................. 36,338
2,000 NetStar, Inc.*............... 36,500
1,500 Network Appliance, Inc.*..... 59,812
3,000 Xircom, Inc.*................ 37,125
-------------
219,025
-------------
COMPUTERS - PERIPHERAL EQUIPMENT (0.9%)
5,610 Exabyte Corp.*............... 82,045
1,440 Seagate Technology, Inc.*.... 68,400
-------------
150,445
-------------
COMPUTERS - SYSTEMS (0.2%)
1,260 VideoServer, Inc.*........... 39,690
-------------
CONSUMER PRODUCTS (0.2%)
1,600 General Nutrition Companies,
Inc.*...................... 36,800
-------------
COSMETICS (0.5%)
1,000 Estee Lauder Companies (Class
A)*........................ 34,875
2,130 Thermolase Corp.*............ 55,114
-------------
89,989
-------------
DRUGS (0.6%)
1,070 Genzyme Corp. General
Division*.................. 66,340
820 Teva Pharmaceutical
Industries Ltd. (ADR)
(Israel)................... 37,925
-------------
104,265
-------------
ELECTRICAL EQUIPMENT (0.6%)
1,220 Fore Systems, Inc.*.......... 72,438
2,730 Methode Electronics, Inc.
(Class A).................. 38,220
-------------
110,658
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
ELECTRONIC COMPONENTS (1.0%)
1,560 Adtran, Inc.*................ $ 84,629
710 Komag Inc.*.................. 32,394
1,400 Teltrend, Inc.*.............. 65,450
-------------
182,473
-------------
ELECTRONICS (0.3%)
2,000 Franklin Electronic
Publishers, Inc.*.......... 59,000
-------------
ELECTRONICS - SEMICONDUCTORS (1.7%)
2,500 ESS Technology, Inc.*........ 57,500
4,000 Integrated Device Technology,
Inc.*...................... 51,500
1,020 KLA Instruments Corp.*....... 26,520
1,330 LSI Logic Corp.*............. 43,558
2,000 MEMC Electronic Materials,
Inc.*...................... 65,250
1,800 Unitrode Corp.*.............. 50,850
-------------
295,178
-------------
ELECTRONICS - SEMICONDUCTORS/COMPONENTS
(1.0%)
1,320 Altera Corp.*................ 65,505
2,570 Atmel Corp.*................. 56,861
3,000 S3, Inc.*.................... 52,500
-------------
174,866
-------------
ENTERTAINMENT & LEISURE TIME (0.4%)
5,040 Cinar Films Inc. (Class B)
(Canada)*.................. 74,970
-------------
ENTERTAINMENT/GAMING (0.3%)
1,810 Showboat, Inc................ 47,739
-------------
ENVIRONMENTAL CONTROL (0.9%)
1,400 Molten Metal Technology,
Inc.*...................... 45,500
7,500 Philip Environmental, Inc.
(Canada)*.................. 45,938
2,000 U.S.A. Waste Services,
Inc.*...................... 37,750
700 United Waste Systems,
Inc.*...................... 25,725
-------------
154,913
-------------
FINANCIAL SERVICES (0.9%)
350 Aames Financial Corp......... 9,756
4,990 Envoy Corp.*................. 85,454
1,200 First USA, Inc............... 53,250
-------------
148,460
-------------
HARDWARE & TOOLS (0.4%)
1,100 Nucor Corp................... 62,838
-------------
HEALTH EQUIPMENT & SERVICES (0.2%)
650 Nellcor Puritan Bennett,
Inc.*...................... 37,700
-------------
HEALTHCARE PRODUCTS & SERVICES (0.6%)
605 HBO & Co..................... 46,131
1,480 Medaphis Corp.*.............. 54,760
-------------
100,891
-------------
HOME BUILDING (0.4%)
3,250 Clayton Homes, Inc........... 69,469
-------------
</TABLE>
95
<PAGE>
Developing Growth
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
HOSPITAL MANAGEMENT & HEALTH MAINTENANCE
ORGANIZATIONS (2.4%)
2,000 American Oncology Resources,
Inc.*...................... $ 96,999
2,090 Compdent Corp.*.............. 86,735
2,300 Coventry Corp.*.............. 47,438
1,600 Genesis Health Ventures,
Inc.*...................... 58,400
2,200 Horizon/CMS Healthcare
Corp.*..................... 55,550
1,000 Oxford Health Plans, Inc.*... 73,500
-------------
418,622
-------------
HOSPITAL MANAGEMENT (0.7%)
3,000 Mariner Health Group,
Inc.*...................... 50,250
300 National Surgery Centers,
Inc.*...................... 6,750
2,000 Total Renal Care Holdings,
Inc.*...................... 59,000
-------------
116,000
-------------
HOSPITAL SUPPLY (0.3%)
5,200 North American Biologicals,
Inc.*...................... 55,900
-------------
HOTELS/MOTELS (1.1%)
570 HFS, Inc.*................... 46,598
2,000 La Quinta Inns, Inc.......... 54,750
3,850 Renaissance Hotel Group NV
(Hong Kong)*............... 98,175
-------------
199,523
-------------
HOUSEHOLD PRODUCTS (0.4%)
4,000 Oneida Ltd................... 70,500
-------------
INSURANCE (3.0%)
2,800 American Travellers Corp..... 78,400
1,400 Exel, Ltd.................... 85,400
3,800 Lawyers Title Corp........... 72,675
1,000 Meadowbrook Insurance Group,
Inc.*...................... 33,500
2,300 Stewart Information Services
Corp....................... 49,450
2,920 U.S. Facilities Corp......... 61,320
1,950 United Dental Care, Inc.*.... 80,438
1,200 Vesta Insurance Group,
Inc........................ 65,400
-------------
526,583
-------------
LIFE INSURANCE (0.3%)
2,500 Wellcare Management Group,
Inc. (The)................. 52,500
-------------
MANUFACTURING (0.9%)
2,000 ABC Rail Products Corp.*..... 44,000
2,940 Brady (W.H.) Co. (Class A)... 76,440
2,500 Memtec Ltd. (ADR)
(Australia)................ 40,625
-------------
161,065
-------------
MEDICAL PRODUCTS & SUPPLIES (3.7%)
3,890 Biomet, Inc.*................ 69,048
1,840 Boston Scientific Corp.*..... 90,160
2,000 Empi, Inc.*.................. 51,000
1,500 Guidant Corp................. 63,375
6,500 Meridian Diagnostics, Inc.... 70,688
2,800 Physician Sales & Service,
Inc.*...................... 78,399
1,400 Research Industries Corp.*... 37,450
4,220 Staar Surgical Co.*.......... 44,838
1,050 Summit Technology, Inc.*..... 35,438
2,100 VISX, Inc.*.................. 81,899
-------------
622,295
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
MEDICAL SERVICES (0.6%)
1,510 Healthsouth Corp.*........... $ 43,979
1,500 Omnicare, Inc................ 67,125
-------------
111,104
-------------
METALS & MINING (0.5%)
1,810 Case Corp.................... 82,808
-------------
OFFICE EQUIPMENT & SUPPLIES (1.2%)
2,800 Corporate Express, Inc.*..... 83,650
2,200 Daisytek International
Corp.*..................... 67,650
1,400 Nu-Kote Holdings, Inc. (Class
A)*........................ 23,800
780 Viking Office Products,
Inc.*...................... 36,270
-------------
211,370
-------------
OIL & GAS EXPLORATION - CANADIAN (0.3%)
1,000 Triton Energy Corp........... 57,375
-------------
OIL & GAS PRODUCTS (1.6%)
2,960 Barrett Resources Corp.*..... 86,949
2,370 Chesapeake Energy Corp.*..... 78,803
12,000 Marine Drilling Co., Inc.*... 58,500
1,650 Seitel Inc.*................. 58,369
-------------
282,621
-------------
OIL DRILLING & SERVICES (2.9%)
4,300 Cross Timbers Oil Co......... 75,788
2,000 Global Industries Ltd.*...... 59,500
6,400 Global Marine, Inc.*......... 56,000
1,500 Input/Output, Inc.*.......... 86,625
3,500 Smith International, Inc.*... 82,250
3,000 Stone Energy Corp.*.......... 46,125
1,500 Western Atlas Inc.*.......... 75,750
-------------
482,038
-------------
OIL RELATED - INTERNATIONAL (0.3%)
2,800 Ensco International Inc...... 58,100
-------------
PHARMACEUTICALS (1.7%)
6,300 Alliance Pharmaceutical
Corp.*..................... 85,050
2,670 Dura-Pharmaceuticals,
Inc.*...................... 92,115
1,900 Ivax Corp.................... 54,150
1,800 Sequus Pharmaceuticals,
Inc.*...................... 25,200
820 Watson Pharmaceuticals,
Inc.*...................... 40,078
-------------
296,593
-------------
RESTAURANTS (0.7%)
5,000 BAB Holdings, Inc.*.......... 26,875
2,600 Daka International, Inc.*.... 70,850
1,470 Sonic Corp.*................. 27,195
-------------
124,920
-------------
</TABLE>
96
<PAGE>
Developing Growth
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
RETAIL (3.3%)
1,020 Barnes & Noble, Inc.*........ $ 29,580
2,020 Bed, Bath & Beyond, Inc.*.... 78,023
2,700 Blyth Industries, Inc.*...... 79,650
5,400 Cole National Corp. (Class
A)*........................ 74,925
370 CompUSA, Inc.*............... 11,516
3,000 Eastbay, Inc.*............... 57,000
1,000 Gadzooks, Inc.*.............. 25,250
1,400 Gucci Group NV (Italy)*...... 54,425
750 Kohl's Corp.*................ 39,375
1,800 Men's Wearhouse, Inc.
(The)*..................... 46,350
1,000 Oakley, Inc.*................ 34,000
2,200 Rexall Sundown, Inc.*........ 48,125
-------------
578,219
-------------
RETAIL - SPECIALTY (0.3%)
2,200 Staples, Inc.*............... 53,625
-------------
SAVINGS & LOAN ASSOCIATIONS (0.4%)
3,255 Downey Financial Corp........ 71,203
-------------
SEMICONDUCTOR EQUIPMENT (1.6%)
1,560 Applied Materials, Inc.*..... 61,230
3,340 Electroglas, Inc.*........... 82,665
3,060 FSI International, Inc.*..... 61,200
1,900 Fusion Systems Corp.*........ 52,250
1,130 Ultratech Stepper, Inc.*..... 28,956
-------------
286,301
-------------
SEMICONDUCTORS (1.5%)
1,500 Aspen Technology, Inc.*...... 50,625
1,600 Lattice Semiconductor
Corp.*..................... 52,200
1,020 Linear Technology Corp....... 40,035
1,800 Microchip Technology,
Inc.*...................... 65,700
1,050 Micron Technology, Inc....... 41,606
1,080 VLSI Technology, Inc.*....... 19,440
-------------
269,606
-------------
SHOES (0.4%)
2,175 Wolverine World Wide, Inc.... 68,513
-------------
TELECOMMUNICATION EQUIPMENT (0.2%)
1,000 Picturetel Corp.*............ 42,875
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
TELECOMMUNICATIONS (3.6%)
2,930 Arch Communications Group,
Inc.*...................... $ 70,320
2,900 Commnet Cellular, Inc.*...... 83,738
1,100 Frontier Corp................ 33,000
580 Glenayre Technologies,
Inc.*...................... 35,960
2,620 Globalstar Telecommunications
Ltd. (Bermuda)*............ 96,939
6,000 Intelcom Group, Inc.*........ 74,250
2,000 LCI International, Inc.*..... 41,000
1,410 Mobilemedia Corp.*........... 31,020
1,400 Paging Network, Inc.*........ 33,250
690 Qualcomm Inc.*............... 29,584
1,100 Tellabs, Inc.*............... 40,700
2,000 Transaction Network Services,
Inc.*...................... 49,000
-------------
618,761
-------------
TEXTILES (0.2%)
2,100 Marisa Christina, Inc.*...... 35,175
-------------
TRANSPORTATION (0.7%)
1,620 Fritz Companies, Inc.*....... 67,230
2,000 Midwest Express Holdings,
Inc.*...................... 55,500
-------------
122,730
-------------
UTILITIES - TELECOMMUNICATIONS (0.1%)
1,000 Intermedia Communications of
Florida, Inc.*............. 17,000
-------------
TOTAL COMMON STOCKS
(IDENTIFIED COST
$11,845,275)............... 13,345,486
-------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
WARRANTS
- -----------
<C> <S> <C>
WARRANTS (0.0%)
COMPUTER SOFTWARE & SERVICES
2,000 New Paradigm Software Co.
(Warrants due 08/11/00)*
(Identified Cost $200)..... 2,250
</TABLE>
<TABLE>
<C> <S> <C>
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS)
- -----------
<C> <S> <C>
SHORT-TERM INVESTMENT (A) (24.7%)
U.S. GOVERNMENT AGENCY
$ 4,300 Federal Home Loan Mortgage
Corp. 5.75% due 01/02/96
(Amortized Cost
$4,299,313)................ 4,299,313
-------------
TOTAL INVESTMENTS (IDENTIFIED
COST $16,144,788) (B)....... 101.4% 17,647,049
LIABILITIES IN EXCESS OF CASH
AND OTHER ASSETS............ (1.4) (235,197)
---------- -------------
NET ASSETS.................... 100.0% $ 17,411,852
---------- -------------
---------- -------------
<FN>
- ----------------
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS
BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED
COST.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
97
<PAGE>
Emerging Markets
Portfolio of Investments DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES/PRINCIPAL
AMOUNT VALUE
- ------------- -----------
<C> <S> <C>
COMMON AND PREFERRED STOCKS,
CONVERTIBLE BONDS AND RIGHTS (82.4%)
ARGENTINA (3.6%)
BANKS
520 Banco de Galicia y Buenos
Aires S.A. (ADR)........ $ 10,660
345 Banco Frances del Rio de
la Plata S.A. (ADR)..... 9,272
-----------
19,932
-----------
FOOD, BEVERAGE, TOBACCO & HOUSEHOLD
PRODUCTS
200 Buenos Aires Embotelladera
S.A. (ADR).............. 4,125
-----------
MULTI-INDUSTRY
8,000 Compania Naviera Perez
Compac
S.A.C.F.I.M.F.A......... 42,396
-----------
OIL & GAS
2,900 Astra Cia Argentina de
Petroleo S.A............ 5,364
2,000 Transportadora de Gas del
Sur S.A. (ADR).......... 25,750
-----------
31,114
-----------
OIL RELATED
600 Yacimentos Petroliferos
Fiscales S.A. (ADR)..... 12,975
-----------
TELECOMMUNICATIONS
1,300 Telefonica de Argentina
S.A. (ADR).............. 35,425
-----------
TOTAL ARGENTINA........... 145,967
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
BRAZIL (11.0%)
BANKING
4,000,000 Banco Bradesco S.A.
(Pref.)................. 34,990
93,528 Banco Bradesco S.A.
(Rights)*............... 154
60,000 Banco Itau S.A. (Pref.)... 16,734
-----------
51,878
-----------
BREWERY
102,000 Companhia Cervejaria
Brahma (Conv. Pref.).... 41,988
-----------
ELECTRONIC & ELECTRICAL EQUIPMENT
18,100 Brasmotor S.A. (Pref.).... 3,595
-----------
METALS & MINING
193,500 Companhia Vale do Rio Doce
S.A. (Pref.)............ 31,862
-----------
MULTI-INDUSTRY
15,000 Itausa Investimentos Itau
S.A. (Pref.)............ 8,182
-----------
<CAPTION>
SHARES/PRINCIPAL
AMOUNT VALUE
- ------------- -----------
<C> <S> <C>
RETAIL
233,700 Lojas Americanas S.A.
(Pref.)................. $ 5,484
-----------
TELECOMMUNICATIONS
3,800 Telecomunicacoes
Brasileiras S.A.
(ADR)................... 180,024
70,000 Telecomunicacoes de Sao
Paulo S.A. (Conv.
Pref.).................. 10,302
-----------
190,326
-----------
UTILITIES - ELECTRIC
2,365 Centrais Electricas
Brasileiras S.A.
(ADR)................... 31,928
200,000 Centrais Electricas
Brasileiras S.A.
(Pref.)................. 54,132
1,400 Companhia Energetica de
Minas Gerais (Pref.)
(ADR) - 144A**.......... 30,713
-----------
116,773
-----------
TOTAL BRAZIL.............. 450,088
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
CHILE (3.3%)
BUILDING & CONSTRUCTION
500 Madeco S.A. (ADR)......... 13,500
-----------
CHEMICALS
100 Sociedad Quimica y Minera
de Chile S.A. (ADR)..... 4,700
-----------
FOOD, BEVERAGE, TOBACCO & HOUSEHOLD
PRODUCTS
500 Compania Cervecerias
Unidas S.A. (ADR)....... 11,563
640 Embotelladora Andina S.A.
(ADR)................... 23,120
500 Santa Isabel S.A. (ADR)... 12,000
-----------
46,683
-----------
PAPER & FOREST PRODUCTS
560 Maderas y Sinteticos
Sociedad Anonima Masisa
(ADR)................... 10,920
-----------
TELECOMMUNICATIONS
200 Compania de
Telecommunicaciones de
Chile S.A. (ADR)........ 16,575
-----------
UTILITIES - ELECTRIC
540 Chilgener S.A. (ADR)...... 13,500
700 Empresa Nacional de
Electricidad Chile
(ADR)................... 15,925
490 Enersis S.A. (ADR)........ 13,965
-----------
43,390
-----------
TOTAL CHILE............... 135,768
-----------
</TABLE>
98
<PAGE>
Emerging Markets
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES/PRINCIPAL
AMOUNT VALUE
- ------------- -----------
<C> <S> <C>
COLOMBIA (0.6%)
BANKING
1,500 Banco Industrial
Colombiano S.A. (ADR)... $ 24,563
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
GREECE (1.3%)
BANKING
750 Ergo Bank S.A............. 29,848
-----------
BUILDING & CONSTRUCTION
2,640 Aegek..................... 22,692
-----------
TOTAL GREECE.............. 52,540
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
HONG KONG (1.6%)
INVESTMENT COMPANIES
3,400 Taiwan Index Fund......... 32,300
-----------
UTILITIES - ELECTRIC
19,000 Consolidated Electric
Power Asia Ltd.......... 34,525
-----------
TOTAL HONG KONG........... 66,825
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
HUNGARY (0.2%)
PHARMACEUTICALS
500 Gedeon Richter (GDR) -
144A**.................. 9,600
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
INDIA (1.9%)
BUILDING & CONSTRUCTION
3,250 Larsen & Toubro Ltd.
(GDR)................... 56,063
-----------
FINANCIAL SERVICES
550 Hindalco Industries Ltd.
(GDR)................... 18,288
-----------
INDUSTRIALS
5,000 Reliance Industries, Ltd.
3.50% due 11/03/99
(Conv.)................. 5,025
-----------
TOTAL INDIA............... 79,376
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
INDONESIA (3.1%)
BANKING
5,000 PT Bank Internasional
Indonesia............... 16,583
-----------
FOOD, BEVERAGE, TOBACCO & HOUSEHOLD
PRODUCTS
2,300 PT Gudang Garam........... 24,067
5,000 PT Indofood Sukses
Makmur.................. 24,081
-----------
48,148
-----------
TELECOMMUNICATIONS
2,400 PT Telekomunikasi
Indonesia
(ADR)................... 60,600
-----------
TOTAL INDONESIA........... 125,331
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES/PRINCIPAL
AMOUNT VALUE
- ------------- -----------
<C> <S> <C>
MALAYSIA (15.0%)
BANKING
18,000 Commerce Asset Holdings
Berhad.................. $ 90,761
30,000 DCB Holdings Berhad....... 87,452
-----------
178,213
-----------
CONGLOMERATES
50,000 Renong Berhad............. 74,059
-----------
ENTERTAINMENT/GAMING & LODGING
12,000 Genting Berhad............ 100,216
-----------
INVESTMENT COMPANIES
36,000 Lion Land Berhad.......... 35,738
13,000 Technology Resources
Industries Berhad....... 38,409
-----------
74,147
-----------
PUBLISHING
16,000 New Straits Times Press
Berhad.................. 53,575
-----------
RETAIL
6,000 Prime Utilities Berhad.... 51,054
-----------
TELECOMMUNICATIONS
11,000 Telekom Malaysia Berhad... 85,798
-----------
TOTAL MALAYSIA............ 617,062
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
MEXICO (11.5%)
BANKING
5,800 Grupo Financiero Inbursa
S.A. (B Shares)*........ 16,992
-----------
BUILDING & CONSTRUCTION
900 Empresas ICA Sociedad
Controladora S.A. de
C.V. (ADR).............. 9,225
-----------
BUILDING MATERIALS
10,700 Cemex S.A. de C.V. (B
Shares)................. 39,010
-----------
CONGLOMERATES
8,500 Grupo Carso S.A. de C.V.
(Series A1)*............ 46,042
4,500 Grupo Industria Alfa (A
Shares)................. 58,008
-----------
104,050
-----------
FOOD PROCESSING
3,000 Grupo Industrial Bimbo
S.A. de C.V. (Series
A)...................... 12,461
-----------
FOOD, BEVERAGE, TOBACCO & HOUSEHOLD
PRODUCTS
600 Coca Cola FEMSA S.A. de
C.V. (ADR).............. 11,100
500 Empresas la Moderna S.A.
de C.V. (ADR)........... 7,750
6,000 Fomento Economico Mexicano
S.A. de C.V. (B
Shares)................. 13,547
1,400 Panamerican Beverages,
Inc..................... 44,800
-----------
77,197
-----------
</TABLE>
99
<PAGE>
Emerging Markets
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES/PRINCIPAL
AMOUNT VALUE
- ------------- -----------
<C> <S> <C>
MEDIA GROUP
820 Grupo Televisa S.A.
(GDR)................... $ 18,450
-----------
MULTI-INDUSTRY
3,300 Desc S.A. (Series B)...... 12,160
-----------
PAPER & FOREST PRODUCTS
2,400 Kimberly-Clark de Mexico
S.A. de C.V. (A
Shares)................. 36,375
-----------
RETAIL
28,800 Cifra S.A. de C.V. (C
Shares)*................ 29,250
-----------
STEEL & IRON
1,700 Tubos de Acero de Mexico
S.A. (ADR)*............. 11,900
-----------
TELECOMMUNICATIONS
3,000 Telefonos de Mexico S.A.
de C.V. (Series L)
(ADR)................... 95,624
-----------
TRANSPORTATION
1,100 Transportacion Maritima
Mexicana S.A. de C.V.
(Series A) (ADR)........ 8,250
-----------
TOTAL MEXICO.............. 470,944
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
PAKISTAN (0.8%)
TELECOMMUNICATIONS
400 Pakistan
Telecommunications Corp.
(GDR)*.................. 34,000
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
PERU (2.2%)
BREWERY
11,800 Cerveceria Backus &
Johnston................ 20,324
-----------
FINANCIAL SERVICES
666 Banco de Credito del
Peru.................... 11,489
-----------
METALS & MINING
2,000 Compania de Minas
Buenaventura (C
Shares)................. 12,928
-----------
TELECOMMUNICATIONS
20,200 CPT-Telefonica de Peru
S.A.
(B Shares).............. 43,380
-----------
TOTAL PERU................ 88,121
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
PHILIPPINES (2.3%)
UTILITIES - ELECTRIC
11,600 Manila Electric Co. (B
Shares)................. 94,711
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
PORTUGAL (2.4%)
BUILDING & CONSTRUCTION
1,300 Sociedade de Construcoes
Soares de Costa S.A..... 14,744
-----------
BUILDING MATERIALS
1,450 Cimentos de Portugal
S.A..................... 23,996
-----------
<CAPTION>
SHARES/PRINCIPAL
AMOUNT VALUE
- ------------- -----------
<C> <S> <C>
INVESTMENT COMPANIES
1,400 Sonae Investimentos
Sociedade Gestora de
Participacoes Sociais
S.A..................... $ 29,897
-----------
TELECOMMUNICATIONS
1,590 Portugal Telecom S.A...... 29,879
-----------
TOTAL PORTUGAL............ 98,516
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
SINGAPORE (1.3%)
FOOD, BEVERAGE, TOBACCO & HOUSEHOLD
PRODUCTS
2,000 Fraser & Neave Ltd........ 25,463
-----------
MULTI-INDUSTRY
3,000 Keppel Corp., Ltd......... 26,736
-----------
TOTAL SINGAPORE........... 52,199
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
SOUTH AFRICA (8.1%)
BANKING
1,000 Nedcor Ltd. (ADR) -
144A**.................. 72,020
-----------
BUILDING MATERIALS
1,000 Anglo Alpha Ltd........... 39,237
-----------
METALS & MINING
5,900 Driefontein Consolidated
Ltd.
(ADR)................... 73,013
-----------
OIL REFINERIES
17,832 Sasol Ltd................. 146,051
-----------
TOTAL SOUTH AFRICA........ 330,321
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
SOUTH KOREA (3.2%)
CHEMICALS
500 L.G. Chemical Ltd.
(GDR)................... 10,125
-----------
ELECTRONIC & ELECTRICAL EQUIPMENT
232 Samsung Electronics
(GDR)................... 22,388
233 Samsung Electronics (GDR)
- 144A**................ 22,485
-----------
44,873
-----------
INVESTMENT COMPANIES
1 Dongyang Dragon Trust..... 14,250
-----------
STEEL & IRON
1,300 Pohang Iron & Steel Co.,
Ltd.
(ADR)................... 28,438
-----------
UTILITIES - ELECTRIC
1,200 Korea Electric Power Corp.
(ADR)................... 31,800
-----------
TOTAL SOUTH KOREA......... 129,486
-----------
</TABLE>
100
<PAGE>
Emerging Markets
Portfolio of Investments DECEMBER 31, 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES/PRINCIPAL
AMOUNT VALUE
- ------------- -----------
<C> <S> <C>
THAILAND (5.5%)
BANKING
$ 55,000 Siam Commercial Bank Co.
3.25% due 01/24/04
(Conv.)................. $ 59,400
6,000 Thai Farmers Bank, Ltd.... 60,524
-----------
119,924
-----------
BUILDING & CONSTRUCTION
1,000 Siam Cement Co., Ltd...... 55,441
-----------
OIL RELATED
4,800 PTT Exploration &
Production Public Co.,
Ltd..................... 50,326
-----------
TOTAL THAILAND............ 225,691
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
TURKEY (0.8%)
BREWERY
10,000 Ege Biracilik Ve Malt
Sanayii AS.............. 3,471
-----------
BUILDING MATERIALS
175,000 Eczacibasi Yapi Gerecleri
Sanayi ve Ticaret AS.... 19,380
-----------
TELECOMMUNICATIONS
31,000 Netas Telekomunik......... 8,839
-----------
TOTAL TURKEY.............. 31,690
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES/PRINCIPAL
AMOUNT VALUE
- ------------- -----------
<C> <S> <C>
UNITED KINGDOM (2.2%)
INVESTMENT COMPANIES
18,750 Five Arrows Chile Fund
Ltd..................... $ 54,750
900 Genesis Chile Fund........ 36,113
-----------
TOTAL UNITED KINGDOM...... 90,863
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
UNITED STATES (0.5%)
INVESTMENT COMPANIES
1,800 Lazard Vietnam Fund
Ltd..................... 19,800
-----------
TOTAL INVESTMENTS (IDENTIFIED
COST $3,357,106) (A)......... 82.4% 3,373,462
CASH AND OTHER ASSETS IN EXCESS
OF LIABILITIES............... 17.6 718,756
---------- -----------
NET ASSETS..................... 100.0% $ 4,092,218
---------- -----------
---------- -----------
<FN>
- ----------------
ADR AMERICAN DEPOSITORY RECEIPT.
GDR GLOBAL DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
(A) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED
COST.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
101
<PAGE>
Emerging Markets
Summary of Investments
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ----------------------------- --------- -------------
<S> <C> <C>
Banking...................... $ 510,021 12.4%
Banks........................ 19,932 0.5
Brewery...................... 65,783 1.6
Building & Construction...... 171,665 4.2
Building Materials........... 121,623 3.0
Chemicals.................... 14,825 0.4
Conglomerates................ 178,109 4.4
Electronic & Electrical
Equipment................... 48,468 1.2
Entertainment/Gaming &
Lodging..................... 100,216 2.4
Financial Services........... 29,777 0.7
Food Processing.............. 12,461 0.3
Food, Beverage, Tobacco &
Household Products.......... 201,616 4.9
Industrials.................. 5,025 0.1
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ----------------------------- --------- -------------
<S> <C> <C>
Investment Companies......... $ 261,257 6.4%
Media Group.................. 18,450 0.5
Metals & Mining.............. 117,803 2.9
Multi-Industry............... 89,474 2.2
Oil & Gas.................... 31,114 0.8
Oil Refineries............... 146,051 3.6
Oil Related.................. 63,301 1.5
Paper & Forest Products...... 47,295 1.2
Pharmaceuticals.............. 9,600 0.2
Publishing................... 53,575 1.3
Retail....................... 85,788 2.1
Steel & Iron................. 40,338 1.0
Telecommunications........... 600,446 14.6
Transportation............... 8,250 0.2
Utilities - Electric......... 321,199 7.8
--------- ---
$3,373,462 82.4%
--------- ---
--------- ---
</TABLE>
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
TYPE OF INVESTMENT VALUE NET ASSETS
- ------------------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Common Stocks........................................................................ $3,070,901 75.0%
Convertible Bonds.................................................................... 64,425 1.6
Convertible Preferred Stocks......................................................... 52,290 1.3
Preferred Stocks..................................................................... 185,692 4.5
Rights............................................................................... 154 0.0
--------- ---
$3,373,462 82.4%
--------- ---
--------- ---
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
102
<PAGE>
(This page left blank intentionally.)
103
<PAGE>
Dean Witter Select Dimensions Investment Series
Statements of Assets and Liabilities
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH
AMERICAN
GOVERNMENT DIVERSIFIED
MONEY MARKET SECURITIES INCOME BALANCED
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities, at
value *..................... $ 41,982,183 $ 1,239,569 $ 10,278,470 $ 16,589,863
Cash.......................... 990 37,510 87,497** --
Receivable for:
Investments sold............ -- -- -- --
Shares of beneficial
interest sold............. 76,894 921 45,445 51,364
Dividends................... -- -- -- 18,665
Interest.................... 27,947 9,630 154,729 51,068
Foreign withholding taxes
reclaimed................. -- -- -- --
Compensated forward foreign
currency contracts........ -- -- 5,734 --
Prepaid expenses and other
assets...................... 1,295 129 312 955
Deferred organizational
expenses.................... 6,432 6,427 6,427 6,427
Receivable from affiliate..... 21,989 12,298 21,540 23,480
------------ ------------ -------------- ------------
TOTAL ASSETS.......... 42,117,730 1,306,484 10,600,154 16,741,822
------------ ------------ -------------- ------------
LIABILITIES:
Payable for:
Investments purchased....... -- -- 1,589,056 400,693
Shares of beneficial
interest repurchased...... 101 31 -- 52
Compensated forward foreign
currency contracts........ -- -- 7,598 --
Unrealized depreciation on
forward foreign currency
contracts................... -- -- 3,544 --
Accrued expenses and other
payables.................... 22,160 12,346 21,536 23,258
Organizational expenses
payable..................... 6,432 6,427 6,427 6,427
------------ ------------ -------------- ------------
TOTAL LIABILITIES..... 28,693 18,804 1,628,161 430,430
------------ ------------ -------------- ------------
NET ASSETS:
Paid-in-capital............... 42,089,011 1,275,675 8,835,101 15,380,566
Accumulated undistributed net
investment income........... 26 5,485 80,298 47,863
Accumulated undistributed net
realized gain (accumulated
net realized loss).......... -- (542) 18,854 112,736
Net unrealized appreciation... -- 7,062 37,740 770,227
------------ ------------ -------------- ------------
NET ASSETS............ $ 42,089,037 $ 1,287,680 $ 8,971,993 $ 16,311,392
------------ ------------ -------------- ------------
------------ ------------ -------------- ------------
*IDENTIFIED COST.............. $ 41,982,183 $ 1,232,507 $ 10,237,790 $ 15,819,636
------------ ------------ -------------- ------------
------------ ------------ -------------- ------------
SHARES OF BENEFICIAL INTEREST
OUTSTANDING................. 42,089,011 126,550 877,542 1,371,923
------------ ------------ -------------- ------------
------------ ------------ -------------- ------------
NET ASSET VALUE PER
SHARE (unlimited authorized
shares of $.01 par value)... $1.00 $10.18 $10.22 $11.89
------------ ------------ -------------- ------------
------------ ------------ -------------- ------------
<FN>
- ------------------
** Includes foreign cash of $10,208.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
104
<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>
ASSETS:
Investments in securities, at
value *..................... $18,124,558 $79,563,772 $24,384,667 $3,953,687 $38,746,467 $16,929,075 $17,647,049 $3,373,462
Cash.......................... 29,366 -- -- -- 93,918 71,153 65,991 796,745
Receivable for:
Investments sold............ -- -- 95,844 -- 100,533 18,609 129,179 56,001
Shares of beneficial
interest sold............. 56,142 139,084 55,101 14,340 70,858 63,382 21,975 22,335
Dividends................... 41,710 215,037 34,436 3,369 19,664 13,061 1,943 6,092
Interest.................... 630 331 -- -- -- -- -- 9,669
Foreign withholding taxes
reclaimed................. -- -- -- -- -- 2,244 -- --
Compensated forward foreign
currency contracts........ -- -- -- -- -- -- -- --
Prepaid expenses and other
assets...................... 480 1,266 9,020 252 583 744 344 282
Deferred organizational
expenses.................... 6,427 6,427 6,427 6,427 6,427 6,427 6,427 6,427
Receivable from affiliate..... 27,359 41,313 26,358 16,224 32,304 37,480 19,173 17,518
---------- ----------- ---------- --------- ---------- ---------- ---------- ----------
TOTAL ASSETS.......... 18,286,672 79,967,230 24,611,853 3,994,299 39,070,754 17,142,175 17,892,081 4,288,531
---------- ----------- ---------- --------- ---------- ---------- ---------- ----------
LIABILITIES:
Payable for:
Investments purchased....... 293,675 1,225,370 609,466 15,252 797,335 24,000 454,658 173,793
Shares of beneficial
interest repurchased...... -- -- -- 28 -- -- -- --
Compensated forward foreign
currency contracts........ -- -- -- -- -- -- -- --
Unrealized depreciation on
forward foreign currency
contracts................... -- -- -- -- -- -- -- --
Accrued expenses and other
payables.................... 27,339 41,205 26,333 16,180 32,206 37,445 19,144 16,093
Organizational expenses
payable..................... 6,427 6,427 6,427 6,427 6,427 6,427 6,427 6,427
---------- ----------- ---------- --------- ---------- ---------- ---------- ----------
TOTAL LIABILITIES..... 327,441 1,273,002 642,226 37,887 835,968 67,872 480,229 196,313
---------- ----------- ---------- --------- ---------- ---------- ---------- ----------
NET ASSETS:
Paid-in-capital............... 16,570,818 71,984,357 22,718,100 3,843,939 34,976,263 16,462,812 15,870,399 4,147,954
Accumulated undistributed net
investment income........... 59,133 234,361 47,520 2,477 66,197 28,778 20,669 6,298
Accumulated undistributed net
realized gain (accumulated
net realized loss).......... 20,650 178,778 24,656 25,262 310,119 (2,790) 18,523 (77,818)
Net unrealized appreciation... 1,308,630 6,296,732 1,179,351 84,734 2,882,207 585,503 1,502,261 15,784
---------- ----------- ---------- --------- ---------- ---------- ---------- ----------
NET ASSETS............ $17,959,231 $78,694,228 $23,969,627 $3,956,412 $38,234,786 $17,074,303 $17,411,852 $4,092,218
---------- ----------- ---------- --------- ---------- ---------- ---------- ----------
---------- ----------- ---------- --------- ---------- ---------- ---------- ----------
*IDENTIFIED COST.............. $16,815,928 $73,267,040 $23,205,316 $3,868,953 $35,864,260 $16,343,525 $16,144,788 $3,357,106
---------- ----------- ---------- --------- ---------- ---------- ---------- ----------
---------- ----------- ---------- --------- ---------- ---------- ---------- ----------
SHARES OF BENEFICIAL INTEREST
OUTSTANDING................. 1,454,280 5,810,477 1,958,151 357,380 2,787,887 1,553,878 1,160,646 422,529
---------- ----------- ---------- --------- ---------- ---------- ---------- ----------
---------- ----------- ---------- --------- ---------- ---------- ---------- ----------
NET ASSET VALUE PER
SHARE (unlimited authorized
shares of $.01 par value)... $12.35 $13.54 $12.24 $11.07 $13.71 $10.99 $15.00 $9.69
---------- ----------- ---------- --------- ---------- ---------- ---------- ----------
---------- ----------- ---------- --------- ---------- ---------- ---------- ----------
</TABLE>
105
<PAGE>
Dean Witter Select Dimensions Investment Series
Statements of Operations
FOR THE YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH
AMERICAN
MONEY GOVERNMENT DIVERSIFIED
MARKET SECURITIES INCOME BALANCED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
INCOME
Interest.................. $ 882,216 $ 32,639 $ 230,744* $ 171,067
Dividends................. -- -- -- 62,502*
Dividends from affiliate
(Note 3)................ -- -- -- --
----------- ----------- ----------- -----------
TOTAL INCOME.......... 882,216 32,639 230,744 233,569
----------- ----------- ----------- -----------
EXPENSES
Investment management
fee..................... 74,525 3,695 12,671 45,557
S&P license fees.......... -- -- -- --
Transfer agent fees and
expenses................ 83 83 83 83
Shareholder reports and
notices................. 10,112 2,179 3,367 7,960
Professional fees......... 22,732 15,611 14,335 14,345
Custodian fees............ 10,448 830 9,399 14,197
Organizational expenses... 1,664 1,664 1,664 1,664
Other..................... 572 854 604 873
----------- ----------- ----------- -----------
TOTAL EXPENSES BEFORE
AMOUNTS
REIMBURSED/WAIVED... 120,136 24,916 42.123 84,679
LESS: AMOUNTS
REIMBURSED/WAIVED....... (120,136) (24,916) (42,123) (84,679)
----------- ----------- ----------- -----------
TOTAL EXPENSES AFTER
AMOUNTS
REIMBURSED/WAIVED... -- -- -- --
----------- ----------- ----------- -----------
NET INVESTMENT
INCOME.......... 882,216 32,639 230,744 233,569
----------- ----------- ----------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS):
Net realized gain (loss)
on:
Investments............. -- (542) 30,320 112,736
Foreign exchange
transactions.......... -- -- (7,970) --
----------- ----------- ----------- -----------
TOTAL GAIN (LOSS)..... -- (542) 22,350 112,736
----------- ----------- ----------- -----------
Net change in unrealized
appreciation/depreciation
on:
Investments............. -- 7,062 40,680 770,654
Translation of forward
foreign currency
contracts, other
assets and liabilities
denominated in foreign
currencies............ -- -- (2,940) --
----------- ----------- ----------- -----------
TOTAL APPRECIATION.... -- 7,062 37,740 770,654
----------- ----------- ----------- -----------
NET GAIN (LOSS)....... -- 6,520 60,090 883,390
----------- ----------- ----------- -----------
NET INCREASE
(DECREASE)...... $ 882,216 $ 39,159 $ 290,834 $ 1,116,959
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<FN>
- ------------------
* Net of $783, $228, $2,141, $325, $140, $193, $5,639, $35, $1,700 in
foreign witholding tax, respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
106
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DIVIDEND VALUE-ADDED AMERICAN GLOBAL DEVELOPING EMERGING
UTILITIES GROWTH MARKET CORE EQUITY VALUE EQUITY GROWTH MARKETS
----------- ---------- ---------- ----------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
INCOME
Interest.................. $ 57,667 $ 89,548 $ 76,711 $ 16,060 $ 138,229 $103,683 $ 95,270 $ 31,011
Dividends................. 178,934* 746,717 141,885* 12,518* 81,384* 59,884* 6,652* 14,924*
Dividends from affiliate
(Note 3)................ -- -- 207 -- -- -- -- --
----------- ---------- ---------- ----------- ---------- -------- -------- --------
TOTAL INCOME.......... 236,601 836,265 218,803 28,578 219,613 163,567 101,922 45,935
----------- ---------- ---------- ----------- ---------- -------- -------- --------
EXPENSES
Investment management
fee..................... 34,637 144,116 35,224 13,049 66,327 58,921 24,345 21,464
S&P license fees.......... -- -- 11,589 -- -- -- -- --
Transfer agent fees and
expenses................ 83 83 83 83 83 83 83 83
Shareholder reports and
notices................. 7,950 15,407 5,839 2,699 8,411 9,264 4,805 4,079
Professional fees......... 18,051 17,342 21,147 21,607 11,517 14,388 20,205 19,880
Custodian fees............ 13,134 12,410 26,807 145 13,378 14,553 8,639 11,496
Organizational expenses... 1,664 1,664 1,664 1,664 1,664 1,664 1,664 1,664
Other..................... 573 556 588 538 564 754 548 690
----------- ---------- ---------- ----------- ---------- -------- -------- --------
TOTAL EXPENSES BEFORE
AMOUNTS
REIMBURSED/WAIVED... 76,092 191,578 102,941 39,785 101,944 99,627 60,289 59,356
LESS: AMOUNTS
REIMBURSED/WAIVED....... (76,092) (191,578) (102,941) (39,785) (101,944) (99,627) (60,289) (59,356)
----------- ---------- ---------- ----------- ---------- -------- -------- --------
TOTAL EXPENSES AFTER
AMOUNTS
REIMBURSED/WAIVED... -- -- -- -- -- -- -- --
----------- ---------- ---------- ----------- ---------- -------- -------- --------
NET INVESTMENT
INCOME.......... 236,601 836,265 218,803 28,578 219,613 163,567 101,922 45,935
----------- ---------- ---------- ----------- ---------- -------- -------- --------
NET REALIZED AND UNREALIZED
GAIN (LOSS):
Net realized gain (loss)
on:
Investments............. 20,650 178,778 24,656 25,262 313,562 (2,749) 18,572 (77,026)
Foreign exchange
transactions.......... -- -- -- -- -- 32 -- (2,360)
----------- ---------- ---------- ----------- ---------- -------- -------- --------
TOTAL GAIN (LOSS)..... 20,650 178,778 24,656 25,262 313,562 (2,717) 18,572 (79,386)
----------- ---------- ---------- ----------- ---------- -------- -------- --------
Net change in unrealized
appreciation/depreciation
on:
Investments............. 1,308,922 6,295,338 1,177,215 84,734 2,867,922 586,834 1,499,356 16,356
Translation of forward
foreign currency
contracts, other
assets and liabilities
denominated in foreign
currencies............ -- -- -- -- -- (47) -- (572)
----------- ---------- ---------- ----------- ---------- -------- -------- --------
TOTAL APPRECIATION.... 1,308,922 6,295,338 1,177,215 84,734 2,867,922 586,787 1,499,356 15,784
----------- ---------- ---------- ----------- ---------- -------- -------- --------
NET GAIN (LOSS)....... 1,329,572 6,474,116 1,201,871 109,996 3,181,484 584,070 1,517,928 (63,602)
----------- ---------- ---------- ----------- ---------- -------- -------- --------
NET INCREASE
(DECREASE)...... $ 1,566,173 $7,310,381 $1,420,674 $ 138,574 $3,401,097 $747,637 $1,619,850 $(17,667)
----------- ---------- ---------- ----------- ---------- -------- -------- --------
----------- ---------- ---------- ----------- ---------- -------- -------- --------
</TABLE>
107
<PAGE>
Dean Witter Select Dimensions Investment Series
Statements of Changes in Net Assets
- ----------------------------------------------------------------
FOR THE PERIOD NOVEMBER 9, 1994* THROUGH DECEMBER 31, 1994 AND FOR THE YEAR
ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NORTH AMERICAN GOVERNMENT
MONEY MARKET SECURITIES
--------------------------- ---------------------------
1995 1994 1995 1994
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
Operations:
Net investment income..... $ 882,216 $ 4,610 $ 32,639 $ 744
Net realized
gain/(loss)............. -- -- (542) --
Net change in unrealized
appreciation/depreciation... -- -- 7,062 --
------------- ------------ ------------- ------------
Net
increase/(decrease)... 882,216 4,610 39,159 744
------------- ------------ ------------- ------------
Dividends from net
investment income......... (882,190) (4,610) (27,649) (249)
------------- ------------ ------------- ------------
Transactions in shares of
beneficial interest:
Net proceeds from sales... 48,812,289 1,239,489 1,470,457 135,795
Reinvestment of
dividends............... 882,190 4,610 27,649 249
Cost of shares
repurchased............. (8,839,415) (10,252) (344,429) (14,146)
------------- ------------ ------------- ------------
Net increase.......... 40,855,064 1,233,847 1,153,677 121,898
------------- ------------ ------------- ------------
Total increase........ 40,855,090 1,233,847 1,165,187 122,393
NET ASSETS:
Beginning of period......... 1,233,947 100 122,493 100
------------- ------------ ------------- ------------
END OF PERIOD............... $ 42,089,037 $ 1,233,947 $ 1,287,680 $ 122,493
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
UNDISTRIBUTED NET INVESTMENT
INCOME...................... $ 26 $ -- $ 5,485 $ 495
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
SHARES ISSUED AND REPURCHASED:
Sold........................ 48,812,289 1,239,489 145,744 13,576
Issued in reinvestment of
dividends................. 882,190 4,610 2,744 25
Repurchased................. (8,839,415) (10,252) (34,139) (1,410)
------------- ------------ ------------- ------------
Net increase................ 40,855,064 1,233,847 114,349 12,191
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
<FN>
- ------------------
* Commencement of operations.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
108
<PAGE>
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
DIVERSIFIED INCOME BALANCED UTILITIES DIVIDEND GROWTH
---------------------- ---------------------- ---------------------- ----------------------
1995 1994 1995 1994 1995 1994 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
Operations:
Net investment income..... $ 230,744 $ 1,572 $ 233,569 $ 3,850 $ 236,601 $ 2,262 $ 836,265 $ 6,872
Net realized
gain/(loss)............. 22,350 -- 112,736 -- 20,650 -- 178,778 --
Net change in unrealized
appreciation/depreciation... 37,740 -- 770,654 (427) 1,308,922 (292) 6,295,338 1,394
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net
increase/(decrease)... 290,834 1,572 1,116,959 3,423 1,566,173 1,970 7,310,381 8,266
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Dividends from net
investment income......... (155,118) (396) (188,705) (851) (179,128) (602) (606,921) (1,855)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Transactions in shares of
beneficial interest:
Net proceeds from sales... 10,018,159 400,638 15,835,264 806,042 17,486,045 518,226 71,950,119 1,393,837
Reinvestment of
dividends............... 155,118 396 188,705 851 179,128 602 606,921 1,855
Cost of shares
repurchased............. (1,739,300) (10) (1,436,358) (14,038) (1,590,907) (22,376) (1,943,986) (24,489)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net increase.......... 8,433,977 401,024 14,587,611 792,855 16,074,266 496,452 70,613,054 1,371,203
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total increase........ 8,569,693 402,200 15,515,865 795,427 17,461,311 497,820 77,316,514 1,377,614
NET ASSETS:
Beginning of period......... 402,300 100 795,527 100 497,920 100 1,377,714 100
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
END OF PERIOD............... $8,971,993 $ 402,300 $16,311,392 $ 795,527 $17,959,231 $ 497,920 $78,694,228 $1,377,714
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
UNDISTRIBUTED NET INVESTMENT
INCOME...................... $ 80,298 $ 1,176 $ 47,863 $ 2,999 $ 59,133 $ 1,660 $ 234,361 $ 5,017
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
SHARES ISSUED AND REPURCHASED:
Sold........................ 994,906 39,986 1,408,020 80,553 1,534,125 51,746 5,787,107 140,397
Issued in reinvestment of
dividends................. 15,447 39 16,807 85 15,750 60 48,577 189
Repurchased................. (172,845) (1) (132,149) (1,403) (145,179) (2,232) (163,343) (2,460)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net increase................ 837,508 40,024 1,292,678 79,235 1,404,696 49,574 5,672,341 138,126
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
109
<PAGE>
Dean Witter Select Dimensions Investment Series
Statements of Changes in Net Assets (CONTINUED)
- --------------------------------------------------------------------------------
FOR THE PERIOD NOVEMBER 9, 1994* THROUGH DECEMBER 31, 1994 AND FOR THE YEAR
ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
VALUE-ADDED MARKET CORE EQUITY
---------------------- ---------------------------
1995 1994 1995 1994
----------- --------- ------------- ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
Operations:
Net investment income..... $ 218,803 $1,138 $ 28,578 $ 1,441
Net realized
gain/(loss)............. 24,656 -- 25,262 --
Net change in unrealized
appreciation/depreciation... 1,177,215 2,136 84,734 --
----------- --------- ------------- ------------
Net
increase/(decrease)... 1,420,674 3,274 138,574 1,441
----------- --------- ------------- ------------
Dividends from net
investment income......... (172,075) (346) (27,202) (340)
----------- --------- ------------- ------------
Transactions in shares of
beneficial interest:
Net proceeds from sales... 23,041,372 349,428 3,676,375 324,157
Reinvestment of
dividends............... 172,075 346 27,202 340
Cost of shares
repurchased............. (841,114) (4,107) (174,491) (9,744)
----------- --------- ------------- ------------
Net increase.......... 22,372,333 345,667 3,529,086 314,753
----------- --------- ------------- ------------
Total increase........ 23,620,932 348,595 3,640,458 315,854
NET ASSETS:
Beginning of period......... 348,695 100 315,954 100
----------- --------- ------------- ------------
END OF PERIOD............... $23,969,627 3$48,695 $ 3,956,412 $ 315,954
----------- --------- ------------- ------------
----------- --------- ------------- ------------
UNDISTRIBUTED NET INVESTMENT
INCOME...................... $ 47,520 $ 792 $ 2,477 $ 1,101
----------- --------- ------------- ------------
----------- --------- ------------- ------------
SHARES ISSUED AND REPURCHASED:
Sold........................ 1,981,323 35,603 339,322 32,374
Issued in reinvestment of
dividends................. 14,750 36 2,604 34
Repurchased................. (73,159) (412) (15,991) (973)
----------- --------- ------------- ------------
Net increase................ 1,922,914 35,227 325,935 31,435
----------- --------- ------------- ------------
----------- --------- ------------- ------------
<FN>
- ------------------
* Commencement of operations.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
110
<PAGE>
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
AMERICAN VALUE GLOBAL EQUITY DEVELOPING GROWTH EMERGING MARKETS
---------------------- ---------------------- -------------------- --------------------
1995 1994 1995 1994 1995 1994 1995 1994
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
Operations:
Net investment income..... $ 219,613 $ 2,947 $ 163,567 $ 4,667 $ 101,922 $ 1,564 $ 45,935 $ 1,790
Net realized
gain/(loss)............. 313,562 (3,443) (2,717) -- 18,572 (49) (79,386) --
Net change in unrealized
appreciation/depreciation... 2,867,922 14,285 586,787 (1,284) 1,499,356 2,905 15,784 --
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
Net
increase/(decrease)... 3,401,097 13,789 747,637 3,383 1,619,850 4,420 (17,667) 1,790
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
Dividends from net
investment income......... (155,569) (794) (137,860) (1,669) (82,425) (392) (39,505) (354)
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
Transactions in shares of
beneficial interest:
Net proceeds from sales... 34,805,828 818,828 16,594,816 1,235,431 18,068,892 385,711 3,782,735 498,374
Reinvestment of
dividends............... 155,569 794 137,860 1,669 82,425 392 39,505 354
Cost of shares
repurchased............. (794,842) (10,014) (1,462,568) (44,496) (2,657,067) (10,054) (120,566) (52,548)
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
Net increase.......... 34,166,555 809,608 15,270,108 1,192,604 15,494,250 376,049 3,701,674 446,180
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
Total increase........ 37,412,083 822,603 15,879,885 1,194,318 17,031,675 380,077 3,644,502 447,616
NET ASSETS:
Beginning of period......... 822,703 100 1,194,418 100 380,177 100 447,716 100
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
END OF PERIOD............... $38,234,786 $ 822,703 $17,074,303 $1,194,418 $17,411,852 $380,177 $4,092,218 $447,716
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
UNDISTRIBUTED NET INVESTMENT
INCOME...................... $ 66,197 $ 2,153 $ 28,778 $ 2,998 $ 20,669 $ 1,172 $ 6,298 $ 1,436
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
SHARES ISSUED AND REPURCHASED:
Sold........................ 2,757,922 82,738 1,558,946 124,455 1,316,995 38,471 386,160 49,777
Issued in reinvestment of
dividends................. 12,349 82 13,086 169 5,995 39 4,031 35
Repurchased................. (64,214) (1,000) (138,315) (4,473) (199,866) (998) (12,240) (5,244)
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
Net increase................ 2,706,057 81,820 1,433,717 120,151 1,123,124 37,512 377,951 44,568
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
---------- ---------- ---------- ---------- ---------- -------- ---------- --------
</TABLE>
111
<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 investment objectives of each Portfolio are as follows:
<TABLE>
<C> <S>
PORTFOLIO INVESTMENT OBJECTIVE
Money Market Seeks high current income, preservation of capital and liquidity by investing
in short-term money market instruments.
North American Seeks to earn a high level of current income while maintaining relatively low
Government volatility of principal by primarily investing in investment grade fixed
Securities income securities issued or guaranteed by the U.S., Canadian or Mexican
governments.
Diversified Seeks, as a primary objective, to earn a high level of current income and, as
Income 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.
Balanced 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.
Utilities 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.
Dividend Seeks to provide reasonable current income and long-term growth of income and
Growth capital by investing primarily in common stock of companies with a record of
paying dividends and the potential for increasing dividends.
Value-Added Seeks to achieve a high level of total return on its assets through a
Market 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.
Core Equity Seeks long-term growth of capital by investing primarily in common stocks and
securities convertible into common stocks issued by domestic and foreign
companies.
American Value 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.
Global Equity 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.
Developing Seeks long-term capital growth by investing primarily in common stocks of
Growth 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.
Emerging Seeks long-term capital appreciation by investing primarily in equity
Markets securities of companies in emerging market countries. The 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.
</TABLE>
112
<PAGE>
Notes to Financial Statements (CONTINUED)
- --------------------------------------------------------------------------------
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures. Actual results
could differ from those estimates. 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) an equity security listed or traded on the New York, American 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);
(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
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, if available, 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 and other distributions are recorded on the
ex-dividend date except certain dividends on foreign securities which are
recorded as soon as the Fund is informed after the ex-dividend date. The
Money Market Portfolio amortizes premiums and accretes discounts over the
life of the respective securities; gains and losses realized upon the sale
of securities are based on amortized cost. For all other Portfolios,
discounts are accreted over the life of the respective securities. Interest
income is accrued daily.
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 exchange 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 Statement of Operations as unrealized gain/loss on foreign
exchange transactions. The Portfolios record realized gains or losses on
delivery of the currency or at the time the forward contract is extinguished
(compensated) by entering into a closing transaction prior to delivery.
113
<PAGE>
Notes to Financial Statements (CONTINUED)
- --------------------------------------------------------------------------------
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) which will be reimbursed for the full amount
thereof, exclusive of amounts waived of $19,967 ($1,664 for each respective
Portfolio except $1,663 for the Money Market Portfolio). 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 Fund expenses are allocated on the basis of relative net assets or
equally among the Portfolios.
2. INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS--Pursuant to an Investment
Management Agreement, the Fund pays 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 PORTFOLIO ANNUAL RATE
- --------------------------------------- ------------- --------------------------------------- -------------
<S> <C> <C> <C>
Money Market........................... 0.50 % Value-Added Market..................... 0.50 %
North American Government Securities... 0.65 Core Equity............................ 0.85
Diversified Income..................... 0.40 American Value......................... 0.625
Balanced............................... 0.75 Global Equity.......................... 1.00
Utilities.............................. 0.65 Developing Growth...................... 0.50
Dividend Growth........................ 0.625 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.
114
<PAGE>
Notes to Financial Statements (CONTINUED)
- --------------------------------------------------------------------------------
The Investment Manager had undertaken to reimburse the Fund for all expenses
(except for any brokerage fees and a portion of organizational expenses) and
waive the compensation (the "management fee") provided for in the Agreement
until December 31, 1995. At December 31, 1995, included in the Statements of
Assets and Liabilities are receivables from affiliate which represent expense
reimbursements due the Fund. For the period January 1, 1996 through December 31,
1996, the Investment Manager will continue to waive the management fee and
reimburse expenses to the extent they exceed 0.50% of daily net assets of the
Portfolio or until such time as the respective Portfolio has $50 million of net
assets, 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 year ended December 31, 1995
were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES OTHER
--------------------------- ----------------------------
PURCHASES SALES/MATURITIES PURCHASES SALES/MATURITIES
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Money Market............................ $ 98,028,828 $98,728,197 $ 170,754,095 $130,159,915
North American Government Securities.... 1,098,088 64,526 -- --
Diversified Income...................... 2,846,460 929 5,941,141 493,256
Balanced................................ 7,576,477 3,055,665 11,589,054 2,559,410
Utilities............................... -- -- 15,395,638 144,432
Dividend Growth......................... -- -- 70,245,972 1,006,085
Value-Added Market...................... 75,090 -- 20,942,930 255,644
Core Equity............................. -- -- 4,044,981 470,311
American Value.......................... 5,126,818 92,156 46,593,113 18,103,094
Global Equity........................... 248,873 -- 16,567,189 3,378,327
Developing Growth....................... -- -- 14,529,361 2,791,500
Emerging Markets........................ -- -- 3,866,464 432,934
</TABLE>
For the year ended December 31, 1995, the following Portfolios incurred
brokerage commissions with Dean Witter Reynolds Inc. ("DWR"), an affiliate of
the Investment Manager, for portfolio transactions executed on behalf of the
following Portfolios:
<TABLE>
<CAPTION>
DIVIDEND AMERICAN GLOBAL DEVELOPING
BALANCED UTILITIES GROWTH CORE EQUITY VALUE EQUITY GROWTH
----------- --------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Commissions............................ $ 6,745 $ 22,805 $ 67,555 $ 740 $ 29,871 $ 6,836 $ 7,703
----------- --------- --------- ----- ----------- --------- -----------
----------- --------- --------- ----- ----------- --------- -----------
</TABLE>
Included in Balanced, Utilities, Dividend Growth, American Value and
Developing Growth's payable for investments purchased are $339,683, $273,925,
$906,558, $192,925 and $61,580, respectively, and included in Developing
Growth's receivable for investments sold is $27,582 for unsettled trades with
DWR at December 31, 1995.
Included in the aforementioned purchases of portfolio securities of
Value-Added Market are purchases of Dean Witter Discover & Co., an affiliate of
the Investment Manager, of $44,855.
Dean Witter Trust Company, an affiliate of the Investment Manager, is the
Fund's transfer agent.
4. FEDERAL INCOME TAX STATUS--At December 31, 1995, the following Portfolios
had an approximate net capital loss carryover which will be available through
December 31, 2003 to offset future capital gains to the extent provided by
regulations: North American Government Securities -- $1,000; Emerging Markets --
$14,000.
115
<PAGE>
Notes to Financial Statements (CONTINUED)
- --------------------------------------------------------------------------------
Net capital and currency losses incurred after October 31 ("post-October
losses") within the taxable year are deemed to arise on the first business day
of the Portfolios' next taxable year. The following Portfolios incurred and will
elect to defer post-October losses during fiscal 1995: Balanced -- $16,000;
Global Equity -- $44,000; Developing Growth -- $23,000; Emerging Markets --
$64,000.
At December 31, 1995, the following Portfolios had significant temporary
book/tax differences as follows: post-October losses -- Balanced, Global Equity,
Developing Growth and Emerging Markets; income from the mark-to-market of open
forward foreign exchange contracts and compensated forward foreign exchange
contracts -- Diversified; income from the mark-to-market of passive foreign
investment companies -- Global Equity and Emerging Markets.
At December 31, 1995, the Diversified, Global Equity and Emerging Markets
Portfolios had permanent book/tax differences attributable to foreign currency
gains/losses. To reflect reclassifications arising from permanent book/tax
differences for the year ended December 31, 1995, the following accounts were
charged (credited):
<TABLE>
<CAPTION>
ACCUMULATED UNDISTRIBUTED
ACCUMULATED NET REALIZED
UNDISTRIBUTED NET GAIN/ACCUMULATED
INVESTMENT INCOME NET REALIZED LOSS
----------------------- ---------------------------
<S> <C> <C>
Diversified............................................. $ (3,496) $ 3,496
Global Equity........................................... (73) 73
Emerging Markets........................................ 1,568 (1,568)
</TABLE>
5. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS--Some of the
Portfolios may enter 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, 1995, the Global Equity Portfolio had outstanding forward
contracts used to facilitate settlement of foreign currency denominated
portfolio transactions and the Diversified Income Portfolio had outstanding
forward contracts used to facilitate settlement of foreign currency denominated
portfolio transactions and manage foreign currency exposure.
Forward contracts involve elements of market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The Portfolios bear 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.
116
<PAGE>
(This page left blank intentionally.)
117
<PAGE>
Financial Highlights
----------------------------------------------------------------
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
NET ASSET NET REALIZED
VALUE NET AND TOTAL FROM LESS NET ASSET
YEAR ENDED BEGINNING INVESTMENT UNREALIZED INVESTMENT DIVIDENDS TO VALUE END
DECEMBER 31 OF PERIOD INCOME GAIN (LOSS) OPERATIONS SHAREHOLDERS OF PERIOD
------------ --------- ---------- ------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Money Market
1994 (a) $ 1.00 $0.01 $ -- $ 0.01 $(0.01) $ 1.00
1995 1.00 0.06 -- 0.06 (0.06) 1.00
North American Government Securities
1994 (a) 10.00 0.06 -- 0.06 (0.02) 10.04
1995 10.04 0.53 0.11 0.64 (0.50) 10.18
Diversified Income
1994 (a) 10.00 0.08 -- 0.08 (0.03) 10.05
1995 10.05 0.57 0.11 0.68 (0.51) 10.22
Balanced
1994 (a) 10.00 0.08 (0.02) 0.06 (0.02) 10.04
1995 10.04 0.40 1.85 2.25 (0.40) 11.89
Utilities
1994 (a) 10.00 0.07 -- 0.07 (0.03) 10.04
1995 10.04 0.45 2.30 2.75 (0.44) 12.35
Dividend Growth
1994 (a) 10.00 0.08 (0.09) (0.01) (0.02) 9.97
1995 9.97 0.36 3.57 3.93 (0.36) 13.54
Value-Added Market
1994 (a) 10.00 0.06 (0.14) (0.08) (0.02) 9.90
1995 9.90 0.31 2.34 2.65 (0.31) 12.24
Core Equity
1994 (a) 10.00 0.07 -- 0.07 (0.02) 10.05
1995 10.05 0.26 1.05 1.31 (0.29) 11.07
American Value
1994 (a) 10.00 0.06 0.01 0.07 (0.02) 10.05
1995 10.05 0.21 3.66 3.87 (0.21) 13.71
Global Equity
1994 (a) 10.00 0.07 (0.10) (0.03) (0.03) 9.94
1995 9.94 0.29 1.05 1.34 (0.29) 10.99
Developing Growth
1994 (a) 10.00 0.08 0.08 0.16 (0.03) 10.13
1995 10.13 0.24 4.88 5.12 (0.25) 15.00
Emerging Markets
1994 (a) 10.00 0.06 -- 0.06 (0.02) 10.04
1995 10.04 0.29 (0.33) (0.04) (0.31) 9.69
</TABLE>
- ------------------------
(a) For the period November 9, 1994 (commencement of operations) through
December 31, 1994. The per share amounts reported are not necessarily
consistent with the corresponding amounts reported on the Statement of
Operations due to the fluctuations in capital stock activity during the
period.
* After application of the Fund's expense limitation.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
118
<PAGE>
Financial Highlights (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATIOS TO RATIOS TO
AVERAGE NET ASSETS AVERAGE NET ASSETS
(BEFORE EXPENSES WERE (AFTER EXPENSES WERE
ASSUMED)* ASSUMED)
----------------------- -----------------------
TOTAL NET ASSETS NET NET PORTFOLIO
INVESTMENT END OF INVESTMENT INVESTMENT TURNOVER
RETURN PERIOD (000'S) EXPENSES INCOME EXPENSES INCOME RATE
---------- -------------- ----------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Money Market
1994 (a) 0.76 %(1 $1,234 2.50%(2) 3.33 %(2 -- % 5.83%(2) N/A%(1)
1995 6.10 42,089 0.81 5.11 -- 5.92 N/A
North American Government Securities
1994 (a) 0.61(1) 122 2.50(2) 1.78(2) -- 4.28(2) -- (1)
1995 6.40 1,288 2.50 3.24 -- 5.74 18
Diversified Income
1994 (a) 0.76(1) 402 2.50(2) 3.08(2) -- 5.58(2) -- (1)
1995 6.96 8,972 1.33 5.95 -- 7.28 33
Balanced
1994 (a) 0.60(1) 796 2.50(2) 2.90(2) -- 5.40(2) -- (1)
1995 22.86 16,311 1.39 2.45 -- 3.84 99
Utilities
1994 (a) 0.65(1) 498 2.50(2) 2.79(2) -- 5.29(2) -- (1)
1995 28.05 17,959 1.43 3.01 -- 4.44 3
Dividend Growth
1994 (a) (0.05) (1) 1,378 2.50(2) 3.28(2) -- 5.78(2) -- (1)
1995 40.13 78,694 0.83 2.80 -- 3.63 4
Value-Added Market
1994 (a) (0.76) (1) 349 2.50(2) 1.25(2) -- 3.75(2) -- (1)
1995 27.14 23,970 1.46 1.64 -- 3.10 4
Core Equity
1994 (a) 0.67(1) 316 2.50(2) 2.32(2) -- 4.82(2) -- (1)
1995 13.29 3,956 2.50 (0.64) -- 1.86 39
American Value
1994 (a) 0.69(1) 823 2.50(2) 1.60(2) -- 4.10(2) 10(1)
1995 38.95 38,235 0.96 1.11 -- 2.07 174
Global Equity
1994 (a) (0.30) (1) 1,194 2.50(2) 2.20(2) -- 4.70(2) -- (1)
1995 13.76 17,074 1.69 1.09 -- 2.78 74
Developing Growth
1994 (a) 1.58(1) 380 2.50(2) 2.31(2) -- 4.81(2) 3(1)
1995 51.26 17,412 1.24 0.86 -- 2.10 80
Emerging Markets
1994 (a) 0.57(1) 448 2.50(2) 2.22(2) -- 4.72(2) -- (1)
1995 (0.57) 4,092 2.50 0.18 -- 2.68 36
</TABLE>
119
<PAGE>
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, 1995, and the results of each of their operations for the year then ended,
the changes in each of their net assets and the financial highlights for the
year then ended and 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 at December 31, 1995 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, 1996
120
<PAGE>
Money Market
Portfolio of Investments JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT (IN ON DATE OF MATURITY
THOUSANDS) PURCHASE DATE VALUE
- ----------- -------------- --------------- ------------
<C> <S> <C> <C> <C>
COMMERCIAL PAPER (77.4%)
AUTOMOTIVE - FINANCE (7.4%)
$ 1,755 Ford Motor Credit Co.................................. 5.40-5.46% 07/31/96-10/03/96 $ 1,738,682
2,770 General Motors Acceptance Corp........................ 5.42-5.86 08/08/96-01/03/97 2,722,872
------------
4,461,554
------------
BANK HOLDING COMPANIES (16.4%)
1,000 BankAmerica Corp...................................... 5.42 11/18/96 979,252
2,670 Barnett Banks Inc..................................... 5.44 07/01/96 2,669,194
1,000 Chase Manhattan Corp.................................. 5.39 08/21/96 992,212
621 Morgan (J.P.) & Co. Inc............................... 5.38 07/11/96 619,901
2,590 PNC Funding Corp...................................... 5.41-5.53 08/13/96-09/24/96 2,562,982
2,075 U.S. Bancorp.......................................... 5.37-5.47 07/08/96-09/05/96 2,067,700
------------
9,891,241
------------
BANKS - COMMERCIAL (18.7%)
2,805 Abbey National North America Corp..................... 5.00-5.48 08/23/96-11/04/96 2,771,696
1,650 ABN - AMRO North America Finance Inc.................. 5.06-5.44 08/27/96-11/12/96 1,628,906
1,000 Canadian Imperial Holdings Inc........................ 5.52 09/09/96 989,120
1,000 Commerzbank U.S. Finance Inc.......................... 5.35 07/01/96 999,707
1,000 National Australia Funding (DE) Inc................... 5.10 09/03/96 990,888
1,000 Societe Generale N.A., Inc............................ 5.40 07/22/96 996,601
2,925 WestPac Capital Corp.................................. 5.47-5.66 09/09/96-12/30/96 2,865,197
------------
11,242,115
------------
BROKERAGE (5.8%)
1,000 Goldman Sachs Group L.P............................... 5.38 08/05/96 994,522
2,540 Morgan Stanley Group, Inc............................. 5.33-5.38 07/09/96-07/12/96 2,535,816
------------
3,530,338
------------
FINANCE - CONSUMER (7.1%)
1,550 American Express Credit Corp.......................... 5.00-5.38 08/09/96-08/19/96 1,539,825
2,745 Norwest Financial Inc................................. 5.32-5.34 07/16/96-07/19/96 2,737,646
------------
4,277,471
------------
FINANCE - DIVERSIFIED (6.3%)
1,000 Associates Corp. of North America..................... 5.19 07/29/96 995,767
2,810 General Electric Capital Corp......................... 5.35-5.41 08/22/96-10/24/96 2,780,830
------------
3,776,597
------------
OFFICE EQUIPMENT (4.9%)
2,000 IBM Credit Corp....................................... 5.35-5.39 07/03/96-07/24/96 1,995,684
1,000 Xerox Credit Corp..................................... 5.47 09/18/96 987,850
------------
2,983,534
------------
RETAIL (4.5%)
2,725 Sears Roebuck Acceptance Corp......................... 5.39-5.45 08/07/96-09/26/96 2,700,907
------------
</TABLE>
121
<PAGE>
Money Market
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL YIELD
AMOUNT (IN ON DATE OF MATURITY
THOUSANDS) PURCHASE DATE VALUE
- ----------- -------------- --------------- ------------
<C> <S> <C> <C> <C>
TELEPHONES (5.4%)
$ 1,000 Ameritech Corp........................................ 5.43% 10/18/96 $ 983,597
1,215 AT&T Corp............................................. 5.38-5.52 08/14/96-10/15/96 1,202,013
1,045 BellSouth Telecommunications Inc...................... 5.36 07/02/96 1,044,534
------------
3,230,144
------------
UTILITIES - FINANCE (0.9%)
531 National Rural Utilities Cooperative Finance Corp..... 5.45 08/19/96 526,938
------------
TOTAL COMMERCIAL PAPER (AMORTIZED COST $46,620,839).................................... 46,620,839
------------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C> <C> <C>
BANKERS' ACCEPTANCES (9.0%)
2,750 First National Bank of Boston......................... 5.20-5.42 07/10/96-08/02/96 2,740,404
1,000 First Union National Bank of Florida.................. 5.07 07/26/96 996,287
1,699 Mellon Bank, N.A...................................... 5.46 08/19/96 1,685,657
------------
TOTAL BANKERS' ACCEPTANCES (AMORTIZED COST $5,422,348)................................. 5,422,348
------------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C> <C> <C>
U.S. GOVERNMENT AGENCIES (8.4%)
1,750 Federal Home Loan Banks............................... 5.10-5.55 07/18/96-02/03/97 1,723,053
2,313 Federal Home Loan Mortgage Corp....................... 5.52 07/01/96 2,312,291
1,000 Federal National Mortgage Assoc....................... 5.25 08/29/96 991,409
------------
TOTAL U.S. GOVERNMENT AGENCIES (AMORTIZED COST $5,026,753)............................. 5,026,753
------------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C> <C> <C>
CERTIFICATES OF DEPOSIT (3.3%)
1,000 Chase Manhattan Bank (USA)............................ 5.42 09/11/96 1,000,000
1,000 Union Bank of California, N.A......................... 5.48 11/20/96 1,000,000
------------
TOTAL CERTIFICATES OF DEPOSIT (AMORTIZED COST $2,000,000).............................. 2,000,000
------------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C> <C> <C>
SHORT-TERM BANK NOTE (1.7%)
1,000 La Salle National Bank (Amortized Cost $1,000,000).... 5.44 08/09/96 1,000,000
------------
TOTAL INVESTMENTS (AMORTIZED COST $60,069,940) (A)......................... 99.8% 60,069,940
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................. 0.2 115,149
---------- ------------
NET ASSETS................................................................. 100.0% $ 60,185,089
---------- ------------
---------- ------------
<FN>
- ----------------
(A) COST IS THE SAME FOR FEDERAL INCOME TAX PURPOSES.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
122
<PAGE>
North American Government Securities
Portfolio of Investments JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATE VALUE
- ------------- ---------- --------- -----------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT & AGENCIES OBLIGATIONS (48.4%)
$ 35 Federal Home Loan Banks............................................ 6.78 % 04/04/97 $ 35,235
40 Federal Home Loan Mortgage Corp.................................... 7.69 12/16/96 40,383
95 Federal National Mortgage Assoc.................................... 6.00 09/01/00 92,374
90 Federal National Mortgage Assoc.................................... 6.50 07/01/02 88,335
99 Federal National Mortgage Assoc.................................... 7.00 10/01/02 99,049
100 Federal National Mortgage Assoc.................................... 7.00 06/01/03 99,625
94 Federal National Mortgage Assoc.................................... 7.046 07/01/24 96,272
75 Federal National Mortgage Assoc.................................... 7.60 01/10/97 75,691
250 U.S. Treasury Note................................................. 5.50 11/15/98 245,977
200 U.S. Treasury Note................................................. 5.50 02/28/99 196,188
150 U.S. Treasury Note................................................. 5.50 04/15/00 145,523
115 U.S. Treasury Note................................................. 6.125 05/15/98 115,000
-----------
TOTAL U.S. GOVERNMENT & AGENCIES OBLIGATIONS (IDENTIFIED COST $1,354,123)................. 1,329,652
-----------
MORTGAGE-BACKED SECURITIES (40.6%)
99 Federal Home Loan Mortgage Corp. PC Gold........................... 5.50 11/01/00 95,337
83 Federal Home Loan Mortgage Corp. PC Gold........................... 6.00 11/01/99 81,505
101 Federal Home Loan Mortgage Corp. PC Gold........................... 6.00 05/01/11 95,539
86 Federal Home Loan Mortgage Corp. PC Gold........................... 7.00 07/01/00 86,692
187 Federal Home Loan Mortgage Corp. PC Gold........................... 7.50 06/01/11 187,609
96 Government National Mortgage Assoc................................. 6.00 08/20/25 95,248
147 Government National Mortgage Assoc................................. 6.50 02/20/23 146,823
98 Government National Mortgage Assoc................................. 6.50 01/20/26 98,376
100 Government National Mortgage Assoc................................. 6.50 05/20/26 100,035
127 Government National Mortgage Assoc................................. 7.00 06/20/25 129,122
-----------
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $1,121,804)............................. 1,116,286
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C> <C> <C>
REPURCHASE AGREEMENT (5.0%)
137 The Bank of New York (dated 06/28/96; proceeds $137,010;
collateralized by $140,231 U.S. Treasury Note 5.375% due 11/30/97
valued at $139,690)
(Identified Cost $136,951)....................................... 5.125 07/01/96 136,951
-----------
TOTAL INVESTMENTS (IDENTIFIED COST $2,612,878) (A)............................ 94.0% 2,582,889
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES................................ 6.0 163,752
---------- -----------
NET ASSETS.................................................................... 100.0% $ 2,746,641
---------- -----------
---------- -----------
<FN>
- ----------------
(A) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES
IDENTIFIED COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION WAS
$510 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION WAS
$30,499, RESULTING IN NET UNREALIZED DEPRECIATION OF $29,989.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
123
<PAGE>
Diversified Income
Portfolio of Investments JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATE VALUE
- ----------- --------- --------------- -------------
<C> <S> <C> <C> <C>
GOVERNMENT & CORPORATE BONDS (87.2%)
AUSTRALIA (3.2%)
GOVERNMENT OBLIGATION
Au$ 844 Queensland Treasury Corp.................................. 8.00 % 05/14/97 $ 665,605
-------------
CANADA (2.7%)
GOVERNMENT OBLIGATION
Ca$ 740 Canada Treasury Bond (a).................................. 8.00 11/01/98 562,380
-------------
DENMARK (3.0%)
GOVERNMENT OBLIGATION
DKr 3,350 Denmark Treasury Note (a)................................. 9.00 11/15/98 618,998
-------------
GERMANY (0.8%)
GOVERNMENT OBLIGATION
DEM 230 Bundes Obligation (a)..................................... 6.875 02/24/99 159,168
-------------
ITALY (3.4%)
FINANCE (0.1%)
ITL 30M Credit Suisse Finance Gibraltar........................... 11.625 05/27/97 20,023
-------------
GOVERNMENT OBLIGATIONS (3.3%)
750M Italy Treasury Bond (a)................................... 10.50 04/15/98 505,638
250M Italy Treasury Bond (a)................................... 9.50 02/01/99 167,340
-------------
672,978
-------------
TOTAL ITALY........................................................................... 693,001
-------------
NEW ZEALAND (3.4%)
GOVERNMENT OBLIGATIONS
NZ$ 600 New Zealand Treasury Bond................................. 9.00 11/15/96 409,142
425 New Zealand Treasury Bond (a)............................. 8.00 07/15/98 284,451
-------------
TOTAL NEW ZEALAND..................................................................... 693,593
-------------
PORTUGAL (2.8%)
GOVERNMENT OBLIGATION
PTE 90M Portugal Treasury Bond (a)................................ 8.375 01/23/99 583,234
-------------
SPAIN (3.7%)
GOVERNMENT OBLIGATIONS
ESP 14M Spain Treasury Bond (a)................................... 11.45 08/30/98 117,634
43M Spain Treasury Bond (a)................................... 9.90 10/31/98 351,915
35M Spain Treasury Bond (a)................................... 10.25 11/30/98 288,599
-------------
TOTAL SPAIN........................................................................... 758,148
-------------
SWEDEN (2.1%)
GOVERNMENT OBLIGATION
SEK 2,800 Sweden Treasury Bond (a).................................. 10.75 01/23/97 432,024
-------------
</TABLE>
124
<PAGE>
Diversified Income
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATE VALUE
- ----------- --------- --------------- -------------
<C> <S> <C> <C> <C>
UNITED KINGDOM (3.6%)
GOVERNMENT OBLIGATION
L 465 United Kingdom Treasury Bond.............................. 7.00 % 08/06/97 $ 730,249
-------------
UNITED STATES (58.5%)
AEROSPACE (0.8%)
$ 200 Sabreliner Corp. (Series B)............................... 12.50 04/15/03 169,000
-------------
AUTOMOTIVE (0.4%)
100 Envirotest Systems, Inc................................... 9.625 04/01/03 77,000
-------------
BROADCAST MEDIA (1.5%)
100 Paxson Communications Corp................................ 11.625 10/01/02 103,500
200 Spanish Broadcasting System, Inc.......................... 7.50 06/15/02 199,500
-------------
303,000
-------------
BUSINESS SERVICES (1.3%)
250 Xerox Corp................................................ 15.00 06/10/97 270,875
-------------
CABLE & TELECOMMUNICATIONS (6.6%)
205 Adelphia Communications Corp. (Series B).................. 9.50+ 02/15/04 177,621
250 American Communications Industries, Inc. - 144A*.......... 12.75++ 04/01/06 131,875
100 AT&T Capital Corp......................................... 15.00 05/05/97 107,176
250 Falcon Holdings Group L.P................................. 11.00+ 09/15/03 238,750
400 Hyperion Communications (Units)++ - 144A*................. 13.00++ 04/15/03 223,000
300 In-Flight Phone Corp. (Series B).......................... 14.00++ 05/15/02 106,500
100 Peoples Telephone Co., Inc................................ 12.25 07/15/02 97,000
500 UIH Australia/Pacific Inc. - 144A*........................ 14.00++ 05/15/06 268,750
-------------
1,350,672
-------------
COMPUTER EQUIPMENT (1.3%)
200 Integrated Device Technology (Conv.)...................... 5.50 06/01/02 157,250
100 Unisys Corp............................................... 15.00 07/01/97 105,750
-------------
263,000
-------------
CONTAINERS (1.2%)
100 Anchor Glass Containers Corp.............................. 10.25 06/30/02 80,000
100 Anchor Glass Containers Corp.............................. 9.875 12/15/08 50,000
200 Ivex Holdings Corp. (Series B)............................ 13.25++ 03/15/05 123,000
-------------
253,000
-------------
ELECTRICAL & ALARM SYSTEMS (0.4%)
100 Mosler, Inc............................................... 11.00 04/15/03 85,000
-------------
ENTERTAINMENT/GAMING & LODGING (4.8%)
100 Cobblestone Golf Group - 144A*............................ 11.50 06/01/03 100,500
250 Cobblestone Holdings Inc. (Units)++ - 144A*............... 0.00 06/01/04 92,500
100 Fitzgeralds Gaming Corp. (Units)++........................ 13.00 12/31/02 84,000
100 Lady Luck Gaming Finance Corp............................. 11.875 03/01/01 98,500
100 Motels of America, Inc. (Series B)........................ 12.00 04/15/04 96,000
250 Players International, Inc................................ 10.875 04/15/05 254,062
100 Plitt Theaters, Inc....................................... 10.875 06/15/04 101,750
200 President Riverboat Casinos, Inc.......................... 13.00 09/15/01 167,000
-------------
994,312
-------------
</TABLE>
125
<PAGE>
Diversified Income
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATE VALUE
- ----------- --------- --------------- -------------
<C> <S> <C> <C> <C>
FOODS & BEVERAGES (2.9%)
$ 100 Envirodyne Industries, Inc................................ 10.25 % 12/01/01 $ 87,000
100 SC International Services, Inc............................ 13.00 10/01/05 108,750
200 Seven Up/RC Bottling Co. Southern California, Inc. (b).... 11.50 08/01/99 141,000
600 Specialty Foods Acquisition Corp. (Series B).............. 13.00++ 08/15/05 264,000
-------------
600,750
-------------
MANUFACTURING (1.5%)
100 Alpine Group, Inc. (Series B)............................. 12.25 07/15/03 100,750
100 Berry Plastics Corp....................................... 12.25 04/15/04 107,500
100 Uniroyal Technology Corp.................................. 11.75 06/01/03 90,000
-------------
298,250
-------------
MANUFACTURING - DIVERSIFIED (2.1%)
100 Foamex L.P................................................ 11.875 10/01/04 102,500
100 Interlake Corp............................................ 12.125 03/01/02 100,250
250 Jordan Industries, Inc.................................... 10.375 08/01/03 238,750
-------------
441,500
-------------
OIL & GAS (0.4%)
100 Empire Gas Corp........................................... 7.00 07/15/04 88,500
-------------
PUBLISHING (1.6%)
200 Affiliated Newspapers Investments, Inc.................... 13.25++ 07/01/06 138,000
200 United States Banknote Corp............................... 10.375 06/01/02 184,000
-------------
322,000
-------------
RESTAURANTS (1.1%)
100 Carrols Corp.............................................. 11.50 08/15/03 101,500
200 Flagstar Corp............................................. 11.25 11/01/04 132,000
-------------
233,500
-------------
RETAIL (1.4%)
100 Cort Furniture Rental Corp................................ 12.00 09/01/00 104,125
200 County Seat Stores Co..................................... 12.00 10/01/02 174,000
-------------
278,125
-------------
RETAIL - FOOD CHAINS (0.9%)
200 Ralphs Grocery Co......................................... 10.45 06/15/04 191,000
-------------
TEXTILES - APPAREL MANUFACTURERS (0.2%)
50 U.S. Leather, Inc......................................... 10.25 07/31/03 42,000
-------------
WASTE MANAGEMENT (0.5%)
100 Norcal Waste Systems - 144A*.............................. 12.50 11/15/05 105,500
-------------
</TABLE>
126
<PAGE>
Diversified Income
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATE VALUE
- ----------- --------- --------------- -------------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT & AGENCIES OBLIGATIONS (27.6%)
Federal National Mortgage Assoc.
02/01/11-
$ 1,008 .......................................................... 6.00 % 03/01/11 $ 952,880
07/01/25-
1,923 .......................................................... 7.00 02/01/26 1,849,534
505 .......................................................... 8.00 06/01/26 508,788
-------------
3,311,202
-------------
Government National Mortgage Assoc.
505 .......................................................... 7.50 04/15/26 497,348
02/15/26-
990 .......................................................... 8.00 06/15/26 998,663
-------------
1,496,011
-------------
500 U.S. Treasury Note........................................ 5.75 10/31/00 486,953
500 U.S. Treasury Note Principal Strip........................ 0.00 02/15/00 397,493
-------------
884,446
-------------
5,691,659
-------------
TOTAL UNITED STATES................................................................... 12,058,643
-------------
TOTAL GOVERNMENT & CORPORATE BONDS (IDENTIFIED COST $18,054,156)...................... 17,955,043
-------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES
- -----------
<C> <S> <C>
COMMON AND PREFERRED STOCKS (c) (0.9%)
ENTERTAINMENT/GAMING & LODGING (0.7%)
5,000 Lady Luck Gaming Corp. (Series A) (Pref.)+........................................ 147,500
-------------
OIL & GAS (0.2%)
10,000 HarCor Energy, Inc................................................................ 45,000
-------------
TOTAL COMMON AND PREFERRED STOCKS (IDENTIFIED COST $195,500)...................... 192,500
-------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE
- ----------- ---------------
<C> <S> <C> <C>
WARRANTS (c) (0.0%)
CABLE & TELECOMMUNICATIONS
200 In-Flight Phone Corp. - 144A*..................................... 08/31/02 2,000
-------------
ENTERTAINMENT/GAMING & LODGING
787 Fitzgeralds Gaming Corp. - 144A*.................................. 12/19/98 3,542
-------------
TOTAL WARRANTS (IDENTIFIED COST $14,739)........................................... 5,542
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATE
- ----------- --------- ---------------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS (9.7%)
AUSTRALIA (d) (0.9%)
GOVERNMENT OBLIGATION
Au$ 245 Australia Treasury Bill................................... 7.30 % 07/18/96 192,230
-------------
</TABLE>
127
<PAGE>
Diversified Income
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON MATURITY
THOUSANDS) RATE DATE VALUE
- ----------- --------- --------------- -------------
<C> <S> <C> <C> <C>
PORTUGAL (e) (1.0%)
TIME DEPOSIT
PTE 31M Bankers Trust............................................. 7.125% 07/29/96 $ 196,555
-------------
UNITED STATES (7.8%)
U.S. GOVERNMENT AGENCY (d) (6.8%)
$ 1,400 Federal Home Loan Mortgage Corp........................... 5.52 07/01/96 1,400,000
-------------
REPURCHASE AGREEMENT (1.0%)
211 The Bank of New York (dated 06/28/96; proceeds $211,435;
collateralized by $216,406 U.S. Treasury Note 5.375% due
11/30/97 valued at $215,572) (Identified Cost
$211,345)............................................... 5.125 07/01/96 211,345
-------------
TOTAL UNITED STATES................................................................... 1,611,345
-------------
TOTAL SHORT-TERM INVESTMENTS (IDENTIFIED COST $1,986,765)............................. 2,000,130
-------------
TOTAL INVESTMENTS (IDENTIFIED COST $20,251,160) (f)....................... 97.8% 20,153,215
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................ 2.2 448,658
---------- -------------
NET ASSETS................................................................ 100.0% $ 20,601,873
---------- -------------
---------- -------------
<FN>
- ----------------
M IN MILLIONS.
* RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
++ CONSISTS OF ONE OR MORE CLASS OF SECURITIES TRADED TOGETHER AS A
UNIT; GENERALLY BONDS WITH ATTACHED STOCKS/WARRANTS.
+ PAYMENT-IN-KIND SECURITY.
++ CURRENTLY A ZERO COUPON BOND AND WILL PAY INTEREST AT THE RATE
SHOWN AT A FUTURE SPECIFIED DATE.
(a) SOME OR ALL OF THESE SECURITIES ARE SEGREGATED IN CONNECTION
WITH OPEN FORWARD FOREIGN CURRENCY CONTRACTS.
(b) NON-INCOME PRODUCING SECURITY, ISSUER IN DEFAULT.
(c) NON-INCOME PRODUCING SECURITIES.
(d) SECURITIES WERE PURCHASED ON A DISCOUNT BASIS. THE INTEREST
RATES SHOWN HAVE BEEN ADJUSTED TO REFLECT A MONEY MARKET
EQUIVALENT YIELD.
(e) SUBJECT TO WITHDRAWAL RESTRICTIONS UNTIL MATURITY.
(f) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES
IDENTIFIED COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION WAS
$255,181 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION WAS
$353,126, RESULTING IN NET UNREALIZED DEPRECIATION OF $97,945.
</TABLE>
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT JUNE 30, 1996:
<TABLE>
<CAPTION>
IN UNREALIZED
CONTRACTS EXCHANGE DELIVERY APPRECIATION
TO DELIVER FOR DATE (DEPRECIATION)
- ---------- ---------- -------- ----------------
<S> <C> <C> <C>
Y 20,000,000 $ 186,881 11/05/96 $ 8,024
DEM 306,000 $ 208,036 11/12/96 8,222
Y 75,000,000 $ 688,263 03/07/97 6,785
NLG 559,650 $ 339,388 03/25/97 13,524
DEM 1,148,000 $ 750,670 06/11/97 (1,551)
NLG 336,000 $ 195,998 06/27/97 (575)
-------
Net unrealized appreciation .................. $34,429
-------
-------
</TABLE>
128
<PAGE>
Balanced
Portfolio of Investments JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMMON STOCKS (65.4%)
AEROSPACE (1.4%)
4,200 Boeing Co............................................................................ $ 365,925
-------------
AIR TRANSPORT (0.9%)
2,600 AMR Corp.*........................................................................... 236,600
-------------
AIRCRAFT & AEROSPACE (1.0%)
3,700 Northrop Grumman Corp................................................................ 252,062
-------------
AIRLINES (0.9%)
2,700 Delta Air Lines, Inc................................................................. 224,100
-------------
ALUMINUM (0.5%)
2,300 Aluminum Co. of America.............................................................. 131,962
-------------
AUTO PARTS - AFTER MARKET (0.8%)
5,800 Lear Corp.*.......................................................................... 204,450
-------------
AUTOMOTIVE (2.7%)
6,500 Chrysler Corp........................................................................ 403,000
9,100 Ford Motor Co........................................................................ 294,612
-------------
697,612
-------------
BANKS - MONEY CENTER (1.2%)
3,700 Citicorp............................................................................. 305,712
-------------
BASIC CYCLICAL COMMODITIES (0.9%)
5,900 Union Carbide Corp................................................................... 234,525
-------------
BIOTECHNOLOGY (0.6%)
2,900 Amgen Inc.*.......................................................................... 155,875
-------------
BROKERAGE (1.7%)
6,800 Merrill Lynch & Co., Inc............................................................. 442,850
-------------
COMMERCIAL SERVICES (2.1%)
7,900 Corrections Corp. of America*........................................................ 553,000
-------------
COMMUNICATIONS EQUIPMENT (1.7%)
7,800 Cisco Systems, Inc.*................................................................. 441,675
-------------
COMPUTER SERVICES (3.5%)
2,000 Computer Sciences Corp.*............................................................. 149,500
6,600 Electronic Data Systems Corp.*....................................................... 354,750
5,300 First Data Corp...................................................................... 422,012
-------------
926,262
-------------
COMPUTER SOFTWARE (0.5%)
1,200 Microsoft Corp.*..................................................................... 144,000
-------------
COMPUTER SOFTWARE & SERVICES (0.5%)
3,300 America Online, Inc.*................................................................ 143,550
-------------
COMPUTERS - SYSTEMS (1.6%)
4,200 Hewlett-Packard Co................................................................... 418,425
-------------
</TABLE>
129
<PAGE>
Balanced
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
CONSUMER PRODUCTS (1.6%)
5,500 Kimberly-Clark Corp.................................................................. $ 424,875
-------------
CONSUMER SERVICES (1.7%)
12,500 CUC International, Inc.*............................................................. 443,750
-------------
CRUDE PRODUCTS (0.5%)
5,700 Occidental Petroleum Corp............................................................ 141,075
-------------
ELECTRIC - MAJOR (1.1%)
3,200 General Electric Co.................................................................. 276,800
-------------
ELECTRONICS - SEMICONDUCTORS/COMPONENTS (1.6%)
3,000 Applied Materials, Inc.*............................................................. 91,125
5,400 Motorola, Inc........................................................................ 339,525
-------------
430,650
-------------
ENTERTAINMENT (3.7%)
9,300 Circus Circus Enterprises, Inc.*..................................................... 381,300
5,900 Viacom, Inc. (Class B)*.............................................................. 229,362
6,100 Walt Disney Co....................................................................... 383,538
-------------
994,200
-------------
FINANCE (1.3%)
4,000 Federal Home Loan Mortgage Corp...................................................... 342,000
-------------
FINANCIAL - MISCELLANEOUS (1.8%)
7,700 Associates First Capital Corp.*...................................................... 289,713
6,000 Green Tree Financial Corp............................................................ 187,500
-------------
477,213
-------------
HEALTH EQUIPMENT & SERVICES (1.1%)
5,300 Columbia/HCA Healthcare Corp......................................................... 282,888
-------------
HEALTHCARE - DRUGS (0.5%)
2,060 Lilly (Eli) & Co..................................................................... 133,900
-------------
HOUSEHOLD APPLIANCES (1.7%)
13,600 American Standard Companies, Inc.*................................................... 448,800
-------------
INSURANCE BROKERS (1.2%)
3,400 Marsh & McLennan Companies, Inc...................................................... 328,100
-------------
MACHINERY - CONSTRUCTION & MATERIALS (1.1%)
4,200 Caterpillar, Inc..................................................................... 284,550
-------------
MEDICAL PRODUCTS & SUPPLIES (0.2%)
1,300 Guidant Corp......................................................................... 64,025
-------------
MULTI-LINE INSURANCE (1.1%)
3,050 American International Group, Inc.................................................... 300,806
-------------
NATURAL RESOURCES (1.3%)
4,100 Texaco, Inc.......................................................................... 343,888
-------------
</TABLE>
130
<PAGE>
Balanced
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
OFFICE EQUIPMENT & SUPPLIES (2.8%)
11,300 Corporate Express, Inc.*............................................................. $ 452,000
5,100 Xerox Corp........................................................................... 272,850
-------------
724,850
-------------
OIL INTEGRATED - INTERNATIONAL (1.2%)
5,500 Chevron Corp......................................................................... 324,500
-------------
OIL WELL - MACHINERY (1.1%)
3,500 Schlumberger, Ltd.................................................................... 294,875
-------------
PAPER & FOREST PRODUCTS (1.3%)
7,800 Weyerhaeuser Co...................................................................... 331,500
-------------
PHARMACEUTICALS (3.3%)
6,600 IVAX Corp............................................................................ 104,775
8,400 Johnson & Johnson.................................................................... 415,800
5,200 Merck & Co., Inc..................................................................... 336,050
-------------
856,625
-------------
PUBLISHING (1.3%)
15,000 News Corp. Ltd. (ADR) (Australia).................................................... 352,500
-------------
RAILROADS (0.8%)
2,634 Burlington Northern Santa Fe Corp.................................................... 213,025
-------------
RESTAURANTS (1.8%)
7,000 Boston Chicken Inc.*................................................................. 226,625
5,300 McDonald's Corp...................................................................... 247,775
-------------
474,400
-------------
RETAIL - FOOD CHAINS (1.2%)
9,500 Safeway, Inc.*....................................................................... 313,500
-------------
RETAIL - SPECIALTY (0.9%)
4,500 Home Depot, Inc...................................................................... 243,000
-------------
SEMICONDUCTORS (1.8%)
6,400 Intel Corp........................................................................... 469,600
-------------
SOAP & HOUSEHOLD PRODUCTS (1.0%)
2,800 Procter & Gamble Co.................................................................. 253,750
-------------
TELECOMMUNICATIONS (1.9%)
4,300 GTE Corp............................................................................. 192,425
3,500 Lucent Technologies, Inc............................................................. 132,563
3,900 Sprint Corp.......................................................................... 163,800
-------------
488,788
-------------
UTILITIES - ELECTRIC (1.0%)
6,100 American Electric Power Co., Inc..................................................... 260,013
-------------
TOTAL COMMON STOCKS (IDENTIFIED COST $15,611,006).................................... 17,197,031
-------------
</TABLE>
131
<PAGE>
Balanced
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN COUPON
THOUSANDS) RATE
- ----------- -------------
MATURITY
DATE
--
CORPORATE BONDS (5.7%)
<C> <S> <C> <C>
BANKS - MONEY CENTER (0.5%)
145 Citicorp............................................................. 6.375% 01/15/06 $ 134,879
-------------
BROKERAGE (0.5%)
150 Merrill Lynch & Co., Inc............................................. 6.00 01/15/01 144,688
-------------
ENTERTAINMENT (0.7%)
180 Walt Disney Co....................................................... 6.75 03/30/06 174,622
-------------
FINANCIAL (1.1%)
100 Abbey National PLC (United Kingdom).................................. 6.69 10/17/05 95,868
100 BHP Finance U.S.A. Ltd............................................... 6.69 03/01/06 95,822
110 Wells Fargo & Co..................................................... 6.875 04/01/06 105,965
-------------
297,655
-------------
HEALTHCARE - DRUGS (0.2%)
45 Lilly (Eli) & Co..................................................... 8.375 12/01/06 48,966
-------------
INDUSTRIALS (2.0%)
100 General American Transportation Corp................................. 6.75 03/01/06 94,511
150 Lockheed Martin Corp................................................. 7.25 05/15/06 149,166
15 Mead Corp............................................................ 7.125 08/01/25 13,400
40 Monsanto Co.......................................................... 8.875 12/15/09 45,086
15 Texas Utilities Electric Co.......................................... 7.875 04/01/24 14,479
200 Willamette Industries, Inc........................................... 7.85 07/01/26 204,313
-------------
520,955
-------------
TELECOMMUNICATIONS (0.7%)
50 AT&T Corp............................................................ 7.75 03/01/07 52,060
120 Northern Telecom Capital............................................. 7.40 06/15/06 121,778
-------------
173,838
-------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $1,515,632).......................................... 1,495,603
-------------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C> <C> <C>
U.S. GOVERNMENT AGENCY MORTGAGE PASS-THROUGH CERTIFICATES (14.9%)
339 Federal Home Loan Mortgage Corp...................................... 6.00 03/01/11 320,875
151 Federal Home Loan Mortgage Corp...................................... 6.00 05/01/11 143,309
359 Federal Home Loan Mortgage Corp...................................... 7.50 06/01/11 360,007
116 Federal Home Loan Mortgage Corp...................................... 7.00 09/01/25 111,871
194 Federal Home Loan Mortgage Corp...................................... 7.00 12/01/25 186,748
222 Federal Home Loan Mortgage Corp...................................... 7.00 01/01/26 213,384
306 Federal Home Loan Mortgage Corp...................................... 7.00 04/01/26 293,995
505 Federal Home Loan Mortgage Corp...................................... 8.00 06/01/26 509,419
454 Government National Mortgage Assoc................................... 6.50 02/20/23 455,153
101 Government National Mortgage Assoc................................... 6.50 01/20/25 101,602
296 Government National Mortgage Assoc................................... 7.50 08/15/25 291,750
192 Government National Mortgage Assoc................................... 6.00 08/20/25 190,364
191 Government National Mortgage Assoc................................... 7.50 01/15/26 188,178
196 Government National Mortgage Assoc................................... 6.50 01/20/26 196,518
222 Government National Mortgage Assoc................................... 8.00 06/15/26 224,144
150 Government National Mortgage Assoc................................... 7.50 07/01/26 147,844
-------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE PASS-THROUGH CERTIFICATES (IDENTIFIED COST
$3,995,097)............................................................................... 3,935,161
-------------
</TABLE>
132
<PAGE>
Balanced
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. GOVERNMENT OBLIGATIONS (13.2%)
<C> <S> <C> <C> <C>
$ 780 U.S. Treasury Bond................................................... 7.50% 11/15/24 $ 826,556
230 U.S. Treasury Note................................................... 7.25 11/30/96 231,545
115 U.S. Treasury Note................................................... 7.50 01/31/97 116,204
265 U.S. Treasury Note................................................... 5.00 01/31/98 260,818
515 U.S. Treasury Note................................................... 5.125 04/30/98 506,390
175 U.S. Treasury Note................................................... 7.75 11/30/99 182,246
600 U.S. Treasury Note................................................... 7.75 01/31/00 625,219
325 U.S. Treasury Note................................................... 6.625 06/30/01 327,133
80 U.S. Treasury Note................................................... 7.875 11/15/04 85,937
440 U.S. Treasury Strip.................................................. 0.00 05/15/02 300,859
-------------
TOTAL U.S. GOVERNMENT OBLIGATIONS (IDENTIFIED COST $3,475,119).............................. 3,462,907
-------------
SHORT-TERM INVESTMENTS (7.3%)
U.S. GOVERNMENT AGENCY (A) (3.8%)
1,000 Federal Home Loan Mortgage Corp...................................... 5.25 07/01/96 1,000,000
-------------
REPURCHASE AGREEMENT (3.5%)
919 The Bank of New York (dated 06/28/96; proceeds $919,557;
collateralized by $837,101 U.S. Treasury Bond 8.75% due 11/15/08
valued at $937,547) (Identified Cost $919,164)..................... 5.125 07/01/96 919,164
-------------
TOTAL SHORT-TERM INVESTMENTS (IDENTIFIED COST $1,919,164)................................... 1,919,164
-------------
TOTAL INVESTMENTS (IDENTIFIED COST $26,516,018) (B).......................... 106.5% 28,009,866
LIABILITIES IN EXCESS OF OTHER ASSETS........................................ (6.5) (1,702,470)
---------- -------------
NET ASSETS................................................................... 100.0% $ 26,307,396
---------- -------------
---------- -------------
<FN>
- ----------------
* NON-INCOME PRODUCING SECURITY.
(A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE
SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT
YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES
IDENTIFIED COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION WAS
$1,852,029 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION WAS
$358,181, RESULTING IN NET UNREALIZED APPRECIATION OF
$1,493,848.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
133
<PAGE>
Utilities
Portfolio of Investments JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMMON STOCKS (91.7%)
NATURAL GAS (15.4%)
11,000 AGL Resources, Inc...................... $ 207,625
8,500 American Water Works Company, Inc....... 342,125
7,000 Anadarko Petroleum Corp................. 406,000
6,500 Brooklyn Union Gas Co................... 177,125
4,500 Consolidated Natural Gas Co............. 235,125
5,300 El Paso Natural Gas Co.................. 204,050
6,000 Enron Corp.............................. 245,250
9,500 Indiana Energy Inc...................... 271,937
6,000 KN Energy, Inc.......................... 201,000
9,000 MCN Corp................................ 219,375
3,500 Mitchell Energy & Development Corp.
(Class B)............................. 66,500
8,000 New Jersey Resources Corp............... 230,000
7,000 North Carolina Natural Gas Corp......... 192,500
5,500 Northwest Natural Gas Co................ 192,500
6,500 PanEnergy Corp.......................... 213,687
7,500 Questar Corp............................ 255,000
2,000 Seagull Energy Corp.*................... 50,000
5,500 Sonat, Inc.............................. 247,500
5,500 South Jersey Industries, Inc............ 116,875
5,000 Southwest Gas Corp...................... 80,000
6,500 Tenneco, Inc............................ 332,312
-------------
4,486,486
-------------
TELECOMMUNICATIONS (40.0%)
7,000 360 Communications Co.*................. 168,000
6,000 Airtouch Communications, Inc.*.......... 169,500
7,000 Alcatel Alsthom (ADR) (France).......... 123,375
7,500 Alltel Corp............................. 230,625
3,000 Ameritech Corp.......................... 178,125
7,000 Arch Communications Group, Inc.*........ 128,625
5,000 AT&T Corp............................... 310,000
7,500 BCE, Inc. (Canada)...................... 296,250
2,500 Bell Atlantic Corp...................... 159,375
5,000 BellSouth Corp.......................... 211,875
3,000 Cellular Communications International,
Inc.*................................. 99,000
6,500 Century Telephone Enterprises, Inc...... 207,187
5,500 Clearnet Communications Inc.
(Class A)* (Canada)................... 92,125
8,000 Colonial Data Technologies Corp.*....... 119,000
6,000 Comcast Corp. (Class A)................. 109,500
4,500 Ericsson (L.M.) Telephone Co. AB (ADR)
(Sweden).............................. 96,187
8,000 Frontier Corp........................... 245,000
5,500 General Instrument Corp.*............... 158,812
7,000 Grupo Iusacell S.A. de C.V. (Series L)
(ADR)* (Mexico)....................... 75,250
4,500 GTE Corp................................ 201,375
4,000 Harris Corp............................. 244,000
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
8,000 IntelCom Group, Inc.*................... $ 200,000
8,000 Intercel, Inc.*......................... 160,000
8,500 LCI International, Inc.*................ 266,687
8,000 Liberty Media Group (Class A)*.......... 212,000
5,600 Lucent Technologies, Inc................ 212,100
9,500 MCI Communications Corp................. 242,250
75,000 Metromedia International Group
Inc.*................................. 918,750
8,000 MFS Communications Company,
Inc.*................................. 300,000
10,000 MIDCOM Communications, Inc.*............ 141,250
8,500 News Corp. Ltd. (ADR) (Australia)....... 199,750
8,000 Nextel Communications, Inc.
(Class A)*............................ 152,000
6,000 Nippon Telegraph & Telephone Corp. (ADR)
(Japan)............................... 219,000
5,000 Northern Telecom Ltd. (Canada).......... 271,875
4,000 NYNEX Corp.............................. 190,000
3,000 Pacific Telesis Group................... 101,250
4,000 Paging Network, Inc.*................... 94,500
7,000 Philips Electronics NV (ADR)
(Netherlands)......................... 228,375
9,500 Portugal Telecom S.A. (ADR)*
(Portugal)............................ 249,375
5,500 Royal PTT Nederland NV (ADR)
(Netherlands)......................... 207,625
4,000 SBC Communications, Inc................. 197,000
8,000 Scientific-Atlanta, Inc................. 124,000
4,500 Southern New England Telecommunications
Corp.................................. 189,000
7,000 Sprint Corp............................. 294,000
7,000 Tele Danmark AS (ADR) (Denmark)......... 177,625
8,000 Tele-Communications, Inc. (Class A)*.... 144,000
5,000 Telecom Argentina S.A. (ADR)
(Argentina)........................... 234,375
6,000 Telefonica Espana S.A. (ADR) (Spain).... 330,750
3,000 Telefonos de Mexico S.A. de C.V.
(Series L) (ADR) (Mexico)............. 100,500
7,000 Telephone & Data Systems, Inc........... 315,000
3,000 Teleport Communications Group Inc.
(Class A)*............................ 56,625
3,000 U.S. West Communications Group.......... 95,625
7,500 U.S. West Media Group*.................. 136,875
7,000 United States Cellular Corp.*........... 217,000
5,500 Vanguard Cellular Systems, Inc. (Class
A)*................................... 119,625
5,000 Viacom, Inc. (Class A)*................. 190,625
6,500 Vodafone Group PLC (ADR) (United
Kingdom).............................. 239,687
5,500 WorldCom, Inc.*......................... 303,875
-------------
11,656,160
-------------
</TABLE>
134
<PAGE>
Utilities
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
UTILITIES - ELECTRIC (36.3%)
8,000 AES Corp.*.............................. $ 224,000
9,500 Allegheny Power System, Inc............. 293,313
8,000 American Electric Power Co.............. 341,000
7,500 Bangor Hydro-Electric Co................ 80,625
5,000 Boston Edison Co........................ 127,500
9,000 Calenergy, Inc.*........................ 229,500
9,000 Carolina Power & Light Co............... 342,000
7,500 Central & South West Corp............... 217,500
8,000 Central Louisiana Electric.............. 213,000
7,000 CINergy Corp............................ 224,000
8,000 CMS Energy Corp......................... 247,000
7,000 Consolidated Edison Co. of New York,
Inc................................... 204,750
5,000 Dominion Resources, Inc................. 200,000
6,500 DQE, Inc................................ 178,750
4,000 Duke Power Co........................... 205,000
3,000 Eastern Utilities Assoc................. 58,875
11,500 Edison International.................... 202,688
6,500 Enersis S.A. (ADR) (Chile).............. 201,500
7,500 Enova Corp.............................. 173,438
8,000 Entergy Corp............................ 227,000
6,000 FPL Group, Inc.......................... 276,000
10,500 General Public Utilities Corp........... 370,125
10,000 Houston Industries, Inc................. 246,250
6,500 Illinova Corp........................... 186,875
10,500 IPALCO Enterprises, Inc................. 275,625
9,500 Kansas City Power & Light Co............ 261,250
5,500 National Power PLC (ADR)
(United Kingdom)...................... 173,250
6,000 New England Electric System............. 218,250
8,500 NIPSCO Industries, Inc.................. 342,125
7,000 Northwestern Public Service Co.......... 188,125
6,000 Oklahoma Gas & Electric Co.............. 237,750
8,000 Pacific Enterprises..................... 237,000
4,000 Pacific Gas & Electric Co............... 93,000
9,500 PacifiCorp.............................. 211,375
7,500 Peco Energy Co.......................... 195,000
6,500 Pinnacle West Capital Corp.............. 197,438
7,000 Public Service Company of Colorado...... 257,250
9,000 Public Service Company of New Mexico.... 184,500
6,000 Public Service Enterprise Group, Inc.... 164,250
10,500 SCANA Corp.............................. 295,313
10,000 Southern Co............................. 246,250
9,500 Teco Energy, Inc........................ 239,875
8,500 TNP Enterprises, Inc.................... 241,188
7,000 Unicom Corp............................. 195,125
10,000 Utilicorp United, Inc................... 276,250
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
9,500 Western Resources, Inc.................. $ 283,813
10,000 Wisconsin Energy Corp................... 288,750
-------------
10,573,441
-------------
TOTAL COMMON STOCKS
(IDENTIFIED COST $24,436,309)......... 26,716,087
-------------
PREFERRED STOCKS (1.3%)
U.S. GOVERNMENT AGENCY (0.1%)
1,000 Tennessee Valley Authority (Series 95-A)
$2.00................................. 25,125
-------------
UTILITIES - ELECTRIC (1.2%)
6,000 Alabama Power Capital Trust I
$1.84................................. 138,000
1,000 Duquesne Capital LP $2.09............... 24,375
2,500 Public Service Electric & Gas Co.
$2.00................................. 61,563
5,000 Virginia Power Capital $2.0125.......... 123,750
-------------
347,688
-------------
TOTAL PREFERRED STOCKS (IDENTIFIED COST
$388,687)............................. 372,813
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS)
- -----------
<C> <S> <C>
CORPORATE BONDS (0.6%)
TELECOMMUNICATIONS
100 Century Telephone
Enterprises, Inc. 7.20% due
12/01/25................... 93,303
100 Southwestern Bell Telephone
Co. 7.25% due 07/15/25..... 94,451
-------------
TOTAL CORPORATE BONDS
(IDENTIFIED COST
$202,656).................. 187,754
-------------
SHORT-TERM INVESTMENTS (A) (9.0%)
U.S. GOVERNMENT AGENCIES
2,610 Federal Home Loan Mortgage
Corp. 5.25% - 5.52% due
07/01/96 - 07/03/96
(Amortized Cost
$2,609,581)................ 2,609,581
-------------
TOTAL INVESTMENTS (IDENTIFIED
COST $27,637,233) (B)....... 102.6% 29,886,235
LIABILITIES IN EXCESS OF CASH
AND OTHER ASSETS............ (2.6) (756,273)
---------- -------------
NET ASSETS.................... 100.0% $ 29,129,962
---------- -------------
---------- -------------
<FN>
- ----------------
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(A) SECURITIES WERE PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATES SHOWN
HAVE BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED
COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION WAS $2,830,879 AND THE
AGGREGATE GROSS UNREALIZED DEPRECIATION WAS $581,877, RESULTING IN NET
UNREALIZED APPRECIATION OF $2,249,002.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
135
<PAGE>
Dividend Growth
Portfolio of Investments JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- --------------
<C> <S> <C>
COMMON STOCKS (98.1%)
AEROSPACE (3.5%)
48,000 United Technologies Corp................ $ 5,520,000
--------------
AUTOMOTIVE (6.9%)
88,800 Chrysler Corp........................... 5,505,600
169,700 Ford Motor Co........................... 5,494,037
--------------
10,999,637
--------------
BANKS (6.8%)
155,000 Banc One Corp........................... 5,270,000
72,000 BankAmerica Corp........................ 5,454,000
--------------
10,724,000
--------------
BEVERAGES - SOFT DRINKS (3.5%)
157,400 PepsiCo Inc............................. 5,568,025
--------------
CHEMICALS (3.3%)
163,000 Monsanto Co............................. 5,297,500
--------------
COMPUTERS (3.3%)
53,800 International Business Machines
Corp.................................. 5,326,200
--------------
CONGLOMERATES (3.4%)
106,000 Tenneco, Inc............................ 5,419,250
--------------
DRUGS (3.4%)
123,400 Abbott Laboratories..................... 5,367,900
--------------
ELECTRICAL EQUIPMENT (3.5%)
101,200 Honeywell, Inc.......................... 5,515,400
--------------
FOODS (3.1%)
145,800 Quaker Oats Company (The)............... 4,975,425
--------------
MACHINERY - AGRICULTURAL (3.3%)
132,000 Deere & Co.............................. 5,280,000
--------------
METALS & MINING (3.3%)
84,400 Phelps Dodge Corp....................... 5,264,450
--------------
NATURAL GAS (3.4%)
133,200 Enron Corp.............................. 5,444,550
--------------
OFFICE EQUIPMENT (3.5%)
116,700 Pitney Bowes, Inc....................... 5,572,425
--------------
OIL INTEGRATED - DOMESTIC (6.8%)
45,800 Atlantic Richfield Co................... 5,427,300
260,000 USX-Marathon Group...................... 5,232,500
--------------
10,659,800
--------------
OIL INTEGRATED - INTERNATIONAL (3.4%)
47,700 Mobil Corp.............................. 5,348,363
--------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- --------------
<C> <S> <C>
PAPER & FOREST PRODUCTS (3.2%)
119,600 Weyerhaeuser Co......................... $ 5,083,000
--------------
PHOTOGRAPHY (3.4%)
68,500 Eastman Kodak Co........................ 5,325,875
--------------
RAILROADS (3.3%)
108,000 CSX Corp................................ 5,211,000
--------------
RETAIL - DEPARTMENT STORES (3.3%)
119,000 May Department Stores Co................ 5,206,250
--------------
RETAIL - FOOD CHAINS (3.6%)
138,000 American Stores Co...................... 5,692,500
--------------
TELECOMMUNICATIONS (7.0%)
85,500 Bell Atlantic Corp...................... 5,450,625
132,000 Sprint Corp............................. 5,544,000
--------------
10,994,625
--------------
TOBACCO (3.4%)
51,200 Philip Morris Companies, Inc............ 5,324,800
--------------
UTILITIES - ELECTRIC (6.5%)
163,300 General Public Utilities Corp........... 5,756,325
194,700 Pacific Gas & Electric Co............... 4,526,775
--------------
10,283,100
--------------
TOTAL COMMON STOCKS (IDENTIFIED COST
$144,234,442)......................... 155,404,075
--------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS)
- -----------
<C> <S> <C>
SHORT-TERM INVESTMENT (2.5%)
REPURCHASE AGREEMENT
3,931 The Bank of New York 5.125%
due 07/01/96 (dated
06/28/96; proceeds
$3,932,634;
collateralized by
$3,871,141 U.S. Treasury
Bond 7.125% due 02/15/23
valued at $4,009,574)
(Identified Cost
$3,930,955).............. 3,930,955
--------------
TOTAL INVESTMENTS (IDENTIFIED
COST $148,165,397) (A)..... 100.6% 159,335,030
LIABILITIES IN EXCESS OF
OTHER ASSETS............... (0.6) (983,996)
---------- --------------
NET ASSETS................... 100.0% $ 158,351,034
---------- --------------
---------- --------------
<FN>
- ----------------
(A) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED
COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION WAS $13,120,128 AND THE
AGGREGATE GROSS UNREALIZED DEPRECIATION WAS $1,950,495, RESULTING IN NET
UNREALIZED APPRECIATION OF $11,169,633.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
136
<PAGE>
Value-Added Market
Portfolio of Investments JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMMON STOCKS (96.5%)
AEROSPACE & DEFENSE (1.4%)
950 Boeing Co............................... $ 82,769
1,450 General Dynamics Corp................... 89,900
1,100 Lockheed Martin Corp.................... 92,400
1,800 McDonnell Douglas Corp.................. 87,300
1,450 Northrop Grumman Corp................... 98,781
1,650 Raytheon Co............................. 85,181
1,650 Rockwell International Corp............. 94,462
800 United Technologies Corp................ 92,000
-------------
722,793
-------------
AIRLINES (0.6%)
900 AMR Corp.*.............................. 81,900
1,100 Delta Air Lines, Inc.................... 91,300
3,000 Southwest Airlines Co................... 87,375
5,000 USAir Group, Inc.*...................... 90,000
-------------
350,575
-------------
ALUMINUM (0.4%)
2,750 Alcan Aluminum Ltd. (Canada)............ 83,875
1,450 Aluminum Co. of America................. 83,194
1,700 Reynolds Metals Co...................... 88,612
-------------
255,681
-------------
AUTO PARTS - AFTER MARKET (0.6%)
4,100 Cooper Tire & Rubber Co................. 91,225
2,300 Echlin, Inc............................. 87,112
1,900 Genuine Parts Co........................ 86,925
1,750 Goodyear Tire & Rubber Co............... 84,437
-------------
349,699
-------------
AUTOMOBILES (0.5%)
1,500 Chrysler Corp........................... 93,000
2,850 Ford Motor Co........................... 92,269
1,750 General Motors Corp..................... 91,656
-------------
276,925
-------------
BANKS - MONEY CENTER (1.0%)
1,200 BankAmerica Corp........................ 90,900
1,100 Bankers Trust New York Corp............. 81,262
1,361 Chase Manhattan Corp.................... 96,121
1,100 Citicorp................................ 90,887
2,050 First Chicago NBD Corp.................. 80,206
1,100 Morgan (J.P.) & Co., Inc................ 93,087
-------------
532,463
-------------
BANKS - REGIONAL (4.1%)
2,600 Banc One Corp........................... 88,400
1,800 Bank of Boston Corp..................... 89,100
1,650 Bank of New York Co., Inc............... 84,562
1,450 Barnett Banks, Inc...................... 88,450
2,300 Boatmen's Bancshares, Inc............... 91,712
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
2,000 Comerica, Inc........................... $ 89,250
2,200 Corestates Financial Corp............... 84,700
1,600 Fifth Third Bancorp..................... 86,000
1,500 First Bank System, Inc.................. 87,000
1,542 First Union Corp........................ 93,869
2,150 Fleet Financial Group, Inc.............. 93,525
2,200 KeyCorp................................. 85,250
1,600 Mellon Bank Corp........................ 91,200
2,350 National City Corp...................... 82,544
1,150 NationsBank Corp........................ 95,019
2,700 Norwest Corp............................ 94,162
2,850 PNC Bank Corp........................... 84,787
1,500 Republic New York Corp.................. 93,375
2,500 SunTrust Banks, Inc..................... 92,500
2,500 U.S. Bancorp............................ 90,000
2,000 Wachovia Corp........................... 87,500
430 Wells Fargo & Co........................ 102,716
-------------
1,975,621
-------------
BEVERAGES - ALCOHOLIC (0.8%)
1,200 Anheuser-Busch Companies, Inc........... 90,000
2,400 Brown-Forman Corp. (Class B)............ 96,000
5,200 Coors (Adolph) Co....................... 92,950
2,590 Seagram Co. Ltd. (Canada)............... 87,089
-------------
366,039
-------------
BEVERAGES - SOFT DRINKS (0.4%)
1,700 Coca Cola Co............................ 83,087
2,700 PepsiCo Inc............................. 95,512
-------------
178,599
-------------
BROADCAST MEDIA (0.6%)
5,200 Comcast Corp. (Class A Special)......... 94,900
4,800 Tele-Communications, Inc. (Class A)*.... 86,400
4,800 U.S. West Media Group*.................. 87,600
-------------
268,900
-------------
BUILDING MATERIALS (0.6%)
3,050 Masco Corp.............................. 92,262
2,250 Owens-Corning Fiberglas Corp............ 96,750
2,150 Sherwin-Williams Co..................... 99,975
-------------
288,987
-------------
CHEMICALS (1.9%)
1,600 Air Products & Chemicals, Inc........... 92,400
1,200 Dow Chemical Co......................... 91,200
1,150 Du Pont (E.I.) de Nemours & Co.......... 90,994
1,400 Eastman Chemical Co..................... 85,225
2,150 Goodrich (B.F.) Co...................... 80,356
1,600 Hercules, Inc........................... 88,400
2,750 Monsanto Co............................. 89,375
2,300 Praxair, Inc............................ 97,175
1,350 Rohm & Haas Co.......................... 84,712
2,150 Union Carbide Corp...................... 85,462
-------------
885,299
-------------
</TABLE>
137
<PAGE>
Value-Added Market
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
CHEMICALS - DIVERSIFIED (0.8%)
1,550 Avery Dennison Corp..................... $ 85,056
4,050 Engelhard Corp.......................... 93,150
1,500 FMC Corp.*.............................. 97,875
1,650 PPG Industries, Inc..................... 80,437
-------------
356,518
-------------
CHEMICALS - SPECIALTY (0.9%)
1,150 Grace (W.R.) & Co....................... 81,506
1,350 Great Lakes Chemical Corp............... 84,037
2,500 Morton International, Inc............... 93,125
3,000 Nalco Chemical Co....................... 94,500
1,650 Sigma-Aldrich Corp...................... 87,450
-------------
440,618
-------------
COMMUNICATIONS - EQUIPMENT/MANUFACTURERS (2.0%)
2,000 3Com Corp.*............................. 91,250
1,800 Andrew Corp.*........................... 97,200
3,600 Bay Networks, Inc.*..................... 92,700
1,350 Cabletron Systems, Inc.*................ 92,644
1,550 Cisco Systems, Inc.*.................... 87,769
3,350 DSC Communications Corp.*............... 100,500
3,100 General Instrument Corp.*............... 89,512
1,650 Northern Telecom Ltd. (Canada).......... 89,719
5,500 Scientific-Atlanta, Inc................. 85,250
1,510 Tellabs, Inc.*.......................... 100,792
-------------
927,336
-------------
COMPUTER SOFTWARE & SERVICES (2.0%)
3,000 Autodesk, Inc........................... 89,250
2,400 Automatic Data Processing, Inc.......... 92,700
1,800 Ceridian Corp.*......................... 90,900
1,300 Computer Associates International,
Inc................................... 92,625
1,200 Computer Sciences Corp.*................ 89,700
1,100 First Data Corp......................... 87,587
750 Microsoft Corp.*........................ 90,000
6,700 Novell, Inc.*........................... 92,125
2,625 Oracle Corp............................. 103,359
1,400 Shared Medical Systems Corp............. 89,950
-------------
918,196
-------------
COMPUTERS - SYSTEMS (2.6%)
9,000 Amdahl Corp.*........................... 96,750
4,200 Apple Computer, Inc.*................... 87,675
1,760 COMPAQ Computer Corp.*.................. 86,680
7,200 Data General Corp.*..................... 93,600
2,100 Digital Equipment Corp.*................ 94,500
5,000 EMC Corp.*.............................. 93,125
950 Hewlett-Packard Co...................... 94,644
7,900 Intergraph Corp.*....................... 95,787
850 International Business Machines
Corp.................................. 84,150
3,750 Silicon Graphics, Inc.*................. 90,000
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
1,500 Sun Microsystems, Inc.*................. $ 88,125
8,000 Tandem Computers Inc.*.................. 99,000
13,000 Unisys Corp.*........................... 92,625
-------------
1,196,661
-------------
CONGLOMERATES (0.6%)
2,350 Teledyne, Inc........................... 84,894
23 Teledyne, Inc. (Series E) (Pref.)
$1.20+................................ 354
1,600 Tenneco Inc............................. 81,800
1,150 Textron Inc............................. 91,856
-------------
258,904
-------------
CONTAINERS - METAL & GLASS (0.4%)
3,300 Ball Corp............................... 94,875
2,000 Crown Cork & Seal Co., Inc.*............ 90,000
-------------
184,875
-------------
CONTAINERS - PAPER (0.6%)
2,700 Bemis Company, Inc...................... 94,500
5,900 Stone Container Corp.................... 81,125
2,000 Temple-Inland Inc....................... 93,500
-------------
269,125
-------------
COSMETICS (0.7%)
1,830 Alberto-Culver Co. (Class B)............ 84,866
2,100 Avon Products, Inc...................... 94,762
1,300 Gillette Co............................. 81,087
1,700 International Flavors & Fragrances
Inc................................... 80,962
-------------
341,677
-------------
DISTRIBUTORS - CONSUMER PRODUCTS (0.6%)
6,000 Fleming Cos., Inc....................... 86,250
3,000 SuperValu Stores, Inc................... 94,500
2,650 Sysco Corp.............................. 90,762
-------------
271,512
-------------
ELECTRICAL EQUIPMENT (1.7%)
2,100 AMP, Inc................................ 84,262
950 Emerson Electric Co..................... 85,856
950 General Electric Co..................... 82,175
2,300 General Signal Corp..................... 87,112
1,300 Grainger (W.W.), Inc.................... 100,750
1,600 Honeywell, Inc.......................... 87,200
1,250 Raychem Corp............................ 89,844
2,300 Thomas & Betts Corp..................... 86,250
4,900 Westinghouse Electric Corp.............. 91,875
-------------
795,324
-------------
ELECTRONICS - DEFENSE (0.2%)
4,100 EG & G, Inc............................. 87,637
-------------
</TABLE>
138
<PAGE>
Value-Added Market
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
ELECTRONICS - INSTRUMENTATION (0.4%)
1,900 Perkin-Elmer Corp....................... $ 91,675
2,100 Tektronix, Inc.......................... 93,975
-------------
185,650
-------------
ELECTRONICS - SEMICONDUCTORS (1.6%)
6,800 Advanced Micro Devices, Inc.*........... 92,650
2,950 Applied Materials, Inc.*................ 89,606
1,350 Intel Corp.............................. 99,056
3,600 LSI Logic Corp.*........................ 93,600
3,500 Micron Technology, Inc.................. 90,562
1,350 Motorola, Inc........................... 84,881
5,800 National Semiconductor Corp.*........... 89,900
1,800 Texas Instruments Inc................... 89,775
-------------
730,030
-------------
ENGINEERING & CONSTRUCTION (0.4%)
1,250 Fluor Corp.............................. 81,719
2,050 Foster Wheeler Corp..................... 91,994
-------------
173,713
-------------
ENTERTAINMENT (0.8%)
2,350 King World Productions Inc.*............ 85,481
2,350 Time Warner, Inc........................ 92,237
2,400 Viacom, Inc. (Class B)*................. 93,300
1,450 Walt Disney Co.......................... 91,169
-------------
362,187
-------------
FINANCIAL - MISCELLANEOUS (1.3%)
1,900 American Express Co..................... 84,787
2,250 American General Corp................... 81,844
1,100 Federal Home Loan Mortgage
Corp.................................. 94,050
2,750 Federal National Mortgage Assoc......... 92,125
2,800 Green Tree Financial Corp............... 87,500
3,400 MBNA Corp............................... 96,900
1,100 Transamerica Corp....................... 89,100
-------------
626,306
-------------
FOODS (2.5%)
4,700 Archer-Daniels-Midland Co............... 89,887
1,250 Campbell Soup Co........................ 88,125
2,100 ConAgra, Inc............................ 95,287
1,250 CPC International Inc................... 90,000
1,550 General Mills, Inc...................... 84,475
2,900 Heinz (H.J.) Co......................... 88,087
1,300 Hershey Foods Corp...................... 95,387
1,100 Kellogg Co.............................. 80,575
2,600 Quaker Oats Company (The)............... 88,725
1,500 Ralston-Ralston Purina Group............ 96,187
2,750 Sara Lee Corp........................... 89,031
670 Unilever NV (ADR) (Netherlands)......... 97,234
1,750 Wrigley (Wm.) Jr. Co. (Class A)......... 88,375
-------------
1,171,375
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
GOLD MINING (1.2%)
3,350 Barrick Gold Corp. (Canada)............. $ 90,869
8,000 Echo Bay Mines Ltd. (Canada)............ 86,000
5,300 Homestake Mining Co..................... 90,762
1,800 Newmont Mining Corp..................... 88,875
3,750 Placer Dome Inc. (Canada)............... 89,531
6,500 Santa Fe Pacific Gold Corp.............. 91,812
-------------
537,849
-------------
HARDWARE & TOOLS (0.6%)
2,500 Black & Decker Corp..................... 96,562
1,700 Snap-On, Inc............................ 80,537
2,900 Stanley Works........................... 86,275
-------------
263,374
-------------
HEALTHCARE - DIVERSIFIED (1.3%)
2,100 Abbott Laboratories..................... 91,350
2,150 Allergan, Inc........................... 84,387
1,400 American Home Products Corp............. 84,175
1,000 Bristol-Myers Squibb Co................. 90,000
1,800 Johnson & Johnson....................... 89,100
2,450 Mallinckrodt Group, Inc................. 95,244
1,650 Warner-Lambert Co....................... 90,750
-------------
625,006
-------------
HEALTHCARE - DRUGS (1.0%)
1,500 Lilly (Eli) & Co........................ 97,500
1,450 Merck & Co., Inc........................ 93,706
1,300 Pfizer, Inc............................. 92,787
2,000 Pharmacia & Upjohn, Inc................. 88,750
1,550 Schering-Plough Corp.................... 97,262
-------------
470,005
-------------
HEALTHCARE - MISCELLANEOUS (0.7%)
3,200 Alza Corp.*............................. 87,600
1,600 Amgen Inc.*............................. 86,000
6,800 Beverly Enterprises, Inc.*.............. 81,600
2,300 Manor Care, Inc......................... 90,562
-------------
345,762
-------------
HEALTHCARE HMOS (0.6%)
5,000 Humana, Inc.*........................... 89,375
1,500 U.S. Healthcare, Inc.................... 82,312
1,800 United Healthcare Corp.................. 90,900
-------------
262,587
-------------
HEAVY DUTY TRUCKS & PARTS (1.2%)
2,300 Cummins Engine Co., Inc................. 92,862
2,950 Dana Corp............................... 91,450
1,500 Eaton Corp.............................. 87,937
3,600 ITT Industries, Inc..................... 90,450
9,600 Navistar International Corp.*........... 94,800
1,900 PACCAR, Inc............................. 92,625
-------------
550,124
-------------
</TABLE>
139
<PAGE>
Value-Added Market
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
HOME BUILDING (0.6%)
3,050 Centex Corp............................. $ 94,931
6,300 Kaufman & Broad Home Corp............... 91,350
3,300 Pulte Corp.............................. 88,275
-------------
274,556
-------------
HOSPITAL MANAGEMENT (0.6%)
1,600 Columbia/HCA Healthcare Corp............ 85,400
9,850 Community Psychiatric Centers*.......... 93,575
4,400 Tenet Healthcare Corp.*................. 94,050
-------------
273,025
-------------
HOTELS/MOTELS (0.8%)
3,300 Harrah's Entertainment, Inc.*........... 93,225
750 Hilton Hotels Corp.*.................... 84,375
1,400 ITT Corp.*.............................. 92,750
1,850 Marriot International Inc............... 99,437
-------------
369,787
-------------
HOUSEHOLD FURNISHINGS & APPLIANCES (0.6%)
1,450 Armstrong World Industries Inc.......... 83,556
4,300 Maytag Corp............................. 89,762
1,900 Whirlpool Corp.......................... 94,287
-------------
267,605
-------------
HOUSEHOLD PRODUCTS (0.8%)
950 Clorox Co............................... 84,194
1,000 Colgate-Palmolive Co.................... 84,750
1,200 Kimberly-Clark Corp..................... 92,700
1,000 Procter & Gamble Co..................... 90,625
-------------
352,269
-------------
HOUSEWARES (0.6%)
2,700 Newell Co............................... 82,687
3,150 Rubbermaid, Inc......................... 85,837
2,100 Tupperware Corp.*....................... 88,725
-------------
257,249
-------------
INSURANCE BROKERS (0.6%)
4,550 Alexander & Alexander Services,
Inc................................... 89,862
1,700 Aon Corp................................ 86,275
980 Marsh & McLennan Cos., Inc.............. 94,570
-------------
270,707
-------------
INVESTMENT BANKING/BROKERAGE (1.0%)
1,450 Dean Witter, Discover & Co.
(Note 3).............................. 83,012
1,400 Merrill Lynch & Co., Inc................ 91,175
1,800 Morgan Stanley Group, Inc............... 88,425
2,100 Salomon, Inc............................ 92,400
2,025 Travelers Group, Inc.................... 92,391
-------------
447,403
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
LEISURE TIME (0.6%)
4,250 Bally Entertainment Corp.*.............. $ 116,875
4,150 Brunswick Corp.......................... 83,000
4,800 Outboard Marine Corp.................... 87,000
-------------
286,875
-------------
LIFE INSURANCE (1.2%)
1,800 Jefferson-Pilot Corp.................... 92,925
1,900 Lincoln National Corp................... 87,875
2,000 Providian Corp.......................... 85,750
2,100 Torchmark Corp.......................... 91,875
1,550 UNUM Corp............................... 96,487
2,950 USLIFE Corp............................. 96,981
-------------
551,893
-------------
MACHINE TOOLS (0.4%)
3,600 Cincinnati Milacron, Inc................ 86,400
5,400 Giddings & Lewis, Inc................... 87,750
-------------
174,150
-------------
MACHINERY - DIVERSIFIED (1.9%)
2,050 Briggs & Stratton Corp.................. 84,306
1,950 Case Corp............................... 93,600
1,250 Caterpillar, Inc........................ 84,687
2,200 Cooper Industries, Inc.................. 91,300
2,200 Deere & Co.............................. 88,000
2,700 Harnischfeger Industries, Inc........... 89,775
2,100 Ingersoll-Rand Co....................... 91,875
1,600 NACCO Industries, Inc. (Class A)........ 88,600
2,400 Timken Co............................... 93,000
1,700 Varity Corp.*........................... 81,812
-------------
886,955
-------------
MANUFACTURED HOUSING (0.2%)
3,200 Fleetwood Enterprises, Inc.............. 99,200
-------------
MANUFACTURING - DIVERSIFIED (1.9%)
1,600 AlliedSignal, Inc....................... 91,400
2,300 Crane Co................................ 94,300
1,900 Dover Corp.............................. 87,637
1,400 Illinois Tool Works Inc................. 94,675
1,200 Johnson Controls, Inc................... 83,400
2,250 Millipore Corp.......................... 94,219
4,000 Pall Corp............................... 96,500
2,200 Parker-Hannifin Corp.................... 93,225
2,700 Trinova Corp............................ 90,112
2,000 Tyco International Ltd.................. 81,500
-------------
906,968
-------------
MEDICAL PRODUCTS & SUPPLIES (1.7%)
2,650 Bard (C.R.), Inc........................ 90,100
1,900 Bausch & Lomb, Inc...................... 80,750
1,750 Baxter International, Inc............... 82,687
1,100 Becton, Dickinson & Co.................. 88,275
6,500 Biomet, Inc.*........................... 91,813
1,980 Boston Scientific Corp.*................ 89,100
1,600 Medtronic Inc........................... 89,600
2,600 St. Jude Medical, Inc.*................. 86,450
3,000 United States Surgical Corp............. 93,000
-------------
791,775
-------------
</TABLE>
140
<PAGE>
Value-Added Market
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
METALS - MISCELLANEOUS (0.9%)
3,200 ASARCO, Inc............................. $ 88,400
3,500 Cyprus Amax Minerals Co................. 79,188
3,000 Freeport-McMoran Copper & Gold, Inc.
(Class B)............................. 95,625
2,700 Inco Ltd. (Canada)...................... 87,075
1,450 Phelps Dodge Corp....................... 90,444
-------------
440,732
-------------
MISCELLANEOUS (2.1%)
3,200 Airtouch Communications, Inc.*.......... 90,400
3,400 American Greetings Corp. (Class A)...... 92,650
2,450 Corning, Inc............................ 94,019
3,200 Dial Corp............................... 91,600
1,850 Harcourt General, Inc................... 92,500
1,400 Harris Corp............................. 85,400
4,500 Jostens, Inc............................ 88,875
1,350 Minnesota Mining & Manufacturing
Co.................................... 93,150
1,500 Pioneer Hi-Bred International, Inc...... 79,313
950 TRW, Inc................................ 85,381
3,700 Whitman Corp............................ 89,263
-------------
982,551
-------------
MULTI-LINE INSURANCE (0.8%)
1,250 Aetna Life & Casualty Co................ 89,375
950 American International Group, Inc....... 93,694
800 CIGNA Corp.............................. 94,300
1,700 ITT Hartford Group, Inc.*++............. 90,525
-------------
367,894
-------------
OFFICE EQUIPMENT & SUPPLIES (0.8%)
1,900 Alco Standard Corp...................... 85,975
4,300 Moore Corp. Ltd. (Canada)............... 81,163
2,000 Pitney Bowes, Inc....................... 95,500
1,650 Xerox Corp.............................. 88,275
-------------
350,913
-------------
OIL & GAS DRILLING (0.4%)
2,400 Helmerich & Payne, Inc.................. 87,900
6,100 Rowan Companies, Inc.*.................. 89,975
-------------
177,875
-------------
OIL - DOMESTIC INTEGRATED (2.1%)
1,650 Amerada Hess Corp....................... 88,481
2,350 Ashland Oil, Inc........................ 93,119
700 Atlantic Richfield Co................... 82,950
1,400 Kerr-McGee Corp......................... 85,225
1,730 Louisiana Land & Exploration Co......... 99,691
3,400 Occidental Petroleum Corp............... 84,150
1,800 Pennzoil Co............................. 83,250
2,250 Phillips Petroleum Co................... 94,219
2,900 Sun Co., Inc............................ 88,088
2,800 Unocal Corp............................. 94,500
4,600 USX-Marathon Group...................... 92,575
-------------
986,248
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
OIL - EXPLORATION & PRODUCTION (0.6%)
2,410 Burlington Resources, Inc............... $ 103,630
5,550 Oryx Energy Co.*........................ 90,188
7,800 Santa Fe Energy Resources, Inc.*........ 92,625
-------------
286,443
-------------
OIL - INTERNATIONAL INTEGRATED (1.2%)
1,250 Amoco Corp.............................. 90,469
1,500 Chevron Corp............................ 88,500
1,100 Exxon Corp.............................. 95,563
800 Mobil Corp.............................. 89,700
600 Royal Dutch Petroleum Co.
(Netherlands)......................... 92,250
1,050 Texaco, Inc............................. 88,069
-------------
544,551
-------------
OIL WELL EQUIPMENT & SERVICE (1.2%)
2,950 Baker Hughes Inc........................ 96,981
3,000 Dresser Industries, Inc................. 88,500
1,550 Halliburton Co.......................... 86,025
4,100 McDermott International, Inc............ 85,588
1,130 Schlumberger, Ltd....................... 95,203
1,500 Western Atlas, Inc.*.................... 87,375
-------------
539,672
-------------
PAPER & FOREST PRODUCTS (2.2%)
2,550 Boise Cascade Corp...................... 93,394
1,900 Champion International Corp............. 79,325
1,250 Georgia-Pacific Corp.................... 88,750
2,200 International Paper Co.................. 81,125
3,400 James River Corp. of Virginia........... 89,675
3,850 Louisiana-Pacific Corp.................. 85,181
1,750 Mead Corp............................... 90,781
2,400 Potlatch Corp........................... 93,900
1,700 Union Camp Corp......................... 82,875
3,000 Westvaco Corp........................... 89,625
2,000 Weyerhaeuser Co......................... 85,000
1,450 Willamette Industries, Inc.............. 85,913
-------------
1,045,544
-------------
PERSONAL LOANS (0.4%)
1,550 Beneficial Corp......................... 86,994
1,250 Household International, Inc............ 95,000
-------------
181,994
-------------
PHOTOGRAPHY/IMAGING (0.4%)
1,150 Eastman Kodak Co........................ 89,413
1,980 Polaroid Corp........................... 90,338
-------------
179,751
-------------
</TABLE>
141
<PAGE>
Value-Added Market
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
POLLUTION CONTROL (0.6%)
3,200 Browning-Ferris Industries, Inc......... $ 92,800
8,600 Laidlaw Inc. (Class B) (Canada)......... 87,075
2,750 WMX Technologies, Inc................... 90,063
-------------
269,938
-------------
PROPERTY - CASUALTY INSURANCE (1.4%)
1,900 Allstate Corp........................... 86,688
1,900 Chubb Corp.............................. 94,763
550 General Re Corp......................... 83,738
1,250 Loews Corp.............................. 98,594
2,600 SAFECO Corp............................. 91,975
1,700 St. Paul Companies, Inc................. 90,950
5,600 USF&G Corp.............................. 91,700
-------------
638,408
-------------
PUBLISHING (0.6%)
1,500 Dun & Bradstreet Corp................... 93,750
2,000 McGraw-Hill, Inc........................ 91,500
2,050 Meredith Corp........................... 85,588
-------------
270,838
-------------
PUBLISHING - NEWSPAPER (1.2%)
2,300 Dow Jones & Co., Inc.................... 96,025
1,330 Gannett Co., Inc........................ 94,098
1,250 Knight-Ridder Newspapers, Inc........... 90,625
2,850 New York Times Co. (Class A)............ 92,981
1,950 Times Mirror Co. (Class A).............. 84,825
1,250 Tribune Co.............................. 90,781
-------------
549,335
-------------
RAILROADS (0.9%)
1,100 Burlington Northern Sante Fe
Corp.................................. 88,963
1,200 Conrail, Inc............................ 79,650
1,900 CSX Corp................................ 91,675
1,000 Norfolk Southern Corp................... 84,750
1,300 Union Pacific Corp...................... 90,838
-------------
435,876
-------------
RESTAURANTS (1.1%)
7,700 Darden Restaurants, Inc................. 82,775
3,900 Luby's Cafeterias, Inc.................. 91,650
1,750 McDonald's Corp......................... 81,813
9,430 Ryan's Family Steak Houses, Inc.*....... 87,228
7,500 Shoney's Inc.*.......................... 81,563
5,050 Wendy's International, Inc.............. 94,056
-------------
519,085
-------------
RETAIL - DEPARTMENT STORES (1.2%)
2,650 Dillard Department Stores, Inc. (Class
A)*................................... 96,725
2,850 Federated Department Stores, Inc.*...... 97,256
2,050 May Department Stores Co................ 89,688
1,500 Mercantile Stores Co., Inc.............. 87,938
2,100 Nordstrom, Inc.......................... 92,925
1,750 Penney (J.C.) Co., Inc.................. 91,875
-------------
556,407
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
RETAIL - DRUG STORES (0.6%)
2,200 Longs Drug Stores Corp.................. $ 98,175
2,850 Rite Aid Corp........................... 84,788
2,700 Walgreen Co............................. 90,450
-------------
273,413
-------------
RETAIL - FOOD CHAINS (1.2%)
2,250 Albertson's Inc......................... 93,094
2,200 American Stores Co...................... 90,750
2,500 Giant Food, Inc. (Class A).............. 89,688
2,920 Great Atlantic & Pacific Tea Co.,
Inc................................... 95,995
2,300 Kroger Co.*............................. 90,850
2,700 Winn-Dixie Stores, Inc.................. 95,513
-------------
555,890
-------------
RETAIL - GENERAL MERCHANDISE (0.8%)
850 Dayton-Hudson Corp...................... 87,656
7,400 Kmart Corp.*............................ 91,575
1,900 Sears, Roebuck & Co..................... 92,388
3,500 Wal-Mart Stores, Inc. (Class A)......... 88,813
-------------
360,432
-------------
RETAIL - SPECIALTY (1.8%)
2,550 Circuit City Stores, Inc................ 92,119
1,600 Home Depot, Inc......................... 86,400
2,500 Lowe's Companies, Inc................... 90,313
2,150 Melville Corp........................... 87,075
2,700 Pep Boys-Manny Moe & Jack............... 91,800
4,600 Price/Costco, Inc.*..................... 98,325
1,850 Tandy Corp.............................. 87,644
3,100 Toys 'R' Us, Inc.*...................... 88,350
4,700 Woolworth Corp.*........................ 105,750
-------------
827,776
-------------
RETAIL - SPECIALTY APPAREL (0.8%)
15,000 Charming Shoppes, Inc................... 104,063
2,800 Gap, Inc................................ 89,950
4,550 Limited (The), Inc...................... 97,825
2,550 TJX Companies, Inc...................... 86,063
-------------
377,901
-------------
SAVINGS & LOAN COMPANIES (0.6%)
3,600 Ahmanson (H.F.) & Co.................... 97,200
1,600 Golden West Financial Corp.............. 89,600
3,900 Great Western Financial Corp............ 93,113
-------------
279,913
-------------
SHOES (0.8%)
5,300 Brown Group Inc......................... 92,088
950 Nike, Inc. (Class B).................... 97,613
3,100 Reebok International Ltd.
(United Kingdom)...................... 104,238
10,800 Stride Rite Corp........................ 89,100
-------------
383,039
-------------
</TABLE>
142
<PAGE>
Value-Added Market
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
SPECIALIZED SERVICES (1.5%)
2,600 Block (H.&R.), Inc...................... $ 84,825
2,260 CUC International, Inc.*................ 80,230
2,800 Ecolab, Inc............................. 92,400
1,800 Interpublic Group of Companies,
Inc................................... 84,375
2,300 National Service Industries, Inc........ 89,988
4,700 Ogden Corp.............................. 85,188
5,600 Safety-Kleen Corp....................... 98,000
1,500 Service Corp. International............. 86,250
-------------
701,256
-------------
SPECIALTY PRINTING (0.6%)
2,400 Deluxe Corp............................. 85,200
2,400 Donnelley (R.R.) & Sons Co.............. 83,700
3,700 Harland (John H.) Co.................... 91,113
-------------
260,013
-------------
STEEL (1.1%)
17,600 Armco, Inc.*............................ 88,000
7,000 Bethlehem Steel Corp.*.................. 83,125
4,700 Inland Steel Industries, Inc............ 92,238
1,600 Nucor Corp.............................. 81,000
3,200 USX-U.S. Steel Group.................... 90,800
4,000 Worthington Industries, Inc............. 82,500
-------------
517,663
-------------
TELECOMMUNICATIONS - LONG DISTANCE (0.8%)
1,400 AT&T Corp............................... 86,800
3,800 MCI Communications Corp................. 96,900
2,000 Sprint Corp............................. 84,000
1,700 WorldCom, Inc.*......................... 93,925
-------------
361,625
-------------
TEXTILES (1.0%)
3,600 Fruit of the Loom, Inc. (Class A)*...... 91,800
2,700 Liz Claiborne, Inc...................... 93,488
2,900 Russell Corp............................ 80,113
1,900 Springs Industries, Inc. (Class A)...... 95,950
1,500 VF Corp................................. 89,438
-------------
450,789
-------------
TOBACCO (0.6%)
2,050 American Brands, Inc.................... 93,019
820 Philip Morris Companies, Inc............ 85,280
2,800 UST, Inc................................ 95,900
-------------
274,199
-------------
TOYS (0.4%)
2,400 Hasbro Inc.............................. 85,800
2,975 Mattel, Inc............................. 85,159
-------------
170,959
-------------
TRANSPORTATION - MISCELLANEOUS (0.4%)
1,000 Federal Express Corp.*.................. 82,000
3,300 Ryder System, Inc....................... 92,813
-------------
174,813
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
TRUCKERS (0.6%)
2,600 Caliber System, Inc..................... $ 88,400
4,150 Consolidated Freightways, Inc........... 87,669
6,500 Yellow Corp.*........................... 85,313
-------------
261,382
-------------
UTILITIES - ELECTRIC (5.2%)
2,200 American Electric Power Co., Inc........ 93,775
3,350 Baltimore Gas & Electric Co............. 95,056
2,500 Carolina Power & Light Co............... 95,000
3,050 Central & South West Corp............... 88,450
2,900 CINergy Corp............................ 92,800
3,200 Consolidated Edison Co. of New York,
Inc................................... 93,600
2,450 Dominion Resources, Inc................. 98,000
3,000 DTE Energy Co........................... 92,625
1,800 Duke Power Co........................... 92,250
5,500 Edison International.................... 96,938
3,450 Entergy Corp............................ 97,894
2,000 FPL Group, Inc.......................... 92,000
2,800 General Public Utilities Corp........... 98,700
4,050 Houston Industries, Inc................. 99,731
11,000 Niagara Mohawk Power Corp.*............. 85,250
1,900 Northern States Power Co................ 93,813
4,100 Ohio Edison Co.......................... 89,688
4,150 Pacific Gas & Electric Co............... 96,488
4,500 PacifiCorp.............................. 100,125
3,500 PECO Energy Co.......................... 91,000
3,800 PP&L Resources, Inc..................... 89,775
3,650 Public Service Enterprise Group,
Inc................................... 99,919
3,700 Southern Co............................. 91,113
2,100 Texas Utilities Co...................... 89,775
3,250 Unicom Corp............................. 90,594
2,200 Union Electric Co....................... 88,550
-------------
2,432,909
-------------
UTILITIES - NATURAL GAS (2.7%)
2,100 Coastal Corp............................ 87,675
1,850 Columbia Gas System, Inc................ 96,431
1,600 Consolidated Natural Gas Co............. 83,600
2,800 Eastern Enterprises..................... 93,100
2,300 Enron Corp.............................. 94,013
4,590 ENSERCH Corp............................ 99,833
3,150 NICOR, Inc.............................. 89,381
8,000 NorAm Energy Corp....................... 87,000
3,710 ONEOK, Inc.............................. 92,750
3,200 Pacific Enterprises..................... 94,800
2,750 PanEnergy Corp.......................... 90,406
2,700 Peoples Energy Corp..................... 90,450
1,855 Sonat, Inc.............................. 83,475
1,900 Williams Cos., Inc...................... 94,050
-------------
1,276,964
-------------
</TABLE>
143
<PAGE>
Value-Added Market
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
UTILITIES - TELEPHONE (1.8%)
3,050 Alltel Corp............................. $ 93,788
1,650 Ameritech Corp.......................... 97,969
1,550 Bell Atlantic Corp...................... 98,813
2,300 BellSouth Corp.......................... 97,463
2,250 GTE Corp................................ 100,688
2,050 NYNEX Corp.............................. 97,375
2,630 Pacific Telesis Group................... 88,763
1,750 SBC Communications, Inc................. 86,188
2,750 U.S. West Communications Group.......... 87,656
-------------
848,703
-------------
TOTAL COMMON STOCKS (IDENTIFIED COST
$41,603,949).......................... 45,128,043
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS) VALUE
- ----------- -------------
<C> <S> <C>
SHORT-TERM INVESTMENT (A) (7.9%)
U.S. GOVERNMENT AGENCY
3,700 Federal Home Loan Mortgage Corp.
5.25% due 07/01/96
(Amortized Cost $3,700,000)........... $ 3,700,000
-------------
TOTAL INVESTMENTS (IDENTIFIED COST
$45,303,949) (B)...................... 104.4% 48,828,043
LIABILITIES IN EXCESS OF CASH AND OTHER
ASSETS................................ (4.4) (2,063,883)
---------- -------------
NET ASSETS.............................. 100.0% $ 46,764,160
---------- -------------
---------- -------------
<FN>
- ----------------
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
+ ACQUIRED THROUGH A SPECIAL STOCK DIVIDEND.
++ PARENT COMPANY OF HARTFORD LIFE INSURANCE COMPANY AND ITT HARTFORD LIFE
AND ANNUITY INSURANCE COMPANY, AFFILIATES OF THE FUND.
(A) SECURITY AS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS
BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED
COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION WAS $4,714,373 AND THE
AGGREGATE GROSS UNREALIZED DEPRECIATION WAS $1,190,279, RESULTING IN NET
UNREALIZED APPRECIATION OF $3,524,094.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
144
<PAGE>
Core Equity
Portfolio of Investments JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -----------
<C> <S> <C>
COMMON STOCKS (98.2%)
AEROSPACE (7.9%)
3,600 Boeing Co...................... $ 313,650
2,500 Thiokol Corp................... 98,750
2,600 United Technologies Corp....... 299,000
-----------
711,400
-----------
AIR TRANSPORT (2.9%)
2,900 AMR Corp.*..................... 263,900
-----------
AIRLINES (5.2%)
3,700 Delta Air Lines, Inc........... 307,100
2,900 UAL Corp.*..................... 155,875
-----------
462,975
-----------
AUTO PARTS - AFTER MARKET (2.5%)
6,400 Lear Corp.*.................... 225,600
-----------
AUTO PARTS - ORIGINAL EQUIPMENT (1.9%)
3,700 Magna International, Inc.
(Class A) (Canada)........... 170,200
-----------
AUTOMOTIVE (4.3%)
4,200 Chrysler Corp.................. 260,400
3,879 Ford Motor Co.................. 125,583
-----------
385,983
-----------
BANKS - MONEY CENTER (3.0%)
3,200 Citicorp....................... 264,400
-----------
BIOTECHNOLOGY (1.8%)
3,000 Amgen Inc.*.................... 161,250
-----------
BROKERAGE (1.6%)
2,200 Merrill Lynch & Co., Inc....... 143,275
-----------
BUILDING MATERIALS (1.3%)
2,700 Champion International Corp.... 112,725
-----------
COMMERCIAL SERVICES (1.0%)
1,100 Corrections Corp. of
America*..................... 77,000
-----------
COMMUNICATIONS EQUIPMENT (4.0%)
6,300 Cisco Systems, Inc.*........... 356,737
-----------
COMPUTER SERVICES (8.9%)
4,200 Computer Sciences Corp.*....... 313,950
5,300 Electronic Data Systems
Corp......................... 284,875
2,500 First Data Corp................ 199,062
-----------
797,887
-----------
COMPUTER SOFTWARE (4.5%)
2,200 Microsoft Corp.*............... 264,000
3,500 Oracle Corp.................... 137,812
-----------
401,812
-----------
COMPUTER SOFTWARE & SERVICES (0.8%)
1,700 America Online, Inc.*.......... 73,950
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -----------
<C> <S> <C>
COMPUTERS - SYSTEMS (3.4%)
3,100 Hewlett-Packard Co............. $ 308,838
-----------
CONSUMER PRODUCTS (1.7%)
2,000 Kimberly-Clark Corp............ 154,500
-----------
CONSUMER SERVICES (1.8%)
4,500 CUC International, Inc.*....... 159,750
-----------
ELECTRONICS - SEMICONDUCTORS/COMPONENTS
(4.0%)
4,000 Motorola, Inc.................. 251,500
2,200 Texas Instruments Inc.......... 109,725
-----------
361,225
-----------
ENTERTAINMENT (2.0%)
4,600 Viacom, Inc. (Class B)*........ 178,825
-----------
FINANCIAL - MISCELLANEOUS (3.8%)
4,000 Associates First Capital
Corp.*....................... 150,500
6,100 Green Tree Financial Corp...... 190,625
-----------
341,125
-----------
HEALTH EQUIPMENT & SERVICES (2.6%)
4,300 Columbia/HCA Healthcare
Corp......................... 229,513
-----------
HOUSEHOLD APPLIANCES (2.3%)
6,200 American Standard Companies,
Inc.*........................ 204,600
-----------
INSURANCE BROKERS (1.1%)
1,000 Marsh & McLennan Companies,
Inc.......................... 96,500
-----------
MACHINERY - CONSTRUCTION & MATERIALS (2.4%)
3,200 Caterpillar, Inc............... 216,800
-----------
NATURAL RESOURCES (0.6%)
600 Texaco, Inc.................... 50,325
-----------
OFFICE EQUIPMENT & SUPPLIES (2.1%)
3,600 Xerox Corp..................... 192,600
-----------
PHARMACEUTICALS (1.8%)
3,400 IVAX Corp...................... 53,975
2,200 Johnson & Johnson.............. 108,900
-----------
162,875
-----------
PUBLISHING (1.9%)
7,300 News Corp. Ltd. (ADR)
(Australia).................. 171,550
-----------
RAILROADS (2.9%)
3,240 Burlington Northern Santa Fe
Corp......................... 262,035
-----------
RESTAURANTS (1.3%)
3,600 Boston Chicken Inc.*........... 116,550
-----------
RETAIL - SPECIALTY (2.3%)
3,800 Home Depot, Inc................ 205,200
-----------
SEMICONDUCTOR EQUIPMENT (0.5%)
1,600 Applied Materials, Inc.*....... 48,600
-----------
SEMICONDUCTORS (4.4%)
5,400 Intel Corp..................... 396,225
-----------
</TABLE>
145
<PAGE>
Core Equity
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -----------
<C> <S> <C>
SOAP & HOUSEHOLD PRODUCTS (2.8%)
2,800 Procter & Gamble Co............ $ 253,750
-----------
TELECOMMUNICATIONS (0.9%)
2,100 Lucent Technologies, Inc....... 79,538
-----------
TOTAL COMMON STOCKS (IDENTIFIED
COST $8,302,884)............. 8,800,018
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS) VALUE
- ------------- -----------
<C> <S> <C>
SHORT-TERM INVESTMENT (4.9%)
REPURCHASE AGREEMENT
$ 443 The Bank of New York 5.125%
due 07/01/96 (dated
06/28/96; proceeds $442,850;
collateralized by $449,580
U.S. Treasury Note 5.25% due
07/31/98 valued at $451,514)
(Identified Cost
$442,661)................... $ 442,661
-----------
TOTAL INVESTMENTS (IDENTIFIED
COST $8,745,545) (A)......... 103.1% 9,242,679
LIABILITIES IN EXCESS OF OTHER
ASSETS....................... (3.1) (277,910)
---------- -----------
NET ASSETS..................... 100.0% $ 8,964,769
---------- -----------
---------- -----------
<FN>
- ----------------
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(A) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES
IDENTIFIED COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION WAS
$727,124 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION WAS
$229,990, RESULTING IN NET UNREALIZED APPRECIATION OF $497,134.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
146
<PAGE>
American Value
Portfolio of Investments JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMMON STOCKS (88.3%)
AEROSPACE (1.1%)
3,700 Boeing Co.................... $ 322,362
5,000 United Technologies Corp..... 575,000
-------------
897,362
-------------
AGRICULTURE RELATED (1.0%)
2,000 AGCO Corp.................... 55,500
6,000 Case Corp.................... 288,000
8,000 Pioneer Hi-Bred
International, Inc......... 423,000
-------------
766,500
-------------
AIR TRANSPORT (3.1%)
6,000 AMR Corp.*................... 546,000
4,000 Atlas Air, Inc.*............. 230,500
6,000 Continental Airlines, Inc.
(Class B)*................. 370,500
8,000 Delta Air Lines, Inc......... 664,000
12,000 UAL Corp.*................... 645,000
-------------
2,456,000
-------------
APPAREL & FOOTWEAR (2.9%)
4,000 Fila Holding SpA (ADR)
(Italy).................... 345,000
6,000 Nike, Inc. (Class B)......... 616,500
10,000 Nine West Group, Inc......... 511,250
11,000 St. John Knits, Inc.......... 490,875
10,000 Vans, Inc.*.................. 168,750
5,000 Wolverine World Wide, Inc.... 162,500
-------------
2,294,875
-------------
AUTO RELATED (2.3%)
16,400 AutoZone, Inc.*.............. 569,900
3,000 Goodyear Tire & Rubber Co.... 144,750
6,000 Harley-Davidson, Inc......... 246,750
6,300 Harman International
Industries, Inc............ 310,275
11,000 Lear Corp.*.................. 387,750
6,000 OEA, Inc..................... 225,000
-------------
1,884,425
-------------
AUTOMOTIVE (0.8%)
4,000 Chrysler Corp................ 248,000
13,000 Ford Motor Co................ 420,875
-------------
668,875
-------------
BANKS (1.2%)
7,000 BankAmerica Corp............. 530,250
4,000 First Bank System, Inc....... 232,000
2,000 NationsBank Corp............. 165,250
-------------
927,500
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
BANKS - MONEY CENTER (0.9%)
9,000 Citicorp..................... $ 743,625
-------------
BASIC CYCLICALS (1.4%)
4,700 Cytec Industries, Inc.*...... 401,850
8,600 Polymer Group, Inc.*......... 150,500
8,000 Titanium Metals Corp.*....... 207,000
10,000 Witco Corp................... 343,750
-------------
1,103,100
-------------
BEVERAGES - SOFT DRINKS (0.8%)
19,000 PepsiCo Inc.................. 672,125
-------------
BIOTECHNOLOGY (1.2%)
5,500 Amgen Inc.*.................. 295,625
5,000 Centocor, Inc.*.............. 149,375
10,000 IDEC Pharmaceuticals
Corp.*..................... 230,000
1,000 Millennium Pharmaceuticals,
Inc.*...................... 14,750
4,000 QLT Phototherapeutics,
Inc.*...................... 73,000
10,000 SangStat Medical Corp.*...... 168,750
-------------
931,500
-------------
CAPITAL GOODS (0.7%)
4,000 Lockheed Martin Corp......... 336,000
3,000 Raychem Corp................. 215,625
-------------
551,625
-------------
CHEMICALS (1.4%)
22,500 Monsanto Co.................. 731,250
8,600 Praxair, Inc................. 363,350
-------------
1,094,600
-------------
COMMUNICATIONS EQUIPMENT (6.3%)
8,000 ADC Telecommunications,
Inc*....................... 356,000
10,000 Adtran, Inc.*................ 707,500
9,000 Ascend Communications,
Inc.*...................... 505,125
8,000 Cascade Communications
Corp.*..................... 544,000
12,000 Cisco Systems, Inc.*......... 679,500
15,000 FORE Systems, Inc.*.......... 540,000
4,000 Newbridge Networks Corp.*
(Canada)................... 262,000
8,000 Pairgain Technologies,
Inc.*...................... 496,000
600 Sawtek, Inc.*................ 20,850
9,000 Tellabs, Inc.*............... 600,750
4,000 U.S. Robotics Corp.*......... 341,000
-------------
5,052,725
-------------
COMPUTER EQUIPMENT (0.4%)
9,000 Gateway 2000, Inc.*.......... 304,875
-------------
</TABLE>
147
<PAGE>
American Value
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMPUTER SERVICES (6.5%)
5,000 America Online, Inc.*........ $ 217,500
4,000 BDM International Inc.*...... 185,000
2,300 Boston Communications Group,
Inc.*...................... 37,375
18,000 Cambridge Technology
Partners, Inc.*............ 549,000
7,000 CBT Group PLC (ADR)*
(Ireland).................. 315,000
4,000 Computer Horizons Corp.*..... 157,000
2,800 Computer Sciences Corp.*..... 209,300
12,000 Dendrite International,
Inc.*...................... 411,000
10,000 DST Systems, Inc.*........... 320,000
4,000 Electronic Data Systems
Corp....................... 215,000
4,860 First Data Corp.............. 386,977
300 First USA Paymentech,
Inc.*...................... 12,000
4,000 Keane, Inc.*................. 147,500
9,000 Netscape Communications
Corp.*..................... 560,250
2,500 NOVA Corp.*.................. 84,375
700 Open Market, Inc.*........... 17,063
15,000 PsiNet, Inc.*................ 170,625
3,000 Remedy Corp.*................ 217,500
800 Renaissance Solutions,
Inc.*...................... 22,000
5,000 Reuters Holdings PLC (ADR)
(United Kingdom)........... 361,875
3,500 Security Dynamics
Technologies, Inc.*........ 287,000
8,000 Sterling Commerce, Inc.*..... 297,000
-------------
5,180,340
-------------
COMPUTER SOFTWARE (5.6%)
10,000 Baan Company NV*
(Netherlands).............. 340,000
10,000 BMC Software, Inc.*.......... 595,000
6,000 Business Objects S.A. (ADR)*
(France)................... 241,500
5,000 Computer Associates
International,
Inc........................ 356,250
6,700 Edify Corp.*................. 174,200
6,000 HNC Software, Inc............ 270,000
300 I2 Technologies, Inc.*....... 12,825
600 Mechanical Dynamics, Inc.*... 8,925
6,000 Microsoft Corp.*............. 720,000
8,000 Oracle Corp.*................ 315,000
8,000 Parametric Technology
Corp.*..................... 346,000
8,000 Peoplesoft, Inc.*............ 568,000
10,000 Rational Software Corp.*..... 537,500
400 Siebel Systems, Inc.*........ 12,000
-------------
4,497,200
-------------
CONGLOMERATES (1.1%)
4,000 General Electric Co.......... 346,000
13,950 Thermo Electron Corp......... 580,669
-------------
926,669
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
CONSUMER BUSINESS SERVICES (3.8%)
2,000 AccuStaff, Inc.*............. $ 54,500
4,000 Alternative Resources
Corp.*..................... 144,000
12,000 Apollo Group, Inc. (Class
A)*........................ 330,000
5,000 COREStaff, Inc.*............. 221,250
4,000 Culligan Water Technologies,
Inc.*...................... 152,000
14,000 ITT Educational Services,
Inc.*...................... 404,250
21,000 National Education Corp.*.... 299,250
8,000 Reynolds & Reynolds Co.
(Class A).................. 426,000
11,000 Service Corp.
International.............. 632,500
10,000 Verifone, Inc.*.............. 422,500
-------------
3,086,250
-------------
CONSUMER PRODUCTS (3.3%)
3,000 Black & Decker Corp.......... 115,875
2,000 Coca Cola Co................. 97,750
13,000 Coca-Cola Enterprises,
Inc........................ 450,125
8,000 Gillette Co.................. 499,000
10,000 Mondavi (Robert) Corp.
(The) (Class A)*........... 315,000
10,000 Panamerican Beverages, Inc.
(Class A) (Mexico)......... 447,500
9,000 Vons Companies, Inc.*........ 336,375
15,000 Whitman Corp................. 361,875
-------------
2,623,500
-------------
ENERGY (4.5%)
13,000 Baker Hughes, Inc............ 427,375
8,000 BJ Services Co.*............. 281,000
15,000 Diamond Offshore Drilling,
Inc.*...................... 858,750
4,000 Dresser Industries, Inc...... 118,000
6,000 Halliburton Co............... 333,000
6,000 Louisiana Land & Exploration
Co......................... 345,750
21,000 Reading & Bates Corp.*....... 464,625
8,000 Rowan Companies, Inc.*....... 118,000
2,000 Sonat Offshore Drilling,
Inc........................ 101,000
12,000 Tidewater, Inc............... 526,500
-------------
3,574,000
-------------
ENTERTAINMENT & LEISURE TIME (4.4%)
5,000 Bally Entertainment Corp.*... 137,500
14,000 Cannondale Corp.*............ 276,500
2,000 Hilton Hotels Corp........... 225,000
12,000 International Game
Technology................. 202,500
14,000 ITT Corp.*................... 927,500
15,000 MGM Grand, Inc.*............. 598,125
11,000 Mirage Resorts, Inc.*........ 594,000
700 Premier Parks, Inc.*......... 15,050
19,000 Showboat, Inc................ 572,375
-------------
3,548,550
-------------
FINANCIAL - MISCELLANEOUS (1.9%)
8,000 Associates First Capital
Corp.*..................... 301,000
7,000 First USA, Inc............... 385,000
8,000 Household International,
Inc........................ 608,000
4,000 Morgan Stanley Group, Inc.... 196,500
-------------
1,490,500
-------------
</TABLE>
148
<PAGE>
American Value
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
HEALTHCARE PRODUCTS & SERVICES (3.6%)
8,000 HBO & Co..................... $ 540,000
10,500 Health Management Associates,
Inc. (Class A)*............ 212,625
5,000 Healthsouth Corp.*........... 180,000
6,000 HPR Inc.*.................... 123,000
1,000 Medic Computer Systems,
Inc.*...................... 81,000
15,000 PhyCor, Inc.*................ 566,250
7,000 Renal Treatment Centers,
Inc.*...................... 201,250
12,000 RoTech Medical Corp.*........ 231,000
7,000 Shared Medical Systems
Corp....................... 449,750
2,000 Sunrise Assisted Living,
Inc.*...................... 48,000
8,000 Vivra, Inc.*................. 263,000
-------------
2,895,875
-------------
INSURANCE (2.1%)
9,500 Allstate Corp................ 433,437
10,000 Conseco Inc.................. 400,000
5,000 Exel Ltd. (Bermuda).......... 352,500
9,000 SunAmerica, Inc.............. 508,500
-------------
1,694,437
-------------
MEDIA (4.6%)
8,000 Argyle Television, Inc.
(Class A)*................. 196,000
8,400 Clear Channel Communications,
Inc.*...................... 691,950
9,000 Emmis Broadcasting Corp.
(Class A)*................. 445,500
10,000 Evergreen Media Corp.
(Class A)*................. 422,500
7,500 General Motors Corp.
(Class H).................. 450,938
25,000 Heftel Broadcasting Corp.
(Class A)*................. 731,250
16,000 Infinity Broadcasting Corp.
(Class A)*................. 480,000
8,000 Renaissance Communications
Corp.*..................... 258,000
-------------
3,676,138
-------------
MEDICAL PRODUCTS & SUPPLIES (1.7%)
900 Arterial Vascular
Engineering, Inc.*......... 32,175
2,000 Becton, Dickinson & Co....... 160,500
8,000 Guidant Corp................. 394,000
7,600 Heartport, Inc.*............. 228,000
8,000 Martek Biosciences Corp.*.... 234,000
4,000 Spine-Tech, Inc.*............ 113,000
5,500 Target Therapeutics, Inc.*... 224,125
-------------
1,385,800
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
OIL DRILLING & SERVICES (1.9%)
20,000 Global Marine, Inc.*......... $ 277,500
22,000 Marine Drilling Company,
Inc.*...................... 220,000
12,000 Smith International, Inc.*... 361,500
11,000 Western Atlas, Inc.*......... 640,750
-------------
1,499,750
-------------
OIL INTEGRATED - INTERNATIONAL (0.2%)
2,000 Chesapeake Energy Corp.*..... 179,750
-------------
OIL WELL - MACHINERY (0.6%)
6,000 Schlumberger, Ltd............ 505,500
-------------
PHARMACEUTICALS (2.9%)
10,000 American Home Products
Corp....................... 601,250
10,000 Biochem Pharma, Inc.*........ 373,750
7,200 Johnson & Johnson............ 356,400
4,000 Lilly (Eli) & Co............. 260,000
10,000 Pfizer, Inc.................. 713,750
-------------
2,305,150
-------------
RESTAURANTS (0.4%)
3,000 Landry's Seafood Restaurants,
Inc.*...................... 72,000
1,000 Planet Hollywood
International, Inc. (Class
A)*........................ 26,875
7,000 Starbucks Corp.*............. 196,875
-------------
295,750
-------------
RETAIL (5.7%)
2,000 Dayton-Hudson Corp........... 206,250
10,000 Federated Department Stores,
Inc.*...................... 341,250
7,000 Gadzooks, Inc.*.............. 223,125
8,500 Gucci Group NV (Italy)....... 548,250
9,000 Kohl's Corp.*................ 329,625
6,000 Luxottica Group SpA (ADR)
(Italy).................... 440,250
11,000 Oakley, Inc.*................ 500,500
8,000 Pacific Sunwear of
California, Inc.*.......... 188,000
8,000 PetSmart, Inc.*.............. 378,000
9,000 Quiksilver, Inc.*............ 270,000
8,000 Sears, Roebuck & Co.......... 389,000
6,000 Tiffany & Co................. 438,000
14,000 Williams-Sonoma Inc.*........ 329,000
-------------
4,581,250
-------------
RETAIL - FOOD CHAINS (0.6%)
5,000 American Stores Co........... 206,250
9,000 Safeway, Inc.*............... 297,000
-------------
503,250
-------------
RETAIL - SPECIALTY (1.3%)
14,000 Home Depot, Inc.............. 756,000
15,200 Price/Costco, Inc.*.......... 324,900
-------------
1,080,900
-------------
SEMICONDUCTORS (0.2%)
3,000 Actel Corp.*................. 55,125
1,000 Intel Corp................... 73,375
-------------
128,500
-------------
</TABLE>
149
<PAGE>
American Value
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
SOAP & HOUSEHOLD PRODUCTS (3.0%)
8,000 Avon Products, Inc........... $ 361,000
6,000 Clorox Co.................... 531,750
10,000 Kimberly-Clark Corp.......... 772,500
8,000 Procter & Gamble Co.......... 725,000
-------------
2,390,250
-------------
TELECOMMUNICATIONS (1.7%)
6,000 Globalstar Telecommunications
Ltd.* (Bermuda)............ 258,000
16,000 MFS Communications Company,
Inc.*...................... 600,000
3,000 Omnipoint Corp.*............. 78,000
1,000 Premiere Technologies,
Inc.*...................... 30,750
7,900 WorldCom, Inc.*.............. 436,475
-------------
1,403,225
-------------
TEXTILES (0.6%)
2,000 Designer Holdings Ltd.*...... 53,250
9,000 Jones Apparel Group, Inc.*... 442,125
-------------
495,375
-------------
TOBACCO (0.6%)
5,000 Philip Morris Companies,
Inc........................ 520,000
-------------
TOTAL COMMON STOCKS
(IDENTIFIED COST
$65,665,163)............... 70,817,621
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS) VALUE
- ----------- -------------
<C> <S> <C>
U.S. GOVERNMENT OBLIGATION (2.5%)
2,300 U.S. Treasury Bond 6.00% due
02/15/26 (Identified Cost
$1,999,109)................ $ 2,040,172
-------------
SHORT-TERM INVESTMENTS (9.8%)
U.S. GOVERNMENT AGENCIES (a) (9.0%)
7,230 Federal Home Loan Mortgage
Corp. 5.25% - 5.52% due
07/01/96................... 7,230,000
-------------
REPURCHASE AGREEMENT (0.8%)
627 The Bank of New York 5.125%
due 07/01/96 (dated
06/28/96; proceeds
$627,412; collateralized by
$636,946 U.S. Treasury Note
5.25% due 07/31/98 valued
at $639,687) (Identified
Cost $627,144)............. 627,144
-------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST
$7,857,144)................ 7,857,144
-------------
TOTAL INVESTMENTS (IDENTIFIED
COST $75,521,416) (B)....... 100.6% 80,714,937
LIABILITIES IN EXCESS OF OTHER
ASSETS...................... (0.6) (479,657)
---------- -------------
NET ASSETS.................... 100.0% $ 80,235,280
---------- -------------
---------- -------------
<FN>
- ----------------
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(A) SECURITIES WERE PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATES SHOWN
HAVE BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED
COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION WAS $6,956,800 AND THE
AGGREGATE GROSS UNREALIZED DEPRECIATION WAS $1,763,279, RESULTING IN NET
UNREALIZED APPRECIATION OF $5,193,521.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
150
<PAGE>
Global Equity
Portfolio of Investments JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMMON AND PREFERRED STOCKS (91.3%)
ARGENTINA (1.0%)
AUTOMOTIVE
8,000 Ciadea S.A.*................. $ 56,826
-------------
BANKING
2,508 Bansud S.A.*................. 29,608
-------------
BREWERY
3,900 Quilmes Industrial S.A.
(ADR)...................... 39,975
-------------
ENERGY
10,000 Perez Companc S.A. (Class
B)......................... 66,280
3,500 Yacimentos Petroliferos
Fiscales S.A. (ADR)........ 78,750
-------------
145,030
-------------
STEEL
4,500 Siderar S.A. (A Shares)
(ADR)* - 144A**............ 92,812
-------------
TELECOMMUNICATIONS
800 Telefonica de Argentina S.A.
(ADR)...................... 23,700
-------------
TOTAL ARGENTINA.............. 387,951
-------------
AUSTRALIA (0.9%)
BUSINESS SERVICES
22,000 Mayne Nickless Ltd........... 128,676
-------------
ENERGY
4,300 Broken Hill Proprietary Co.
Ltd........................ 59,474
-------------
METALS & MINING
60,000 M.I.M. Holdings Ltd.......... 77,539
40,000 Pasminco Ltd................. 56,364
-------------
133,903
-------------
RETAIL
20,488 Woolworth's Ltd.............. 49,513
-------------
TOTAL AUSTRALIA.............. 371,566
-------------
AUSTRIA (0.0%)
ENERGY
110 OMV AG....................... 11,129
-------------
BELGIUM (0.2%)
RETAIL
1,500 G.I.B. Holdings Ltd.......... 67,268
-------------
BRAZIL (1.9%)
APPLIANCES & HOUSEHOLD DURABLES
5,500 Refrigeracao Parana S.A.
(ADR)*..................... 66,715
-------------
FOREST PRODUCTS, PAPER & PACKAGING
7,000 Aracruz Celulose S.A.
(ADR)...................... 66,500
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
STEEL & IRON
6,000 Usinas Siderurgicas de Minas
Gerais S.A. (ADR).......... $ 64,500
-------------
SUPERMARKETS
5,000 Companhia Brasileiras de
Distribuicao (ADR)* -
144A**..................... 81,250
-------------
TELECOMMUNICATIONS
5,600 Telecomunicacoes Brasileiras
S.A. (ADR)................. 389,900
-------------
UTILITIES - ELECTRIC
4,050 Companhia Energetica de Minas
Gerais S.A. (ADR) -
144A**..................... 114,412
-------------
TOTAL BRAZIL................. 783,277
-------------
CANADA (0.3%)
ENERGY
1,500 Suncor, Inc.................. 47,411
-------------
METALS & MINING
3,200 Barrick Gold Corp............ 86,947
-------------
TOTAL CANADA................. 134,358
-------------
CHILE (0.8%)
BANKS
1,000 Banco BHIF (ADR)*............ 20,125
2,000 Banco de A. Edwards (Series
A)
(ADR)...................... 42,000
-------------
62,125
-------------
BEVERAGES - SOFT DRINKS
1,500 Embotelladora Andina S.A.
(ADR)...................... 55,125
-------------
FOREST PRODUCTS, PAPER & PACKAGING
3,000 Cristalerias de Chile
(ADR)...................... 70,500
-------------
TELECOMMUNICATIONS
900 Compania de
Telecommunicaciones de
Chile S.A. (ADR)........... 88,312
-------------
UTILITIES - ELECTRIC
2,000 Enersis S.A. (ADR)........... 62,000
-------------
TOTAL CHILE.................. 338,062
-------------
DENMARK (0.2%)
TRANSPORTATION
800 Kobenhavns Lufthavne AS...... 79,033
-------------
FINLAND (0.2%)
MANUFACTURING
3,000 Valmet Corp. (ADR)........... 99,000
-------------
FRANCE (2.1%)
APPAREL
300 Hermes International......... 79,193
-------------
</TABLE>
151
<PAGE>
Global Equity
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
BANKING
300 Societe Generale............. $ 32,958
-------------
BROADCAST MEDIA
500 Societe Television Francaise
1.......................... 57,065
-------------
BUILDING MATERIALS
300 Compagnie de Saint-Gobain.... 40,120
500 IMETAL....................... 70,846
-------------
110,966
-------------
BUSINESS & PUBLIC SERVICES
200 Compagnie Generale des
Eaux....................... 22,321
-------------
FINANCIAL SERVICES
350 Cetelem Group................ 78,600
-------------
FOODS & BEVERAGES
260 LVMH Moet-Hennessy Louis
Vuitton.................... 61,619
1,500 SEITA........................ 68,711
-------------
130,330
-------------
INSURANCE
700 Scor S.A..................... 27,242
-------------
PHARMACEUTICALS
1,050 Sanofi S.A................... 78,628
-------------
RETAIL
135 Carrefour Supermarche........ 75,571
400 Castorama Dubois
Investissement............. 78,727
300 Promodes..................... 86,413
-------------
240,711
-------------
TOTAL FRANCE................. 858,014
-------------
GERMANY (1.5%)
APPAREL
1,200 Adidas AG.................... 100,715
1,000 Puma AG*..................... 35,862
-------------
136,577
-------------
AUTOMOTIVE
120 Bayerische Motoren Werke
(BMW) AG................... 69,493
200 Volkswagen AG................ 74,218
-------------
143,711
-------------
BUSINESS SERVICES
600 SAP AG (Pref.)............... 88,864
-------------
CHEMICALS
2,400 Bayer AG..................... 84,651
-------------
ELECTRICAL EQUIPMENT
1,200 Siemens AG................... 64,020
-------------
PHARMACEUTICALS
100 Gehe AG...................... 68,902
-------------
TOTAL GERMANY................ 586,725
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
HONG KONG (4.6%)
BANKING
10,000 Guoco Group Ltd.............. $ 47,673
6,000 Hang Seng Bank Ltd........... 60,464
13,670 HSBC Holdings PLC............ 206,634
-------------
314,771
-------------
BUILDING & CONSTRUCTION
32,000 New World Infrastructure
Ltd.*...................... 68,215
-------------
BUSINESS SERVICES
124,000 First Pacific Co. Ltd........ 190,641
-------------
CONGLOMERATES
40,000 Hutchison Whampoa, Ltd....... 251,673
20,600 Jardine Matheson Holdings
Ltd........................ 151,410
19,500 Swire Pacific Ltd. (Class
A)......................... 166,905
33,000 Wheelock & Company, Ltd...... 65,231
-------------
635,219
-------------
ELECTRONICS
24,000 Gold Peak Industries
(Holdings) Ltd............. 13,566
-------------
HOTELS
14,000 Harbour Centre Development... 18,992
-------------
REAL ESTATE
33,000 Cheung Kong (Holdings)
Ltd........................ 237,688
11,000 New World Development Co.
Ltd........................ 51,019
44,000 Shangri-La Asia Ltd.......... 61,678
11,000 Sun Hung Kai Properties
Ltd........................ 111,205
-------------
461,590
-------------
TRANSPORTATION
7,500 The Guangshen Railway Co.,
Ltd. (ADR)*................ 143,437
-------------
TOTAL HONG KONG.............. 1,846,431
-------------
INDIA (0.2%)
BUILDING & CONSTRUCTION
2,000 Larsen & Toubro Ltd. (GDR)... 37,500
-------------
METALS & MINING
1,000 Hindalco Industries Ltd.
(GDR)* - 144A**............ 38,000
-------------
TOTAL INDIA.................. 75,500
-------------
INDONESIA (0.2%)
TELECOMMUNICATIONS
3,000 PT Indosat (ADR)............. 100,500
-------------
ITALY (0.8%)
CONSUMER PRODUCTS
1,000 De Rigo SpA (ADR)*........... 22,875
-------------
ENERGY
2,500 Ente Nazionale Idrocarburi
SpA (ADR).................. 125,000
-------------
</TABLE>
152
<PAGE>
Global Equity
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
TELECOMMUNICATIONS
40,000 Telecom Italia Mobile SpA.... $ 89,309
40,000 Telecom Italia SpA........... 85,919
-------------
175,228
-------------
TOTAL ITALY.................. 323,103
-------------
JAPAN (34.6%)
APPAREL
1,000 Maruco Co., Ltd.............. 89,798
-------------
APPLIANCES & HOUSEHOLD DURABLES
2,000 Enix Corp.................... 62,540
-------------
AUTO PARTS
1,000 Autobacs Seven Co............ 96,636
-------------
AUTOMOTIVE
33,000 Mitsubishi Motors Corp....... 288,814
11,000 Suzuki Motor Co. Ltd......... 144,407
-------------
433,221
-------------
BANKING
29,000 Asahi Bank, Ltd.............. 335,764
17,000 Sanwa Bank, Ltd.............. 314,614
15,000 Sumitomo Bank................ 289,908
10,000 Sumitomo Trust & Banking..... 136,749
-------------
1,077,035
-------------
BREWERY
5,000 Kirin Brewery Co., Ltd....... 61,081
-------------
BUILDING & CONSTRUCTION
1,000 Mitsui Home Co., Ltd......... 16,228
30,000 Nishimatsu Construction
Co......................... 328,198
25,000 Sekisui House Ltd............ 284,894
-------------
629,320
-------------
BUILDING MATERIALS
6,000 Tostem Corp.................. 176,680
-------------
BUSINESS SERVICES
1,000 Chuo Warehouse Co............ 13,128
14,000 Dai Nippon Printing Co.
Ltd........................ 270,581
5,000 Secom Co..................... 330,021
-------------
613,730
-------------
CHEMICALS
43,000 Asahi Chemical Industry Co.
Ltd........................ 306,555
23,000 Kaneka Corp.................. 154,535
23,000 Nippon Shokubai K.K. Co...... 222,263
2,100 Shin-Etsu Chemical Co........ 40,204
-------------
723,557
-------------
COMPUTER SERVICES
1,000 Daiwabo Information Systems
Co......................... 24,615
-------------
COMPUTER SOFTWARE
4,000 Square Co. Ltd............... 234,479
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
CONSUMER PRODUCTS
18,000 Kao Corp..................... $ 242,866
-------------
ELECTRONICS
1,000 Alpine Electronics Inc....... 18,689
18,000 Canon, Inc................... 374,145
12,000 Matsushita Electric
Industrial
Co. Ltd.................... 223,174
1,100 Mitsui High-Tec.............. 25,672
10,000 NEC Corp..................... 108,488
5,000 Nissin Electric.............. 41,572
2,000 Nitto Denko Corp............. 35,190
4,000 Sony Corp.................... 262,923
-------------
1,089,853
-------------
ELECTRONICS - SEMICONDUCTORS/COMPONENTS
2,000 Kyocera Corp................. 141,307
6,000 Rohm Co., Ltd................ 396,025
10,000 Ryoyo Electro Corp........... 215,152
-------------
752,484
-------------
ENGINEERING & CONSTRUCTION
8,000 Kajima Corp.................. 82,414
-------------
FINANCIAL SERVICES
28,000 New Japan Securities Co.,
Ltd.*...................... 170,262
11,000 Nomura Securities Co. Ltd.... 214,605
7,000 Orix Corp.................... 259,094
3,000 Promise Co., Ltd............. 147,689
-------------
791,650
-------------
FOODS
1,100 Stamina Foods................ 10,530
-------------
FOREST PRODUCTS, PAPER & PACKAGING
2,000 Daishowa Paper Manufacturing
Co. Ltd.*.................. 15,407
-------------
FURNITURE
4,000 Itoki Crebio Corp............ 36,138
-------------
INSURANCE
17,000 Dai-Tokyo Fire & Marine
Insurance Co. Ltd.......... 127,860
24,000 Tokio Marine & Fire Insurance
Co......................... 319,446
-------------
447,306
-------------
INTERNATIONAL TRADE
5,000 Mitsubishi Corp.............. 65,639
42,000 Mitsui & Co.................. 380,217
-------------
445,856
-------------
LEISURE
3,000 Nintendo Corp., Ltd.......... 223,174
-------------
MACHINE TOOLS
25,480 Asahi Diamond Industries Co.
Ltd........................ 332,176
-------------
</TABLE>
153
<PAGE>
Global Equity
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
MACHINERY
2,000 Aichi Corp................... $ 21,515
5,000 Daifuku Co. Ltd.............. 76,579
6,000 Daikin Industries Ltd........ 65,639
29,000 Komatsu Ltd.................. 285,532
2,000 Mabuchi Motor Co............. 127,268
15,000 Minebea Co., Ltd............. 125,946
39,000 Mitsubishi Heavy Industries,
Ltd........................ 338,837
4,000 Nippon Thompson Co........... 34,461
2,200 Nitto Electric Works......... 36,302
7,000 NSK Ltd...................... 52,904
-------------
1,164,983
-------------
MANUFACTURING
2,000 Bridgestone Metalpha Corp.... 28,626
32,000 Hitachi Cable................ 267,809
5,000 Nippon Electric Glass Co.,
Ltd........................ 85,240
-------------
381,675
-------------
METALS & MINING
72,000 Nippon Steel Co.............. 246,805
-------------
NATURAL GAS
11,000 Osaka Gas Co................. 40,213
-------------
PHARMACEUTICALS
19,600 Eisai Co. Ltd................ 369,879
4,000 Terumo....................... 50,688
-------------
420,567
-------------
REAL ESTATE
4,000 Cesar Co..................... 39,748
2,000 Chubu Sekiwa Real Estate,
Ltd........................ 32,273
8,000 Mitsui Fudosan Co............ 107,941
34,000 Sumitomo Realty &
Development................ 268,739
-------------
448,701
-------------
RESTAURANTS
15 Yoshinoya D & C Company
Ltd........................ 202,389
-------------
RETAIL
3,000 Aoyama Trading Co., Ltd...... 78,494
2,000 Circle K Japan Co. Ltd....... 103,565
1,000 Honma Golf Co. Ltd........... 28,535
15,000 Izumiya Co. Ltd.............. 300,848
7,000 Jusco Co..................... 229,100
1,000 Sundrug Co., Ltd............. 44,124
-------------
784,666
-------------
STEEL & IRON
113,000 NKK Corp.*................... 342,018
-------------
TELECOMMUNICATIONS
40 DDI Corp..................... 348,619
9 Nippon Telegraph &
Telephone.................. 66,624
-------------
415,243
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
TEXTILES - APPAREL
13,000 Kuraray Co. Ltd.............. $ 145,774
4,000 Tokyo Style.................. 69,651
-------------
215,425
-------------
TRANSPORTATION
12 East Japan Railway Co........ 62,905
33,000 Nippon Yusen Kabushiki
Kaish...................... 190,738
27,000 Yamato Transport Co. Ltd..... 317,531
-------------
571,174
-------------
TOTAL JAPAN.................. 13,926,405
-------------
MALAYSIA (2.8%)
BANKING
52,000 DCB Holdings Berhad.......... 178,268
14,000 Malayan Banking Berhad....... 134,723
17,000 Public Bank Berhad........... 47,033
-------------
360,024
-------------
BUILDING & CONSTRUCTION
32,000 United Engineers Malaysia
Berhad..................... 221,973
-------------
ENTERTAINMENT
10,000 Genting Berhad............... 78,188
-------------
LEISURE
10,000 Berjaya Sports Toto Berhad... 33,079
-------------
MACHINERY
12,000 UMW Holdings Berhad.......... 42,823
-------------
NATURAL GAS
20,000 Petronas Gas Berhad.......... 85,806
-------------
REAL ESTATE
10,000 Land & General Berhad........ 24,659
-------------
TELECOMMUNICATIONS
44,000 Technology Resources
Industries Berhad*......... 153,488
3,000 Telekom Malaysia Berhad...... 26,704
-------------
180,192
-------------
TOBACCO
15,000 RJ Reynolds Berhad........... 44,206
-------------
UTILITIES - ELECTRIC
15,000 Tenaga Nasional Berhad....... 63,152
-------------
TOTAL MALAYSIA............... 1,134,102
-------------
MEXICO (1.8%)
AUTOMOTIVE
9,000 Sanluis Corporacion S.A. de
C.V........................ 55,078
-------------
BANKING
15,000 Grupo Financiero Banamex
Accival S.A. de C.V. (B
Shares)*................... 31,258
450 Grupo Financiero Banamex
Accival S.A. de C.V.
(Series L)*................ 854
70,000 Grupo Financiero Bancomer
S.A. de C.V. (B Shares)*... 30,467
-------------
62,579
-------------
</TABLE>
154
<PAGE>
Global Equity
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
BUILDING & CONSTRUCTION
16,000 Corporacion GEO S.A. de C.V.
(Series B)*................ $ 71,327
4,000 Empresas ICA Sociedad
Controladora S.A. de C.V.
(ADR)*..................... 55,500
-------------
126,827
-------------
BUILDING MATERIALS
16,000 Apasco S.A. de C.V........... 87,998
600 Cemex S.A. de C.V. (B
Shares).................... 2,366
50,000 Grupo Cementos de Chihuahua
S.A. de C.V. (B Shares).... 51,306
-------------
141,670
-------------
CONGLOMERATES
34,573 Grupo Industria Alfa S.A. de
C.V. (A Shares)............ 155,492
-------------
MANUFACTURING
4,000 Elamax S.A. de C.V.*......... 39,000
-------------
METALS & MINING
8,000 Industrias Penoles S.A....... 36,613
6,100 Tubos de Acero de Mexico S.A.
de C.V. (ADR)*............. 57,569
-------------
94,182
-------------
TRANSPORTATION
4,500 Transportacion Maritima
Mexicana S.A. de C.V.
(Series L) (ADR)........... 33,187
-------------
TOTAL MEXICO................. 708,015
-------------
NETHERLANDS (2.3%)
BANKING
1,600 ABN-AMRO Holding NV.......... 85,773
-------------
BUILDING MATERIALS
800 Hunter Douglas NV............ 54,544
-------------
BUSINESS & PUBLIC SERVICES
1,500 Randstad Holdings NV......... 110,610
-------------
FURNITURE
2,000 Ahrend Groep NV.............. 90,478
-------------
INSURANCE
2,000 Aegon NV..................... 92,000
3,000 ING Groep NV................. 89,366
-------------
181,366
-------------
PUBLISHING
5,800 Elsevier NV.................. 87,915
5,000 Ver Ned Uitgev Ver Bezit
NV......................... 77,544
600 Wegener NV................... 63,522
600 Wolters Kluwer NV............ 68,087
-------------
297,068
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
RETAIL
2,000 Koninklijke Ahold NV......... $ 108,270
-------------
TOTAL NETHERLANDS............ 928,109
-------------
NORWAY (0.3%)
INSURANCE
24,500 UNI Storebrand AS (A
Shares)*................... 110,023
-------------
PANAMA (0.3%)
BANKING
2,000 Banco Latinoamericano de
Exportaciones S.A. (E
Shares).................... 112,500
-------------
PERU (0.4%)
METALS & MINING
7,500 Companhia de Minas
Buenaventura S.A. (ADR)*... 149,062
-------------
PHILIPPINES (0.1%)
TELECOMMUNICATIONS
900 Philippine Long Distance
Telephone Co. (ADR)........ 52,312
-------------
PORTUGAL (0.3%)
TELECOMMUNICATIONS
4,000 Portugal Telecom S.A.
(ADR)...................... 105,000
-------------
SINGAPORE (1.7%)
BANKING
8,500 Development Bank of
Singapore, Ltd............. 106,062
20,000 Overseas Union Bank, Ltd..... 137,540
5,000 United Overseas Bank, Ltd.... 47,855
-------------
291,457
-------------
BEVERAGES - SOFT DRINKS
4,800 Fraser & Neave Ltd........... 49,684
-------------
MACHINERY - DIVERSIFIED
7,000 Keppel Corp., Ltd............ 58,561
-------------
PUBLISHING
4,000 Singapore Press Holdings
Ltd........................ 78,554
-------------
REAL ESTATE
25,000 DBS Land Ltd................. 85,785
14,000 Singapore Land Ltd........... 94,789
-------------
180,574
-------------
TRANSPORTATION
4,000 Singapore Airlines Ltd....... 42,255
-------------
TOTAL SINGAPORE.............. 701,085
-------------
SOUTH AFRICA (0.1%)
BREWERY
500 South African Breweries Ltd.
(ADR)...................... 14,688
-------------
</TABLE>
155
<PAGE>
Global Equity
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
CONGLOMERATES
2,000 Barlow Ltd. (ADR)............ $ 20,800
-------------
TOTAL SOUTH AFRICA........... 35,488
-------------
SOUTH KOREA (0.1%)
UTILITIES - ELECTRIC
1,500 Korea Electric Power Corp.
(ADR)...................... 36,375
-------------
SPAIN (1.4%)
BANKS
1,600 Banco Bilbao Vizcaya......... 64,774
400 Banco Popular Espanol S.A.... 71,264
-------------
136,038
-------------
FINANCIAL SERVICES
1,000 Corporacion Financiera
Alba....................... 83,151
-------------
NATURAL GAS
500 Gas Natural SDG S.A. (Series
E)......................... 104,914
-------------
TELECOMMUNICATIONS
1,800 Telefonica de Espana S.A.
(ADR)...................... 99,225
-------------
UTILITIES - ELECTRIC
1,000 Empresa Nacional de
Electricidad S.A........... 62,324
7,000 Iberdrola S.A................ 71,802
-------------
134,126
-------------
TOTAL SPAIN.................. 557,454
-------------
SWEDEN (1.9%)
AUTOMOTIVE
4,000 Volvo AB (B Shares).......... 90,912
-------------
BUSINESS SERVICES
4,000 Scribona AB (Series "B"
Free)...................... 41,843
6,000 Securitas AB (Series "B"
Free)...................... 125,530
-------------
167,373
-------------
MACHINERY
4,300 Kalmar Industries AB......... 90,611
-------------
MEDICAL SUPPLIES
5,200 Getinge Industrier AB (B
Shares).................... 97,836
-------------
PHARMACEUTICALS
3,000 Astra AB (Series "A" Free)... 132,304
-------------
RETAIL
1,200 Hennes & Mauritz AB (B
Shares).................... 111,081
-------------
TELECOMMUNICATION EQUIPMENT
3,200 Ericsson (L.M.) Telephone Co.
AB (Series "B" Free)....... 68,876
-------------
TOTAL SWEDEN................. 758,993
-------------
SWITZERLAND (0.8%)
CONGLOMERATES
40 ABB AG - Bearer.............. 49,418
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
PHARMACEUTICALS
60 Ciba-Geigy AG................ $ 73,025
10 Roche Holdings AG............ 76,177
110 Sandoz AG (Series B)......... 124,924
-------------
274,126
-------------
TOTAL SWITZERLAND............ 323,544
-------------
UNITED KINGDOM (5.4%)
AEROSPACE & DEFENSE
4,815 British Aerospace PLC........ 72,711
30,000 Rolls-Royce PLC.............. 103,829
3,600 Smiths Industries PLC........ 39,390
-------------
215,930
-------------
AUTO PARTS
8,646 BBA Group PLC................ 41,309
-------------
BANKING
17,000 Lloyds TSB Group PLC......... 83,110
4,868 National Westminster Bank
PLC........................ 46,388
-------------
129,498
-------------
BREWERY
3,300 Bass PLC..................... 41,331
9,100 Guinness PLC................. 66,238
-------------
107,569
-------------
BROADCAST MEDIA
10,000 British Sky Broadcasting
Group
PLC........................ 68,288
6,300 Flextech PLC*................ 49,084
8,500 General Cable PLC*........... 25,724
-------------
143,096
-------------
BUILDING & CONSTRUCTION
10,267 Blue Circle Industries PLC... 57,364
-------------
BUSINESS SERVICES
8,400 Reuters Holdings PLC......... 101,557
-------------
CHEMICALS
16,000 Albright & Wilson PLC........ 44,201
-------------
CONGLOMERATES
3,600 BTR PLC...................... 14,136
-------------
CONSUMER PRODUCTS
3,400 Vendome Luxury Group PLC
(Units)++.................. 31,555
-------------
ENERGY
22,237 British Petroleum Co. PLC.... 194,992
8,000 Shell Transport & Trading
Co. PLC.................... 117,207
-------------
312,199
-------------
FOODS
6,200 Associated British Foods
PLC........................ 37,239
-------------
</TABLE>
156
<PAGE>
Global Equity
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
INSURANCE
2,440 General Accident PLC......... $ 24,634
14,493 Prudential Corp. PLC......... 91,322
6,700 Royal Insurance Holdings
PLC........................ 41,386
-------------
157,342
-------------
LEISURE
6,542 Granada Group PLC............ 87,317
7,572 Tomkins PLC.................. 28,439
-------------
115,756
-------------
MANUFACTURING
2,500 IMI PLC...................... 13,735
-------------
NATURAL GAS
13,000 British Gas PLC.............. 36,115
-------------
PHARMACEUTICALS
8,212 Glaxo Wellcome PLC........... 110,499
9,603 Medeva PLC................... 37,558
-------------
148,057
-------------
RETAIL
5,036 Boots Co. PLC................ 45,176
7,500 Next PLC..................... 65,533
-------------
110,709
-------------
TELECOMMUNICATIONS
17,600 British Telecommunications
PLC........................ 94,511
15,724 Securicor Group PLC (Class
A)......................... 63,813
15,000 Vodafone Group PLC........... 55,872
-------------
214,196
-------------
TRANSPORTATION
8,520 British Airways PLC.......... 73,123
-------------
UTILITIES
2,745 Thames Water PLC............. 23,985
4,000 Yorkshire Water PLC.......... 40,973
-------------
64,958
-------------
TOTAL UNITED KINGDOM......... 2,169,644
-------------
UNITED STATES (22.0%)
AEROSPACE
3,200 Boeing Co.................... 278,800
-------------
AIRLINES
4,700 UAL Corp.*................... 252,625
-------------
AUTOMOTIVE
4,800 General Motors Corp.......... 251,400
-------------
BEVERAGES - SOFT DRINKS
6,600 PepsiCo Inc.................. 233,475
-------------
BROKERAGE
3,650 Merrill Lynch & Co., Inc..... 237,706
-------------
CHEMICALS
3,600 Dow Chemical Co.............. 273,600
9,500 Monsanto Co.................. 308,750
7,500 Praxair, Inc................. 316,875
-------------
899,225
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMPUTERS - PERIPHERAL EQUIPMENT
5,000 Seagate Technology, Inc.*.... $ 225,000
15,300 Teradyne, Inc.*.............. 263,925
-------------
488,925
-------------
COMPUTERS - SYSTEMS
2,800 Hewlett-Packard Co........... 278,950
4,700 Sun Microsystems, Inc.*...... 276,125
-------------
555,075
-------------
ELECTRICAL EQUIPMENT
5,200 Honeywell, Inc............... 283,400
-------------
ELECTRONICS - SEMICONDUCTORS/COMPONENTS
5,400 Texas Instruments Inc........ 269,325
-------------
ENTERTAINMENT
9,000 Carnival Corp. (Class A)..... 259,875
-------------
FINANCIAL - MISCELLANEOUS
7,600 Federal National Mortgage
Assoc...................... 254,600
4,300 Golden West Financial
Corp....................... 240,800
-------------
495,400
-------------
FOODS
3,800 General Mills, Inc........... 207,100
-------------
HOUSEHOLD PRODUCTS
2,700 Colgate-Palmolive Co......... 228,825
-------------
MEDICAL PRODUCTS & SUPPLIES
3,900 Medtronic, Inc............... 218,400
-------------
NATURAL GAS
10,100 Pacific Enterprises.......... 299,212
-------------
OIL INTEGRATED - INTERNATIONAL
4,600 Chevron Corp................. 271,400
3,200 Exxon Corp................... 278,000
2,400 Mobil Corp................... 269,100
-------------
818,500
-------------
PHARMACEUTICALS
4,000 American Home Products
Corp....................... 240,500
4,400 Johnson & Johnson............ 217,800
-------------
458,300
-------------
RESTAURANTS
5,500 McDonald's Corp.............. 257,125
-------------
RETAIL - SPECIALTY
13,200 Price/Costco, Inc.*.......... 282,150
-------------
RETAIL - SPECIALTY APPAREL
7,900 Gap, Inc..................... 253,788
-------------
SEMICONDUCTORS
3,900 Intel Corp................... 286,163
-------------
</TABLE>
157
<PAGE>
Global Equity
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
SHOES
<C> <S> <C>
2,700 Nike, Inc. (Class B)........ $ 277,425
-------------
TOBACCO
2,200 Philip Morris Companies,
Inc....................... 228,800
-------------
TRANSPORTATION
3,800 Conrail, Inc................ 252,225
-------------
UTILITIES - ELECTRIC
9,000 CINergy Corp................ 288,000
-------------
TOTAL UNITED STATES......... 8,861,244
-------------
VENEZUELA (0.1%)
STEEL & IRON
10,000 Siderurgica Venezolana
Sivens S.A. de C.V. (ADR)
-- 144A**................. 31,000
-------------
TOTAL COMMON AND PREFERRED
STOCKS (IDENTIFIED COST
$34,682,827).............. 36,762,272
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS) VALUE
- ----------- -------------
SHORT-TERM INVESTMENTS (10.3%)
<C> <S> <C>
U.S. GOVERNMENT AGENCY (a) (6.2%)
$2,500 Federal Home Loan Mortgage
Corp. 5.25% due
07/02/96.................. $ 2,499,635
-------------
REPURCHASE AGREEMENT (4.1%)
1,627 The Bank of New York 5.125%
due 07/01/96 (dated
06/28/96; proceeds
$1,627,278; collateralized
by $1,626,530 U.S.
Treasury Note 6.00% due
08/31/97 valued at
$1,659,115) (Identified
Cost $1,626,583).......... 1,626,583
-------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST
$4,126,218)............... 4,126,218
-------------
TOTAL INVESTMENTS (IDENTIFIED
COST $38,809,045) (B)....... 101.6 % 40,888,490
LIABILITIES IN EXCESS OF OTHER
ASSETS...................... (1.6) (651,783)
---------- -------------
NET ASSETS.................... 100.0 % $ 40,236,707
---------- -------------
---------- -------------
<FN>
- ----------------
ADR AMERICAN DEPOSITORY RECEIPT.
GDR GLOBAL DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
++ CONSISTS OF ONE OR MORE CLASS OF SECURITIES TRADED TOGETHER AS A
UNIT; GENERALLY STOCKS WITH ATTACHED WARRANTS.
(A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE
SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT
YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES
IDENTIFIED COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION WAS
$2,701,427 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION WAS
$621,982, RESULTING IN NET UNREALIZED APPRECIATION OF
$2,079,445.
</TABLE>
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT JUNE 30, 1996:
<TABLE>
<CAPTION>
CONTRACTS IN
TO EXCHANGE DELIVERY UNREALIZED
RECEIVE FOR DATE DEPRECIATION
- ---------- ---------- -------- --------------
<S> <C> <C> <C>
Y 33,814,891 $ 309,377 07/02/96 $ (1,100 )
Y 3,434,538 $ 31,366 07/03/96 (54 )
L 179,899 $ 279,562 07/05/96 (360 )
-------
Total unrealized depreciation...............$(1,514)
-------
-------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
158
<PAGE>
Global Equity
Summary of Investments
JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------- ------------ -------------
<S> <C> <C>
Aerospace...................... $ 278,800 0.7%
Aerospace & Defense............ 215,930 0.5
Airlines....................... 252,625 0.6
Apparel........................ 305,568 0.8
Appliances & Household
Durables...................... 129,255 0.3
Auto Parts..................... 137,945 0.4
Automotive..................... 1,031,148 2.6
Banking........................ 2,496,203 6.2
Banks.......................... 198,163 0.5
Beverages - Soft Drinks........ 338,284 0.8
Brewery........................ 223,313 0.6
Broadcast Media................ 200,161 0.5
Brokerage...................... 237,706 0.6
Building & Construction........ 1,141,199 2.8
Building Materials............. 483,860 1.2
Business & Public Services..... 132,931 0.3
Business Services.............. 1,290,841 3.2
Chemicals...................... 1,751,634 4.4
Computer Services.............. 24,615 0.1
Computer Software.............. 234,479 0.6
Computers - Peripheral Equip-
ment.......................... 488,925 1.2
Computers - Systems............ 555,075 1.4
Conglomerates.................. 875,065 2.2
Consumer Products.............. 297,296 0.8
Electrical Equipment........... 347,420 0.9
Electronics.................... 1,103,419 2.8
Electronics - Semiconduc-
tors/Components............... 1,021,809 2.5
Energy......................... 700,243 1.7
Engineering & Construction..... 82,414 0.2
Entertainment.................. 338,063 0.8
Financial - Miscellaneous...... 495,400 1.2
Financial Services............. 953,401 2.4
Foods.......................... 254,869 0.6
Foods & Beverages.............. 130,330 0.3
Forest Products, Paper &
Packaging..................... 152,407 0.4
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------- ------------ -------------
<S> <C> <C>
Furniture...................... $ 126,616 0.3%
Hotels......................... 18,992 0.0
Household Products............. 228,825 0.6
Insurance...................... 923,279 2.3
International Trade............ 445,856 1.1
Leisure........................ 372,009 0.9
Machine Tools.................. 332,176 0.8
Machinery...................... 1,298,417 3.2
Machinery - Diversified........ 58,561 0.1
Manufacturing.................. 533,410 1.3
Medical Products & Supplies.... 218,400 0.6
Medical Supplies............... 97,836 0.2
Metals & Mining................ 748,899 1.9
Natural Gas.................... 566,260 1.4
Oil Integrated -
International................. 818,500 2.0
Pharmaceuticals................ 1,580,884 3.9
Publishing..................... 375,622 0.9
Real Estate.................... 1,115,524 2.8
Repurchase Agreement........... 1,626,583 4.1
Restaurants.................... 459,514 1.1
Retail......................... 1,472,218 3.7
Retail - Specialty............. 282,150 0.7
Retail - Specialty Apparel..... 253,788 0.6
Semiconductors................. 286,163 0.7
Shoes.......................... 277,425 0.7
Steel.......................... 92,812 0.2
Steel & Iron................... 437,518 1.1
Supermarkets................... 81,250 0.2
Telecommunication Equipment.... 68,876 0.2
Telecommunications............. 1,843,808 4.6
Textiles - Apparel............. 215,425 0.5
Tobacco........................ 273,006 0.7
Transportation................. 1,194,434 3.0
U.S. Government Agency......... 2,499,635 6.2
Utilities...................... 64,958 0.2
Utilities - Electric........... 698,065 1.7
------------ -----
$ 40,888,490 101.6%
------------ -----
------------ -----
</TABLE>
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
TYPE OF INVESTMENT VALUE NET ASSETS
- ---------------------------------------------------------------------------------------------- ------------ -------------
<S> <C> <C>
Common Stocks................................................................................. $ 36,673,408 91.1%
Preferred Stocks.............................................................................. 88,864 0.2
Short-Term Investments........................................................................ 4,126,218 10.3
------------ -----
$ 40,888,490 101.6%
------------ -----
------------ -----
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
159
<PAGE>
Developing Growth
Portfolio of Investments JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMMON STOCKS (91.7%)
AEROSPACE (0.4%)
10,000 Orbital Sciences Corp.*...... $ 162,500
-------------
BIOTECHNOLOGY (1.9%)
10,400 Creative Biomolecules,
Inc.*...................... 87,100
3,100 Genetics Institute, Inc.*.... 194,525
5,900 Genzyme Corp. General
Division*.................. 296,475
7,000 SangStat Medical Corp.*...... 118,125
2,200 Teva Pharmaceutical
Industries Ltd. (ADR)
(Israel)................... 83,325
-------------
779,550
-------------
BROADCAST MEDIA (2.4%)
5,000 American Radio Systems
Corp.*..................... 215,000
7,000 Jacor Communications, Inc.... 216,125
5,150 Lin Television Corp.*........ 182,825
10,000 Mecklermedia Corp............ 202,500
5,500 SFX Broadcasting, Inc. (Class
A)*........................ 211,750
-------------
1,028,200
-------------
BUILDING MATERIALS (0.5%)
10,050 Watsco, Inc.................. 211,050
-------------
BUSINESS EQUIPMENT (0.4%)
4,800 Checkpoint Systems, Inc.*.... 165,000
-------------
BUSINESS SERVICES (4.3%)
9,800 CFI Proservices, Inc.*....... 242,550
8,900 Compuserve Corp.*............ 186,900
6,000 Gartner Group, Inc. (Class
A)*........................ 219,750
4,000 Reynolds & Reynolds Co.
(Class A).................. 213,000
6,000 Saville Systems Ireland PLC
(ADR)* (Ireland)........... 166,500
4,200 Sykes Enterprises, Inc.*..... 206,850
9,825 TCSI Corp.................... 233,344
7,999 Transaction Network Services,
Inc.*...................... 171,978
9,200 Vanstar Corp................. 154,100
-------------
1,794,972
-------------
BUSINESS SYSTEMS (2.0%)
6,750 American Management Systems,
Inc.*...................... 197,437
10,200 Cellular Technical Services
Co.*....................... 178,500
4,600 CSG Systems International,
Inc.*...................... 116,150
7,400 DecisionOne Corp.*........... 175,750
5,950 ITI Technologies, Inc........ 194,119
-------------
861,956
-------------
CHEMICALS (0.2%)
4,550 Hanna (M.A.) Co.............. 94,981
-------------
COMMERCIAL SERVICES (6.0%)
4,850 Analysts International
Corp....................... 197,637
4,800 APAC Teleservices, Inc.*..... 170,400
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
8,100 Barnett, Inc.*............... $ 228,825
6,800 Career Horizons, Inc.*....... 238,000
4,200 Danka Business Systems PLC
(ADR) (United Kingdom)..... 121,800
2,000 DeVRY, Inc.*................. 90,000
3,110 IntelliQuest Information
Group, Inc.*............... 101,852
13,300 Iron Mountain, Inc.*......... 269,325
9,600 Metromail Corp.*............. 214,800
12,500 Metromedia International
Group
Inc.*...................... 153,125
4,750 On Assignment, Inc.*......... 171,000
11,700 Protection One, Inc.*........ 191,587
5,000 Sitel Corp.*................. 207,500
4,350 Sylvan Learning Systems,
Inc.*...................... 164,212
-------------
2,520,063
-------------
COMMUNICATIONS - EQUIPMENT/MANUFACTURERS
(1.6%)
3,255 Andrew Corp.*................ 175,770
6,610 Boston Technology, Inc.*..... 111,544
5,750 Comverse Technology, Inc.*... 175,375
3,380 Premisys Communications,
Inc.*...................... 206,180
-------------
668,869
-------------
COMMUNICATIONS EQUIPMENT (1.9%)
3,020 Adtran, Inc.*................ 213,665
3,300 Cascade Communications
Corp.*..................... 224,400
2,800 Newbridge Networks Corp.*
(Canada)................... 183,400
2,220 U.S. Robotics Corp.*......... 189,255
-------------
810,720
-------------
COMPUTER EQUIPMENT (4.1%)
8,280 3D Systems Corp.*............ 180,090
3,800 ACT Networks, Inc.*.......... 122,550
3,800 Aspect Telecommunications
Corp.*..................... 188,100
19,000 Caere Corp.*................. 216,125
7,700 DSC Communications Corp.*.... 231,000
3,700 Glenayre Technologies,
Inc.*...................... 184,537
4,820 Picturetel Corp.*............ 189,787
17,500 Proxima Corp.*............... 207,812
3,300 Tellabs, Inc.*............... 220,275
-------------
1,740,276
-------------
COMPUTER SERVICES (3.0%)
14,250 Boston Communications Group,
Inc.*...................... 231,562
9,950 Dendrite International,
Inc.*...................... 340,787
6,700 DST Systems, Inc.*........... 214,400
5,000 First USA Paymentech,
Inc.*...................... 200,000
6,900 Network General Corp......... 146,625
4,110 Sterling Commerce, Inc.*..... 152,584
-------------
1,285,958
-------------
</TABLE>
160
<PAGE>
Developing Growth
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMPUTER SOFTWARE (5.3%)
5,300 Business Objects S.A. (ADR)*
(France)................... $ 213,325
9,800 Ciber, Inc.*................. 208,250
24,000 FTP Software, Inc.*.......... 192,000
4,200 I2 Technologies, Inc.*....... 179,550
5,220 Integrated Systems, Inc.*.... 204,885
4,875 Macromedia, Inc.*............ 106,641
7,000 MetaTools, Inc.*............. 162,750
3,000 PeopleSoft, Inc.*............ 213,000
4,000 Renaissance Solutions
Inc.*...................... 110,000
2,200 Security Dynamics
Technologies, Inc.*........ 180,400
2,800 Shiva Corp.*................. 223,300
3,400 Transaction Systems
Architects, Inc. (Class
A)......................... 227,800
-------------
2,221,901
-------------
COMPUTER SOFTWARE & SERVICES (4.2%)
5,000 Aspect Development, Inc.*.... 125,000
700 Check Point Software
Technologies Ltd.*
(Israel)................... 16,800
10,000 Checkfree Corp.*............. 198,750
4,300 Clarify, Inc.*............... 210,700
5,500 Geoworks*.................... 189,750
3,340 Legato Systems, Inc.*........ 179,525
3,200 Netscape Communications
Corp.*..................... 199,200
7,100 Raptor Systems, Inc.*........ 186,375
4,000 Sapient Corp.*............... 165,000
6,000 Segue Software, Inc.*........ 172,500
25,740 Silicon Valley Research
Inc.*...................... 148,005
-------------
1,791,605
-------------
COMPUTERS (0.2%)
4,100 Lumisys, Inc.*............... 64,575
-------------
CONSUMER SERVICES (1.4%)
5,375 CUC International, Inc.*..... 190,812
7,000 Gemstar International Group
Ltd. (Hong Kong)........... 204,750
6,400 Thermolase Corp.*............ 174,400
-------------
569,962
-------------
ELECTRONIC COMPONENTS (0.4%)
4,100 Teltrend, Inc.*.............. 158,875
-------------
ELECTRONICS (1.9%)
6,000 Dynatech Corp................ 195,000
9,800 Etec Systems, Inc............ 215,600
9,700 Ortel Corp.*................. 232,800
8,400 Trimble Navigation Ltd....... 159,600
-------------
803,000
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
ENTERTAINMENT & LEISURE TIME (1.4%)
10,030 Cannondale Corp.*............ $ 198,092
7,930 Cinar Films, Inc. (Class B)*
(Canada)................... 170,495
9,000 Primadonna Resorts, Inc...... 207,000
-------------
575,587
-------------
ENVIRONMENTAL CONTROL (1.4%)
21,270 Philip Environmental, Inc.*
(Canada)................... 167,501
5,900 U.S. Filter Corp.*........... 205,025
7,000 United Waste Systems,
Inc.*...................... 222,250
-------------
594,776
-------------
FINANCIAL - MISCELLANEOUS (0.4%)
3,000 First USA, Inc............... 165,000
-------------
FINANCIAL SERVICES (2.3%)
7,400 Envoy Corp.*................. 214,600
3,300 Finova Group Inc............. 160,875
6,500 GreenPoint Financial Corp.... 183,625
10,000 People's Bank................ 222,500
27,000 World Acceptance Corp........ 195,750
-------------
977,350
-------------
FOREST PRODUCTS, PAPER & PACKAGING (0.5%)
7,260 Buckeye Cellulose Corp....... 200,557
-------------
HEALTH EQUIPMENT & SERVICES (0.5%)
4,700 Access Health Marketing,
Inc........................ 222,075
-------------
HEALTHCARE PRODUCTS & SERVICES (0.4%)
2,150 Medic Computer Systems,
Inc.*...................... 174,150
-------------
HEALTHCARE SERVICES (0.5%)
1,460 Healthsouth Corp.*........... 52,560
5,000 Vivra, Inc.*................. 164,375
-------------
216,935
-------------
HOSPITAL MANAGEMENT (2.6%)
8,400 American Oncology Resources,
Inc.*...................... 180,600
11,100 Mariner Health Group,
Inc.*...................... 203,962
7,700 Orthodontic Centers of
America,
Inc.*...................... 200,200
8,200 Sunrise Assisted Living,
Inc.*...................... 196,800
5,000 Total Renal Care Holdings,
Inc.*...................... 211,250
4,800 Veterinary Centers of
America,
Inc.*...................... 105,000
-------------
1,097,812
-------------
HOTELS/MOTELS (1.5%)
3,140 HFS, Inc.*................... 219,800
13,900 Red Roof Inns Inc.*.......... 196,338
11,100 Renaissance Hotel Group NV*
(Hong Kong)................ 235,875
-------------
652,013
-------------
</TABLE>
161
<PAGE>
Developing Growth
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
INSURANCE (2.3%)
8,700 American Travellers Corp.*... $ 199,013
4,700 CRA Managed Care, Inc.*...... 210,325
7,200 Delphi Financial Group, Inc.
(Class A)*................. 190,800
9,000 Inphynet Medical Management,
Inc.*...................... 168,750
5,000 United Dental Care, Inc.*.... 205,000
-------------
973,888
-------------
LEISURE (0.5%)
13,000 GT Bicycles, Inc.*........... 211,250
-------------
MANUFACTURING (0.9%)
9,700 NN Ball & Roller, Inc........ 194,000
6,100 Waters Corp.*................ 201,300
-------------
395,300
-------------
MEDICAL PRODUCTS & SUPPLIES (2.9%)
3,510 Boston Scientific Corp.*..... 157,950
5,235 Clintrials Research, Inc.*... 214,635
2,100 Guidant Corp................. 103,425
4,700 Heartport, Inc.*............. 141,000
6,800 Spine-Tech, Inc.*............ 192,100
14,420 Staar Surgical Co.*.......... 221,708
10,000 TECNOL Medical Products,
Inc........................ 188,750
-------------
1,219,568
-------------
MEDICAL SERVICES (0.4%)
6,390 Physician Sales & Service,
Inc.*...................... 154,958
-------------
MEDICAL SOFTWARE/SERVICES (0.5%)
8,200 Amisys Managed Care
Systems*................... 212,175
-------------
METALS & MINING (0.7%)
10,000 Olympic Steel, Inc.*......... 277,500
-------------
OFFICE EQUIPMENT & SUPPLIES (1.4%)
5,000 Corporate Express, Inc.*..... 200,000
4,700 Daisytek International
Corp.*..................... 192,700
6,900 Viking Office Products,
Inc.*...................... 215,625
-------------
608,325
-------------
OIL & GAS DRILLING (0.4%)
16,100 Marine Drilling Company,
Inc.*...................... 161,000
-------------
OIL & GAS EXPLORATION - CANADIAN (0.5%)
4,200 Triton Energy Ltd............ 204,226
-------------
OIL & GAS PRODUCTS (0.3%)
4,200 ENSCO International, Inc.*... 136,500
-------------
OIL DRILLING & SERVICES (2.8%)
6,540 Global Industries Ltd.*...... 194,565
11,510 Global Marine, Inc.*......... 159,701
3,550 Input/Output, Inc.*.......... 114,931
11,000 Noble Drilling Corp.*........ 152,625
5,000 Smith International, Inc.*... 150,625
11,000 Stone Energy Corp.*.......... 220,000
3,000 Western Atlas, Inc.*......... 174,750
-------------
1,167,197
-------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
OIL INTEGRATED - INTERNATIONAL (0.5%)
2,370 Chesapeake Energy Corp.*..... $ 213,004
-------------
PHARMACEUTICALS (4.0%)
4,500 Agouron Pharmaceutical,
Inc.*...................... 174,375
9,600 Alliance Pharmaceutical
Corp.*..................... 157,200
3,640 Biochem Pharma, Inc.*........ 136,045
8,400 Depotech Corp.*.............. 207,900
2,670 Dura-Pharmaceuticals,
Inc.*...................... 149,520
5,250 Jones Medical Industries,
Inc........................ 172,594
29,100 La Jolla Pharmaceutical
Co.*....................... 156,413
11,600 PathoGenesis Corp.*.......... 178,350
10,500 Sequus Pharmaceuticals,
Inc.*...................... 208,688
5,400 Vertex Pharmaceuticals,
Inc.*...................... 163,350
-------------
1,704,435
-------------
POLLUTION CONTROL (0.4%)
4,500 Memtec Ltd. (ADR)
(Australia)................ 163,125
-------------
RESTAURANTS (0.4%)
5,000 BAB Holdings, Inc.*.......... 52,500
4,600 Daka International, Inc.*.... 106,950
-------------
159,450
-------------
RETAIL (9.4%)
4,860 Bed, Bath & Beyond, Inc.*.... 128,183
3,380 Blyth Industries, Inc.*...... 153,368
5,500 Borders Group, Inc.*......... 177,375
5,200 Consolidated Stores Corp..... 191,100
13,800 Damark International,
Inc.*...................... 193,200
5,000 Dollar Tree Stores, Inc.*.... 158,750
2,500 Empire of Carolina Inc.*..... 30,000
7,800 Friedman's, Inc. (Class
A)*........................ 198,900
7,250 Galoob (Lewis) Toys, Inc.*... 204,813
2,970 Gucci Group NV (Italy)....... 191,565
6,000 Gymboree Corp. (The)......... 181,500
8,500 Marks Bros. Jewelers, Inc.... 191,250
5,800 Men's Wearhouse, Inc.
(The)*..................... 187,050
7,500 Pacific Sunwear of
California, Inc.*.......... 176,250
4,600 PetSmart, Inc.*.............. 217,350
5,700 Proffitt's, Inc.*............ 202,350
7,150 Rexall Sundown, Inc.*........ 193,050
20,000 Sports & Recreation, Inc..... 182,500
9,750 Staples, Inc.*............... 188,906
11,500 Stein Mart, Inc.*............ 209,875
6,500 The Sports Authority, Inc.... 212,875
6,200 Williams-Sonoma Inc.*........ 145,700
-------------
3,915,910
-------------
SEMICONDUCTORS (0.7%)
8,050 International Rectifier
Corp.*..................... 129,806
9,000 Triquint Semiconductor,
Inc.*...................... 184,500
-------------
314,306
-------------
</TABLE>
162
<PAGE>
Developing Growth
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
SHOES (0.9%)
6,500 Reebok International Ltd.
(United Kingdom)........... $ 218,563
5,100 Wolverine World Wide, Inc.... 165,750
-------------
384,313
-------------
TELECOMMUNICATIONS (3.4%)
10,400 Arch Communications Group,
Inc.*...................... 191,100
5,725 CommNet Cellular, Inc.*...... 171,750
3,820 Globalstar Telecommunications
Ltd.* (Bermuda)............ 164,260
8,200 IntelCom Group, Inc.*........ 205,000
8,750 Intercel, Inc.*.............. 175,000
6,200 Intermedia Communications of
Florida, Inc.*............. 198,400
6,600 LCI International, Inc.*..... 207,075
10,300 MobileMedia Corp.*........... 122,313
-------------
1,434,898
-------------
TEXTILES (1.7%)
5,600 Designer Holdings Ltd.*...... 149,100
3,800 Jones Apparel Group, Inc.*... 186,675
9,100 Marisa Christina, Inc.*...... 179,725
6,800 Nautica Enterprises, Inc.*... 195,500
-------------
711,000
-------------
TRANSPORTATION (3.1%)
3,950 Atlas Air, Inc.*............. 227,619
7,000 Comair Holdings, Inc......... 189,875
5,900 Fritz Companies, Inc.*....... 188,800
9,410 Hub Group, Inc.*............. 190,553
7,100 Landstar Systems, Inc.*...... 202,350
3,800 Midwest Express Holdings,
Inc.*...................... 122,075
14,000 Offshore Logistics, Inc.*.... 194,250
-------------
1,315,522
-------------
TOTAL COMMON STOCKS
(IDENTIFIED COST
$34,477,812)............... 38,648,118
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (IN
THOUSANDS) VALUE
- ----------- -------------
<C> <S> <C>
SHORT-TERM INVESTMENTS (9.0%)
U.S. GOVERNMENT AGENCY (a) (8.1%)
3,400 Federal Home Loan Mortgage
Corp. 5.52% due 07/01/96... $ 3,400,000
-------------
REPURCHASE AGREEMENT (0.9%)
386 The Bank of New York 5.125%
due 07/01/96 (dated
06/28/96; proceeds
$386,275; collateralized by
$392,145 U.S. Treasury Note
5.25% due 07/31/98 valued
at $393,832) (Identified
Cost $386,110)............. 386,110
-------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST
$3,786,110)................ 3,786,110
-------------
TOTAL INVESTMENTS (IDENTIFIED
COST $38,263,922) (B)....... 100.6% 42,434,228
LIABILITIES IN EXCESS OF OTHER
ASSETS...................... (0.6) (271,321)
---------- -------------
NET ASSETS.................... 100.0% $ 42,162,907
---------- -------------
---------- -------------
<FN>
- ----------------
ADR AMERICAN DEPOSITORY RECEIPT.
* NON-INCOME PRODUCING SECURITY.
(A) SECURITY WAS PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS
BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD.
(B) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES IDENTIFIED
COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION WAS $6,176,215 AND THE
AGGREGATE GROSS UNREALIZED DEPRECIATION WAS $2,005,909, RESULTING IN NET
UNREALIZED APPRECIATION OF $4,170,306.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
163
<PAGE>
Emerging Markets
Portfolio of Investments JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES/PRINCIPAL
AMOUNT VALUE
- ------------- -------------
<C> <S> <C>
COMMON AND PREFERRED STOCKS, CONVERTIBLE
BONDS AND WARRANTS (93.4%)
ARGENTINA (4.2%)
BANKS
920 Banco de Galicia y Buenos
Aires S.A. de C.V.
(ADR).................. 23,575
3,045 Banco Frances del Rio de
la Plata S.A. (ADR).... 87,544
-------------
111,119
-------------
FOOD, BEVERAGE, TOBACCO & HOUSEHOLD
PRODUCTS
5,000 Bagley S.A. (Class B).... 12,656
800 Molinos Rio de la Plata
S.A. (Class B)*........ 8,404
2,800 Nobleza Piccardo S.A..... 10,645
-------------
31,705
-------------
MULTI-INDUSTRY
20,990 Perez Companc S.A. (Class
B)..................... 137,546
-------------
OIL & GAS
12,200 Astra Compania Argentina
de Petroleo S.A........ 28,927
1,200 Transportadora de Gas del
Sur S.A. (ADR)......... 14,700
3,375 Yacimentos Petroliferos
Fiscales S.A. (ADR).... 75,937
-------------
119,564
-------------
REAL ESTATE
6,500 Inversiones y
Representaciones
S.A.................... 21,785
-------------
STEEL
655 Siderar S.A. (A Shares)
(ADR)* - 144A**........ 13,264
11,500 Siderca S.A. (Class A)... 15,647
-------------
28,911
-------------
TELECOMMUNICATIONS
590 Telecom Argentina Stet -
France Telecom S.A.
(ADR).................. 27,656
1,300 Telefonica de Argentina
S.A. (ADR)............. 38,512
-------------
66,168
-------------
TOTAL ARGENTINA.......... 516,798
-------------
BRAZIL (11.7%)
BANKING
11,690,292 Banco Bradesco S.A.
(Pref.)................ 95,479
60,000 Banco Itau S.A.
(Pref.)................ 24,382
-------------
119,861
-------------
BREWERY
274,000 Companhia Cervejaria
Brahma (Conv.
Pref.)*................ 163,472
-------------
<CAPTION>
SHARES/PRINCIPAL
AMOUNT VALUE
- ------------- -------------
<C> <S> <C>
ELECTRONIC & ELECTRICAL EQUIPMENT
68,100 Brasmotor S.A. (Pref.)... $ 21,298
-------------
FOOD, BEVERAGE, TOBACCO & HOUSEHOLD
PRODUCTS
4,800,000 Refrigeracao Parana S.A.
(Pref.)................ 11,952
-------------
METALS & MINING
1,800,000 Companhia Siderurgica
Nacional............... 45,896
2,800 Companhia Vale do Rio
Doce S.A. (ADR)........ 54,460
-------------
100,356
-------------
MULTI-INDUSTRY
63,000 Itausa Investimentos Itau
S.A. (Pref.)........... 48,317
-------------
OIL & GAS
937,000 Petroleo Brasileiro S.A.
(Pref.)................ 115,258
-------------
PAPER & FOREST PRODUCTS
6,400 Aracruz Celulose S.A.
(ADR).................. 60,800
8,000 Industrias Klabin de
Papel e Celulose S.A.
(Pref.)................ 10,120
-------------
70,920
-------------
STEEL & IRON
20,000,000 Usinas Siderurgicas de
Minas Gerais S.A.
(Pref.)................ 21,116
-------------
TELECOMMUNICATIONS
7,250 Telecomunicacoes
Brasileiras S.A.
(ADR).................. 504,781
13,285 Telecomunicacoes de Sao
Paulo S.A.............. 2,342
310,000 Telecomunicacoes de Sao
Paulo S.A. (Pref.)*.... 66,384
-------------
573,507
-------------
TEXTILES
30,000 Companhia de Tecidos
Norte de Minas
(Pref.)................ 11,832
-------------
UTILITIES - ELECTRIC
2,365 Centrais Electricas
Brasileiras S.A.
(ADR).................. 31,780
300,000 Centrais Electricas
Brasileiras S.A.
(Pref.)................ 85,757
2,975 Companhia Energetica de
Minas Gerais S.A.
(Pref.) (ADR)* -
144A**................. 78,094
40,000 Light Participacoes
S.A.................... 7,558
-------------
203,189
-------------
TOTAL BRAZIL............. 1,461,078
-------------
</TABLE>
164
<PAGE>
Emerging Markets
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES/PRINCIPAL
AMOUNT VALUE
- ------------- -------------
<C> <S> <C>
CHILE (7.1%)
BANKS
2,100 Banco BHIF (ADR)......... $ 42,262
-------------
BUILDING MATERIALS
960 Maderas y Sinteticos
Sociedad Anonima Masisa
(ADR).................. 17,040
-------------
CHEMICALS
850 Sociedad Quimica y Minera
de Chile S.A. (ADR).... 46,112
-------------
FOOD, BEVERAGE, TOBACCO & HOUSEHOLD
PRODUCTS
1,000 Compania Cervecerias
Unidas S.A. (ADR)...... 23,250
2,940 Embotelladora Andina S.A.
(ADR).................. 108,045
1,925 Santa Isabel S.A.
(ADR)*................. 53,419
-------------
184,714
-------------
INVESTMENT COMPANIES
2,810 Genesis Chile Fund
Ltd.................... 115,561
29,850 The Five Arrows Chile
Investment Fund Ltd.... 85,819
-------------
201,380
-------------
MULTI-INDUSTRY
2,150 Madeco S.A. (ADR)........ 60,469
-------------
TELECOMMUNICATIONS
1,510 Compania de
Telecommunicaciones de
Chile S.A. (ADR)....... 148,169
-------------
UTILITIES - ELECTRIC
540 Chilgener S.A. (ADR)..... 12,960
2,800 Empresa Nacional de
Electricidad Chile S.A.
(ADR).................. 60,200
3,890 Enersis S.A. (ADR)....... 120,590
-------------
193,750
-------------
TOTAL CHILE.............. 893,896
-------------
COLOMBIA (0.7%)
BANKING
5,300 Banco Industrial
Colombiano S.A.
(ADR).................. 89,437
-------------
CZECH REPUBLIC (0.4%)
TOBACCO
180 Tabak AS................. 44,425
-------------
GREECE (0.6%)
BANKING
750 Ergo Bank S.A............ 41,229
-------------
<CAPTION>
SHARES/PRINCIPAL
AMOUNT VALUE
- ------------- -------------
<C> <S> <C>
BUILDING & CONSTRUCTION
2,640 Aegek.................... $ 17,525
-------------
FOOD, BEVERAGE, TOBACCO & HOUSEHOLD
PRODUCTS
480 Hellenic Bottling Co.
S.A.................... 15,912
-------------
TOTAL GREECE............. 74,666
-------------
HONG KONG (3.6%)
REAL ESTATE
14,000 Cheung Kong (Holdings)
Ltd.................... 100,837
-------------
TELECOMMUNICATIONS
60,000 Asia Satellite
Telecommunications
Holdings Ltd........... 177,903
-------------
TRANSPORTATION
376,000 The Guangshen Railway
Co.,
Ltd.................... 142,089
1,760 The Guangshen Railway
Co.,
Ltd. (ADR)*............ 33,660
-------------
175,749
-------------
TOTAL HONG KONG.......... 454,489
-------------
INDIA (3.1%)
BUILDING & CONSTRUCTION
5,300 Larsen & Toubro Ltd.
(GDR).................. 98,050
-------------
FINANCIAL SERVICES
3,350 Hindalco Industries Ltd.
(GDR)*................. 125,625
-------------
INDUSTRIALS
$ 5K Reliance Industries, Ltd.
3.50% due 11/03/99
(Conv.)................ 5,113
-------------
UTILITIES - ELECTRIC
1,800 BSES Ltd. (GDR).......... 33,750
7,000 BSES Ltd. (GDR).......... 131,250
-------------
165,000
-------------
TOTAL INDIA.............. 393,788
-------------
INDONESIA (3.1%)
BANKING
42,000 PT Bank Internasional
Indonesia.............. 207,653
-------------
FOOD, BEVERAGE, TOBACCO & HOUSEHOLD
PRODUCTS
30,000 PT Gudang Garam.......... 128,654
-------------
TELECOMMUNICATIONS
1,700 PT Telekomunikasi
Indonesia (ADR)........ 50,575
-------------
TOTAL INDONESIA.......... 386,882
-------------
</TABLE>
165
<PAGE>
Emerging Markets
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES/PRINCIPAL
AMOUNT VALUE
- ------------- -------------
<C> <S> <C>
MALAYSIA (16.4%)
AUTOMOTIVE
24,000 Edaran Otomobil Nasional
Berhad................. $ 229,992
-------------
BANKING
33,000 Commerce Asset Holdings
Berhad................. 201,123
82,000 DCB Holdings Berhad...... 281,115
-------------
482,238
-------------
CONGLOMERATES
25,000 Gadek Berhad............. 147,354
7,000 Gadek Berhad
(Warrants due
12/19/00)*............. 10,129
97,000 Hicom Holdings Berhad.... 276,143
6,500 Hicom Holdings Berhad
(Warrants due
12/18/00)*............. 3,093
18,000 Renong Berhad............ 28,725
20,400 Renong Berhad (ICULS).... 8,180
-------------
473,624
-------------
ENTERTAINMENT/GAMING & LODGING
27,000 Genting Berhad........... 211,107
-------------
PUBLISHING
44,000 New Straits Times Press
Berhad................. 229,350
-------------
RETAIL
53,000 Larut Consolidated
Berhad................. 76,503
12,000 Prime Utilities Berhad... 90,457
3,000 Prime Utilities Berhad
(Warrants due
03/11/01)*............. 4,980
MYR 6K Prime Utilities Berhad
1.00% due 03/11/01
(Conv.)................ 1,636
-------------
173,576
-------------
TELECOMMUNICATIONS
28,000 Telekom Malaysia
Berhad................. 249,238
-------------
TOTAL MALAYSIA........... 2,049,125
-------------
MEXICO (13.6%)
BUILDING & CONSTRUCTION
2,980 Empresas ICA Sociedad
Controladora S.A. de
C.V. (ADR)*............ 41,347
-------------
BUILDING MATERIALS
10,900 Apasco S.A. de C.V....... 60,380
35,360 Cemex S.A. de C.V. (B
Shares)................ 139,677
-------------
200,057
-------------
CONGLOMERATES
8,000 DESC S.A. de C.V. (Series
B)..................... 43,155
112 DESC S.A. de C.V. (Series
C)..................... 583
26,500 Grupo Carso S.A. de C.V.
(Series A1)*........... 188,387
<CAPTION>
SHARES/PRINCIPAL
AMOUNT VALUE
- ------------- -------------
<C> <S> <C>
45,700 Grupo Industria Alfa S.A.
de C.V. (A Shares)..... $ 206,444
-------------
438,569
-------------
CONSUMER PRODUCTS
7,150 Kimberly-Clark de Mexico
S.A. de C.V. (A
Shares)................ 130,609
-------------
FINANCIAL SERVICES
19,300 Grupo Financiero Inbursa
S.A. de C.V. (B
Shares)*............... 79,929
-------------
FOOD, BEVERAGE, TOBACCO & HOUSEHOLD
PRODUCTS
600 Coca Cola FEMSA S.A. de
C.V. (ADR)............. 17,175
2,900 Empresas la Moderna S.A.
de C.V. (ADR).......... 52,200
10,000 Fomento Economico
Mexicano S.A. de C.V.
(B Shares)............. 28,752
11,800 Grupo Industrial Bimbo
S.A. de C.V. (Series
A)..................... 54,627
1,200 Grupo Industrial Maseca
S.A. de C.V............ 18,900
1,400 Panamerican Beverages,
Inc. (Class A)......... 62,650
-------------
234,304
-------------
MEDIA GROUP
3,220 Grupo Televisa S.A.
(GDR).................. 99,015
-------------
RETAIL
92,700 Cifra S.A. de C.V. (C
Shares)*............... 132,289
-------------
STEEL & IRON
4,800 Tubos de Acero de Mexico
S.A. de C.V. (ADR)*.... 45,300
-------------
TELECOMMUNICATIONS
8,500 Telefonos de Mexico S.A.
de C.V. (Series L)
(ADR).................. 284,750
-------------
TRANSPORTATION
2,700 Transportacion Maritima
Mexicana S.A. de C.V.
(Series A) (ADR)....... 17,213
-------------
TOTAL MEXICO............. 1,703,382
-------------
PAKISTAN (0.6%)
TELECOMMUNICATIONS
700 Pakistan
Telecommunications
Corp. (GDR)*........... 81,200
-------------
PERU (2.2%)
BREWERY
34,731 Cerveceria Backus &
Johnston S.A........... 43,911
-------------
</TABLE>
166
<PAGE>
Emerging Markets
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES/PRINCIPAL
AMOUNT VALUE
- ------------- -------------
<C> <S> <C>
FINANCIAL SERVICES
4,182 Banco de Credito del
Peru................... $ 83,117
-------------
METALS & MINING
1,300 Companhia de Minas
Buenaventura S.A.
(ADR)*................. 25,838
544 Companhia de Minas
Buenaventura S.A. (B
Shares)................ 5,342
4,376 Companhia de Minas
Buenaventura S.A. (C
Shares)................ 39,391
-------------
70,571
-------------
TELECOMMUNICATIONS
37,500 CPT Telefonica del Peru
S.A. (B Shares)........ 76,105
-------------
TOTAL PERU............... 273,704
-------------
PHILIPPINES (3.9%)
BANKING
5,800 Philippine National
Bank................... 97,074
-------------
FOOD, BEVERAGE, TOBACCO & HOUSEHOLD
PRODUCTS
45,650 San Miguel Corp. (Class
B)..................... 158,046
-------------
UTILITIES - ELECTRIC
22,700 Manila Electric Co. (B
Shares)................ 238,810
-------------
TOTAL PHILIPPINES........ 493,930
-------------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
PORTUGAL (2.7%)
BUILDING & CONSTRUCTION
1,300 Sociedade de Construcoes
Soares de Costa S.A.... 11,030
-------------
BUILDING MATERIALS
4,200 Cimentos de Portugal
S.A.................... 87,189
-------------
FOREST PRODUCTS, PAPER & PACKAGING
9,000 Portucel Industrial
Empresa
S.A.................... 57,588
-------------
INVESTMENT COMPANIES
3,700 Sonae Investimentos
Sociedade Gestora de
Participacoes Sociais
S.A.................... 96,070
-------------
TELECOMMUNICATIONS
3,400 Portugal Telecom S.A..... 88,780
-------------
TOTAL PORTUGAL........... 340,657
-------------
RUSSIA (0.9%)
OIL & GAS
1,360 Lukoil Holding Co.
(ADR).................. 57,290
-------------
UTILITIES - ELECTRIC
<CAPTION>
SHARES/PRINCIPAL
AMOUNT VALUE
- ------------- -------------
<C> <S> <C>
2,000 Mosenergo (ADR) -
144A**................. $ 55,000
-------------
TOTAL RUSSIA............. 112,290
-------------
SINGAPORE (0.7%)
FOOD, BEVERAGE, TOBACCO & HOUSEHOLD
PRODUCTS
3,600 Fraser & Neave Ltd....... 37,263
-------------
MULTI-INDUSTRY
6,000 Keppel Corp., Ltd........ 50,195
-------------
TOTAL SINGAPORE.......... 87,458
-------------
SOUTH AFRICA (0.7%)
METALS & MINING
5,900 Driefontein Consolidated
Ltd. (ADR)............. 76,700
500 Kloof Gold Mining Co.,
Ltd. (ADR)............. 4,812
500 Vaal Reefs Exploration &
Mining Co., Ltd.
(ADR).................. 3,938
-------------
TOTAL SOUTH AFRICA....... 85,450
-------------
SOUTH KOREA (5.5%)
CHEMICALS
500 L.G. Chemical Ltd.
(GDR).................. 8,125
-------------
ELECTRONIC & ELECTRICAL EQUIPMENT
141 Samsung Electronics
(GDR).................. 7,120
469 Samsung Electronics (GDR)
- 144A**............... 23,685
-------------
30,805
-------------
STEEL & IRON
10,500 Pohang Iron & Steel Co.,
Ltd. (ADR)............. 255,938
-------------
UTILITIES - ELECTRIC
16,100 Korea Electric Power
Corp.
(ADR).................. 390,425
-------------
TOTAL SOUTH KOREA........ 685,293
-------------
TAIWAN (4.9%)
COMPUTERS
7,000 Acer Inc. (GDR).......... 52,500
-------------
INVESTMENT COMPANIES
23,000 ROC Taiwan Fund.......... 261,625
12,100 The Taiwan Index Fund
Ltd.................... 145,200
-------------
406,825
-------------
STEEL & IRON
5,880 China Steel Corp.
(GDS).................. 149,940
-------------
TOTAL TAIWAN............. 609,265
-------------
</TABLE>
167
<PAGE>
Emerging Markets
Portfolio of Investments JUNE 30, 1996 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES/PRINCIPAL
AMOUNT VALUE
- ------------- -------------
<C> <S> <C>
THAILAND (5.4%)
BANKING
9,500 Bangkok Bank PCL......... $ 128,702
$ 45K Siam Commercial Bank Co.
3.25% due 01/24/04
(Conv.)................ 54,450
15,900 Thai Farmers Bank,
Ltd.................... 174,079
-------------
357,231
-------------
BUILDING & CONSTRUCTION
2,400 Siam Cement Co., Ltd..... 117,769
-------------
OIL RELATED
10,100 PTT Exploration &
Production PCL......... 147,968
-------------
REAL ESTATE
4,300 Land & House PCL......... 54,190
-------------
TOTAL THAILAND........... 677,158
-------------
TURKEY (1.3%)
BREWERY
138,000 Ege Biracilik ve Malt
Sanayii
AS..................... 62,956
-------------
BUILDING MATERIALS
175,000 Eczacibasi Yapi Gerecleri
Sanayi ve Ticaret AS... 14,903
-------------
<CAPTION>
SHARES/PRINCIPAL
AMOUNT VALUE
- ------------- -------------
<C> <S> <C>
METALS & MINING
460,000 Eregli Demir ve Celik
Fabrikalari T.A.S...... $ 50,924
122,000 Koc Holdings AS.......... 29,684
-------------
80,608
-------------
TELECOMMUNICATIONS
31,000 Netas Telekomunik........ 7,354
-------------
TOTAL TURKEY............. 165,821
-------------
VIETNAM (0.1%)
INVESTMENT COMPANIES
1,800 Lazard Vietnam Fund
Ltd.................... 18,000
-------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL COMMON AND PREFERRED
STOCKS, CONVERTIBLE BONDS
AND WARRANTS (IDENTIFIED
COST $10,984,923) (A)....... 93.4% 11,698,192
CASH AND OTHER ASSETS IN
EXCESS OF LIABILITIES....... 6.6 829,247
---------- -------------
NET ASSETS.................... 100.0% $ 12,527,439
---------- -------------
---------- -------------
<FN>
- ----------------
ADR AMERICAN DEPOSITORY RECEIPT.
GDR GLOBAL DEPOSITORY RECEIPT.
GDS GLOBAL DEPOSITORY SHARES.
K IN THOUSANDS.
* NON-INCOME PRODUCING SECURITY.
** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS.
(A) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES
IDENTIFIED COST. THE AGGREGATE GROSS UNREALIZED APPRECIATION WAS
$957,357 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION WAS
$244,088, RESULTING IN NET UNREALIZED APPRECIATION OF $713,269.
</TABLE>
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT JUNE 30, 1996:
<TABLE>
<CAPTION>
IN UNREALIZED
CONTRACTS EXCHANGE DELIVERY APPRECIATION
TO RECEIVE FOR DATE (DEPRECIATION)
- --------------- ---------- -------- -----------
<S> <C> <C> <C>
$ 5,829 MYR 14,540 07/01/96 $ (1)
MYR 524,060 $ 209,691 07/02/96 437
MYR 190,915 $ 76,513 07/04/96 37
IDR 143,901,615 $ 61,840 07/31/96 27
-----
Net unrealized appreciation..................$500
-----
-----
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
168
<PAGE>
Emerging Markets
Summary of Investments
JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------ ----------- ----------
<S> <C> <C>
Automotive.................... $ 229,992 1.8 %
Banking....................... 1,394,721 11.1
Banks......................... 153,381 1.2
Brewery....................... 270,339 2.2
Building & Construction....... 285,722 2.3
Building Materials............ 319,188 2.5
Chemicals..................... 54,237 0.4
Computers..................... 52,500 0.4
Conglomerates................. 912,194 7.3
Consumer Products............. 130,609 1.0
Electronic & Electrical
Equipment.................... 52,103 0.4
Entertainment/Gaming &
Lodging...................... 211,107 1.7
Financial Services............ 288,671 2.3
Food, Beverage, Tobacco &
Household Products........... 802,550 6.4
Forest Products, Paper &
Packaging.................... 57,589 0.5
Industrials................... 5,113 0.1
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------ ----------- ----------
<S> <C> <C>
Investment Companies.......... $ 722,275 5.8 %
Media Group................... 99,015 0.8
Metals & Mining............... 336,985 2.7
Multi-Industry................ 296,527 2.4
Oil & Gas..................... 292,113 2.3
Oil Related................... 147,968 1.2
Paper & Forest Products....... 70,920 0.6
Publishing.................... 229,350 1.8
Real Estate................... 176,812 1.4
Retail........................ 305,865 2.4
Steel......................... 28,911 0.2
Steel & Iron.................. 472,293 3.8
Telecommunications............ 1,803,749 14.4
Textiles...................... 11,832 0.1
Tobacco....................... 44,425 0.4
Transportation................ 192,962 1.5
Utilities - Electric.......... 1,246,174 10.0
----------- ---
$11,698,192 93.4 %
----------- ---
----------- ---
</TABLE>
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
TYPE OF INVESTMENT VALUE NET ASSETS
- ------------------------------ ---------- ----------
<S> <C> <C>
Common Stocks................. $10,865,330 86.7 %
Convertible Bonds............. 61,199 0.5
Convertible Preferred
Stocks....................... 163,472 1.3
Preferred Stocks.............. 589,989 4.7
Warrants...................... 18,202 0.2
---------- -----
$11,698,192 93.4 %
---------- -----
---------- -----
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
169
<PAGE>
Dean Witter Select Dimensions Investment Series
Statements of Assets and Liabilities
JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH
AMERICAN
GOVERNMENT DIVERSIFIED
MONEY MARKET SECURITIES INCOME BALANCED
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities, at
value *..................... $ 60,069,940 $ 2,582,889 $ 20,153,215 $ 28,009,866
Cash.......................... 1,974 138,180 30,759** --
Receivable for:
Investments sold............ -- -- 195,858 737,119
Shares of beneficial
interest sold............. 316,342 -- 72,661 46,523
Dividends................... -- -- -- 17,953
Dividends from affiliate
(Note 3).................. -- -- -- --
Interest.................... 21,484 20,348 351,655 87,663
Foreign withholding taxes
reclaimed................. -- -- -- --
Compensated forward foreign
currency contracts........ -- -- 8,894 --
Unrealized appreciation on
open forward foreign
currency contracts.......... -- -- 36,555 --
Prepaid expenses and other
assets...................... 293 82 46 87
Deferred organizational
expenses.................... 5,396 5,396 5,396 5,396
Receivable from affiliate..... -- 3,576 6,291 --
------------ ------------ -------------- ------------
TOTAL ASSETS.......... 60,415,429 2,750,471 20,861,330 28,904,607
------------ ------------ -------------- ------------
LIABILITIES:
Payable for:
Investments purchased....... -- -- 234,250 2,579,509
Shares of beneficial
interest repurchased...... 192,952 101 40 18
Compensated forward foreign
currency contracts........ -- -- 5,706 --
Investment management fee... 15,649 -- 3,715 5,451
Unrealized depreciation on
open forward foreign
currency contracts.......... -- -- 2,126 --
Accrued expenses and other
payables.................... 21,739 3,729 13,620 12,233
------------ ------------ -------------- ------------
TOTAL LIABILITIES..... 230,340 3,830 259,457 2,597,211
------------ ------------ -------------- ------------
NET ASSETS:
Paid-in-capital............... 60,185,047 2,774,824 20,321,284 24,446,966
Accumulated undistributed net
investment income
(net investment loss)....... 42 11,871 143,346 55,872
Accumulated undistributed net
realized gain
(accumulated net realized
loss)....................... -- (10,065) 202,007 310,710
Net unrealized appreciation
(depreciation).............. -- (29,989) (64,764) 1,493,848
------------ ------------ -------------- ------------
NET ASSETS............ $ 60,185,089 $ 2,746,641 $ 20,601,873 $ 26,307,396
------------ ------------ -------------- ------------
------------ ------------ -------------- ------------
*IDENTIFIED COST.............. $ 60,069,940 $ 2,612,878 $ 20,251,160 $ 26,516,018
------------ ------------ -------------- ------------
------------ ------------ -------------- ------------
SHARES OF BENEFICIAL INTEREST
OUTSTANDING................. 60,185,047 274,904 2,000,422 2,117,645
------------ ------------ -------------- ------------
------------ ------------ -------------- ------------
NET ASSET VALUE PER
SHARE (unlimited authorized
shares of $.01 par value)... $1.00 $9.99 $10.30 $12.42
------------ ------------ -------------- ------------
------------ ------------ -------------- ------------
- ------------------
** Includes foreign cash of $29,835.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
170
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DIVIDEND VALUE-ADDED AMERICAN GLOBAL DEVELOPING
UTILITIES GROWTH MARKET CORE EQUITY VALUE EQUITY GROWTH
------------ ------------- ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in securities, at
value *..................... $ 29,886,235 $ 159,335,030 $ 48,828,043 $ 9,242,679 $ 80,714,937 $ 40,888,490 $ 42,434,228
Cash.......................... 2,054 -- 37,480 319,076 -- -- --
Receivable for:
Investments sold............ -- 320,089 106,062 31,374 419,809 176,364 2,257,146
Shares of beneficial
interest sold............. 70,704 754,353 289,642 36,724 389,230 172,625 239,142
Dividends................... 55,820 322,136 59,712 7,044 25,918 62,393 1,326
Dividends from affiliate
(Note 3).................. -- -- 999 -- -- -- --
Interest.................... 3,935 1,679 -- 189 52,207 695 165
Foreign withholding taxes
reclaimed................. 2,396 -- -- -- -- 9,394 --
Compensated forward foreign
currency contracts........ -- -- -- -- -- -- --
Unrealized appreciation on
open forward foreign
currency contracts.......... -- -- -- -- -- -- --
Prepaid expenses and other
assets...................... 156 1,707 3,585 6 307 189 209
Deferred organizational
expenses.................... 5,396 5,396 5,396 5,396 5,396 5,396 5,396
Receivable from affiliate..... 9,367 27,412 5,995 4,834 15,690 33,487 1,794
------------ ------------- ------------ ----------- ------------ ------------ ------------
TOTAL ASSETS.......... 30,036,063 160,767,802 49,336,914 9,647,322 81,623,494 41,349,033 44,939,406
------------ ------------- ------------ ----------- ------------ ------------ ------------
LIABILITIES:
Payable for:
Investments purchased....... 873,000 2,296,902 2,537,812 670,480 1,315,996 1,057,554 2,751,790
Shares of beneficial
interest repurchased...... 47 -- -- -- -- -- --
Compensated forward foreign
currency contracts........ -- -- -- -- -- -- --
Investment management fee... 8,129 78,287 12,557 -- 39,135 11,472 10,970
Unrealized depreciation on
open forward foreign
currency contracts.......... -- -- -- -- -- 1,514 --
Accrued expenses and other
payables.................... 24,925 41,579 22,385 12,073 33,083 41,786 13,739
------------ ------------- ------------ ----------- ------------ ------------ ------------
TOTAL LIABILITIES..... 906,101 2,416,768 2,572,754 682,553 1,388,214 1,112,326 2,776,499
------------ ------------- ------------ ----------- ------------ ------------ ------------
NET ASSETS:
Paid-in-capital............... 26,749,994 140,514,233 43,083,231 8,271,899 73,280,341 37,758,077 37,485,255
Accumulated undistributed net
investment income
(net investment loss)....... 68,337 345,496 60,857 6,575 9,586 38,701 (10,873)
Accumulated undistributed net
realized gain
(accumulated net realized
loss)....................... 62,629 6,321,672 95,978 189,161 1,751,832 361,204 518,219
Net unrealized appreciation
(depreciation).............. 2,249,002 11,169,633 3,524,094 497,134 5,193,521 2,078,725 4,170,306
------------ ------------- ------------ ----------- ------------ ------------ ------------
NET ASSETS............ $ 29,129,962 $ 158,351,034 $ 46,764,160 $ 8,964,769 $ 80,235,280 $ 40,236,707 $ 42,162,907
------------ ------------- ------------ ----------- ------------ ------------ ------------
------------ ------------- ------------ ----------- ------------ ------------ ------------
*IDENTIFIED COST.............. $ 27,637,233 $ 148,165,397 $ 45,303,949 $ 8,745,545 $ 75,521,416 $ 38,809,045 $ 38,263,922
------------ ------------- ------------ ----------- ------------ ------------ ------------
------------ ------------- ------------ ----------- ------------ ------------ ------------
SHARES OF BENEFICIAL INTEREST
OUTSTANDING................. 2,270,974 10,483,748 3,535,259 721,879 5,490,303 3,410,510 2,466,441
------------ ------------- ------------ ----------- ------------ ------------ ------------
------------ ------------- ------------ ----------- ------------ ------------ ------------
NET ASSET VALUE PER
SHARE (unlimited authorized
shares of $.01 par value)... $12.83 $15.10 $13.23 $12.42 $14.61 $11.80 $17.09
------------ ------------- ------------ ----------- ------------ ------------ ------------
------------ ------------- ------------ ----------- ------------ ------------ ------------
<CAPTION>
EMERGING
MARKETS
------------
<S> <C>
ASSETS:
Investments in securities, at
value *..................... $ 11,698,192
Cash.......................... 2,534,601
Receivable for:
Investments sold............ 125,442
Shares of beneficial
interest sold............. 92,244
Dividends................... 26,826
Dividends from affiliate
(Note 3).................. --
Interest.................... 19,306
Foreign withholding taxes
reclaimed................. --
Compensated forward foreign
currency contracts........ --
Unrealized appreciation on
open forward foreign
currency contracts.......... --
Prepaid expenses and other
assets...................... 37
Deferred organizational
expenses.................... 5,396
Receivable from affiliate..... 4,193
------------
TOTAL ASSETS.......... 14,506,237
------------
LIABILITIES:
Payable for:
Investments purchased....... 1,958,900
Shares of beneficial
interest repurchased...... --
Compensated forward foreign
currency contracts........ --
Investment management fee... --
Unrealized depreciation on
open forward foreign
currency contracts.......... --
Accrued expenses and other
payables.................... 19,898
------------
TOTAL LIABILITIES..... 1,978,798
------------
NET ASSETS:
Paid-in-capital............... 11,790,045
Accumulated undistributed net
investment income
(net investment loss)....... 18,789
Accumulated undistributed net
realized gain
(accumulated net realized
loss)....................... 6,021
Net unrealized appreciation
(depreciation).............. 712,584
------------
NET ASSETS............ $ 12,527,439
------------
------------
*IDENTIFIED COST.............. $ 10,984,923
------------
------------
SHARES OF BENEFICIAL INTEREST
OUTSTANDING................. 1,135,789
------------
------------
NET ASSET VALUE PER
SHARE (unlimited authorized
shares of $.01 par value)... $11.03
------------
------------
</TABLE>
171
<PAGE>
Dean Witter Select Dimensions Investment Series
Statements of Operations
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH
AMERICAN
MONEY GOVERNMENT DIVERSIFIED
MARKET SECURITIES INCOME BALANCED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
INCOME
Interest.................. $ 1,340,362 $ 65,177 $ 643,165* $ 248,761
Dividends from affiliate
(Note 3)................ -- -- -- --
Dividends................. -- -- -- 100,140
----------- ----------- ----------- -----------
TOTAL INCOME.......... 1,340,362 65,177 643,165 348,901
----------- ----------- ----------- -----------
EXPENSES
Investment management
fee..................... 122,746 7,306 28,205 80,480
Transfer agent fees and
expenses................ 667 667 667 667
Shareholder reports and
notices................. 7,719 302 971 3,131
S&P license fees.......... -- -- -- --
Professional fees......... 8,690 8,262 7,296 6,242
Trustees' fees and
expenses................ 1,239 390 359 1,655
Custodian fees............ 7,168 1,268 7,254 2,708
Organizational expenses... 801 801 801 801
Other..................... 534 1,588 1,918 1,019
----------- ----------- ----------- -----------
TOTAL EXPENSES BEFORE
AMOUNTS
REIMBURSED/WAIVED... 149,564 20,584 47,471 96,703
LESS: AMOUNTS
REIMBURSED/WAIVED....... (11,716) (14,914) (12,215) (43,254)
----------- ----------- ----------- -----------
TOTAL EXPENSES AFTER
AMOUNTS
REIMBURSED/WAIVED... 137,848 5,670 35,256 53,449
----------- ----------- ----------- -----------
NET INVESTMENT
INCOME.......... 1,202,514 59,507 607,909 295,452
----------- ----------- ----------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS):
Net realized gain (loss)
on:
Investments............. -- (9,523) 188,163 197,974
Foreign exchange
transactions.......... -- -- (5,010) --
----------- ----------- ----------- -----------
TOTAL GAIN (LOSS)..... -- (9,523) 183,153 197,974
----------- ----------- ----------- -----------
Net change in unrealized
appreciation/depreciation
on:
Investments............. -- (37,051) (138,625) 723,621
Translation of forward
foreign currency
contracts, other
assets and liabilities
denominated in foreign
currencies............ -- -- 36,121 --
----------- ----------- ----------- -----------
TOTAL APPRECIATION
(DEPRECIATION)...... -- (37,051) (102,504) 723,621
----------- ----------- ----------- -----------
NET GAIN (LOSS)....... -- (46,574) 80,649 921,595
----------- ----------- ----------- -----------
NET INCREASE...... $ 1,202,514 $ 12,933 $ 688,558 $ 1,217,047
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
- ------------------
* Net of $3,688, $8,163, $1,272, $309, $1,044, $22,988, $140 and $8,314 in
foreign witholding tax, respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
172
<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>
INVESTMENT INCOME:
INCOME
Interest.................. $ 73,026 $ 85,119 $ 66,480 $ 6,815 $ 158,554 $ 92,374 $ 80,177 $ 32,498
Dividends from affiliate
(Note 3)................ -- -- 1,672 -- -- -- -- --
Dividends................. 403,876* 1,660,876 347,790* 28,137* 220,325* 248,374* 12,944* 77,352*
--------- ----------- --------- --------- --------- --------- --------- ---------
TOTAL INCOME.......... 476,902 1,745,995 415,942 34,952 378,879 340,748 93,121 109,850
--------- ----------- --------- --------- --------- --------- --------- ---------
EXPENSES
Investment management
fee..................... 79,152 368,616 87,820 24,572 180,310 139,478 69,088 49,259
Transfer agent fees and
expenses................ 667 667 667 667 667 667 667 667
Shareholder reports and
notices................. 4,769 8,676 2,737 1,151 6,207 4,362 2,208 2,461
S&P license fees.......... -- -- 4,989 -- -- -- -- --
Professional fees......... 7,446 8,105 8,102 8,467 8,142 5,530 8,171 8,641
Trustees' fees and
expenses................ 563 1,833 844 2,396 1,047 390 562 348
Custodian fees............ 9,124 120 15,921 3,722 12,142 26,440 10,342 14,919
Organizational expenses... 801 801 801 801 801 801 801 801
Other..................... 623 549 694 716 560 7,180 727 967
--------- ----------- --------- --------- --------- --------- --------- ---------
TOTAL EXPENSES BEFORE
AMOUNTS
REIMBURSED/WAIVED... 103,145 389,367 122,575 42,492 209,876 184,848 92,566 78,063
LESS: AMOUNTS
REIMBURSED/WAIVED....... (42,259) -- (34,568) (27,814) (16,539) (115,105) (23,267) (58,554)
--------- ----------- --------- --------- --------- --------- --------- ---------
TOTAL EXPENSES AFTER
AMOUNTS
REIMBURSED/WAIVED... 60,886 389,367 88,007 14,678 193,337 69,743 69,299 19,509
--------- ----------- --------- --------- --------- --------- --------- ---------
NET INVESTMENT
INCOME.......... 416,016 1,356,628 327,935 20,274 185,542 271,005 23,822 90,341
--------- ----------- --------- --------- --------- --------- --------- ---------
NET REALIZED AND UNREALIZED
GAIN (LOSS):
Net realized gain (loss)
on:
Investments............. 41,979 6,142,894 71,322 163,899 1,441,713 360,765 499,696 85,979
Foreign exchange
transactions.......... -- -- -- -- -- 3,229 -- (2,140)
--------- ----------- --------- --------- --------- --------- --------- ---------
TOTAL GAIN (LOSS)..... 41,979 6,142,894 71,322 163,899 1,441,713 363,994 499,696 83,839
--------- ----------- --------- --------- --------- --------- --------- ---------
Net change in unrealized
appreciation/depreciation
on:
Investments............. 940,372 4,872,901 2,344,743 412,400 2,311,314 1,493,895 2,668,045 696,913
Translation of forward
foreign currency
contracts, other
assets and liabilities
denominated in foreign
currencies............ -- -- -- -- -- (673) -- (113)
--------- ----------- --------- --------- --------- --------- --------- ---------
TOTAL APPRECIATION
(DEPRECIATION)...... 940,372 4,872,901 2,344,743 412,400 2,311,314 1,493,222 2,668,045 696,800
--------- ----------- --------- --------- --------- --------- --------- ---------
NET GAIN (LOSS)....... 982,351 11,015,795 2,416,065 576,299 3,753,027 1,857,216 3,167,741 780,639
--------- ----------- --------- --------- --------- --------- --------- ---------
NET INCREASE...... $1,398,367 $12,372,423 $2,744,000 $596,573 $3,938,569 $2,128,221 $3,191,563 $ 870,980
--------- ----------- --------- --------- --------- --------- --------- ---------
--------- ----------- --------- --------- --------- --------- --------- ---------
</TABLE>
173
<PAGE>
Dean Witter Select Dimensions Investment Series
Statements of Changes in Net Assets
- ----------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) AND FOR THE YEAR ENDED
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NORTH AMERICAN GOVERNMENT
MONEY MARKET SECURITIES
--------------------------- ---------------------------
1996 1995 1996 1995
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
Operations:
Net investment income..... $ 1,202,514 $ 882,216 $ 59,507 $ 32,639
Net realized gain
(loss).................. -- -- (9,523) (542)
Net change in unrealized
appreciation/depreciation... -- -- (37,051) 7,062
------------- ------------ ------------- ------------
Net increase
(decrease).......... 1,202,514 882,216 12,933 39,159
------------- ------------ ------------- ------------
Dividends from net
investment income......... (1,202,498) (882,190) (53,121) (27,649)
------------- ------------ ------------- ------------
Transactions in shares of
beneficial interest:
Net proceeds from sales... 32,446,835 48,812,289 1,566,627 1,470,457
Reinvestment of
dividends............... 1,202,498 882,190 53,121 27,649
Cost of shares
repurchased............. (15,553,297) (8,839,415) (120,599) (344,429)
------------- ------------ ------------- ------------
Net increase.......... 18,096,036 40,855,064 1,499,149 1,153,677
------------- ------------ ------------- ------------
Total increase........ 18,096,052 40,855,090 1,458,961 1,165,187
NET ASSETS:
Beginning of period......... 42,089,037 1,233,947 1,287,680 122,493
------------- ------------ ------------- ------------
END OF PERIOD............... $ 60,185,089 $ 42,089,037 $ 2,746,641 $ 1,287,680
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
UNDISTRIBUTED NET INVESTMENT
INCOME...................... $ 42 $ 26 $ 11,871 $ 5,485
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
SHARES ISSUED AND REPURCHASED:
Sold........................ 32,446,835 48,812,289 155,074 145,744
Issued in reinvestment of
dividends................. 1,202,498 882,190 5,292 2,744
Repurchased................. (15,553,297) (8,839,415) (12,012) (34,139)
------------- ------------ ------------- ------------
Net increase................ 18,096,036 40,855,064 148,354 114,349
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
174
<PAGE>
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
DIVERSIFIED INCOME BALANCED UTILITIES
------------------------- -------------------------- --------------------------
1996 1995 1996 1995 1996 1995
------------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
Operations:
Net investment income..... $ 607,909 $ 230,744 $ 295,452 $ 233,569 $ 416,016 $ 236,601
Net realized gain
(loss).................. 183,153 22,350 197,974 112,736 41,979 20,650
Net change in unrealized
appreciation/depreciation... (102,504) 37,740 723,621 770,654 940,372 1,308,922
------------ ----------- ------------ ------------ ------------ ------------
Net increase
(decrease).......... 688,558 290,834 1,217,047 1,116,959 1,398,367 1,566,173
------------ ----------- ------------ ------------ ------------ ------------
Dividends from net
investment income......... (544,861) (155,118) (287,443) (188,705) (406,812) (179,128)
------------ ----------- ------------ ------------ ------------ ------------
Transactions in shares of
beneficial interest:
Net proceeds from sales... 12,180,275 10,018,159 13,052,460 15,835,264 13,485,717 17,486,045
Reinvestment of
dividends............... 544,861 155,118 287,443 188,705 406,812 179,128
Cost of shares
repurchased............. (1,238,953) (1,739,300) (4,273,503) (1,436,358) (3,713,353) (1,590,907)
------------ ----------- ------------ ------------ ------------ ------------
Net increase.......... 11,486,183 8,433,977 9,066,400 14,587,611 10,179,176 16,074,266
------------ ----------- ------------ ------------ ------------ ------------
Total increase........ 11,629,880 8,569,693 9,996,004 15,515,865 11,170,731 17,461,311
NET ASSETS:
Beginning of period......... 8,971,993 402,300 16,311,392 795,527 17,959,231 497,920
------------ ----------- ------------ ------------ ------------ ------------
END OF PERIOD............... $ 20,601,873 $ 8,971,993 $ 26,307,396 $ 16,311,392 $ 29,129,962 $ 17,959,231
------------ ----------- ------------ ------------ ------------ ------------
------------ ----------- ------------ ------------ ------------ ------------
UNDISTRIBUTED NET INVESTMENT
INCOME...................... $ 143,346 $ 80,298 $ 55,872 $ 47,863 $ 68,337 $ 59,133
------------ ----------- ------------ ------------ ------------ ------------
------------ ----------- ------------ ------------ ------------ ------------
SHARES ISSUED AND REPURCHASED:
Sold........................ 1,191,198 994,906 1,074,271 1,408,020 1,080,466 1,534,125
Issued in reinvestment of
dividends................. 53,477 15,447 23,596 16,807 32,628 15,750
Repurchased................. (121,795) (172,845) (352,145) (132,149) (296,400) (145,179)
------------ ----------- ------------ ------------ ------------ ------------
Net increase................ 1,122,880 837,508 745,722 1,292,678 816,694 1,404,696
------------ ----------- ------------ ------------ ------------ ------------
------------ ----------- ------------ ------------ ------------ ------------
<CAPTION>
DIVIDEND GROWTH
---------------------------
1996 1995
------------- ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
Operations:
Net investment income..... $ 1,356,628 $ 836,265
Net realized gain
(loss).................. 6,142,894 178,778
Net change in unrealized
appreciation/depreciation... 4,872,901 6,295,338
------------- ------------
Net increase
(decrease).......... 12,372,423 7,310,381
------------- ------------
Dividends from net
investment income......... (1,245,493) (606,921)
------------- ------------
Transactions in shares of
beneficial interest:
Net proceeds from sales... 67,971,701 71,950,119
Reinvestment of
dividends............... 1,245,493 606,921
Cost of shares
repurchased............. (687,318) (1,943,986)
------------- ------------
Net increase.......... 68,529,876 70,613,054
------------- ------------
Total increase........ 79,656,806 77,316,514
NET ASSETS:
Beginning of period......... 78,694,228 1,377,714
------------- ------------
END OF PERIOD............... $ 158,351,034 $ 78,694,228
------------- ------------
------------- ------------
UNDISTRIBUTED NET INVESTMENT
INCOME...................... $ 345,496 $ 234,361
------------- ------------
------------- ------------
SHARES ISSUED AND REPURCHASED:
Sold........................ 4,633,942 5,787,107
Issued in reinvestment of
dividends................. 85,082 48,577
Repurchased................. (45,753) (163,343)
------------- ------------
Net increase................ 4,673,271 5,672,341
------------- ------------
------------- ------------
</TABLE>
175
<PAGE>
Dean Witter Select Dimensions Investment Series
Statements of Changes in Net Assets (CONTINUED)
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) AND FOR THE YEAR ENDED
DECEMBER 31, 1995
<TABLE>
<CAPTION>
VALUE-ADDED MARKET CORE EQUITY
------------------------- ----------------------
1996 1995 1996 1995
----------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
Operations:
Net investment income..... $ 327,935 $ 218,803 $ 20,274 $ 28,578
Net realized gain
(loss).................. 71,322 24,656 163,899 25,262
Net change in unrealized
appreciation/depreciation... 2,344,743 1,177,215 412,400 84,734
----------- ------------ ---------- ----------
Net increase
(decrease).......... 2,744,000 1,420,674 596,573 138,574
----------- ------------ ---------- ----------
Dividends from net
investment income......... (314,598) (172,075) (16,176) (27,202)
----------- ------------ ---------- ----------
Transactions in shares of
beneficial interest:
Net proceeds from sales... 20,739,612 23,041,372 5,170,933 3,676,375
Reinvestment of
dividends............... 314,598 172,075 16,176 27,202
Cost of shares
repurchased............. (689,079) (841,114) (759,149) (174,491)
----------- ------------ ---------- ----------
Net increase.......... 20,365,131 22,372,333 4,427,960 3,529,086
----------- ------------ ---------- ----------
Total increase........ 22,794,533 23,620,932 5,008,357 3,640,458
NET ASSETS:
Beginning of period......... 23,969,627 348,695 3,956,412 315,954
----------- ------------ ---------- ----------
END OF PERIOD............... $46,764,160 $ 23,969,627 $8,964,769 $3,956,412
----------- ------------ ---------- ----------
----------- ------------ ---------- ----------
UNDISTRIBUTED NET INVESTMENT
INCOME...................... $ 60,857 $ 47,520 $ 6,575 $ 2,477
----------- ------------ ---------- ----------
----------- ------------ ---------- ----------
SHARES ISSUED AND REPURCHASED:
Sold........................ 1,607,194 1,981,323 426,341 339,322
Issued in reinvestment of
dividends................. 24,381 14,750 1,375 2,604
Repurchased................. (54,467) (73,159) (63,217) (15,991)
----------- ------------ ---------- ----------
Net increase................ 1,577,108 1,922,914 364,499 325,935
----------- ------------ ---------- ----------
----------- ------------ ---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
176
<PAGE>
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
AMERICAN VALUE GLOBAL EQUITY DEVELOPING GROWTH
-------------------------- -------------------------- --------------------------
1996 1995 1996 1995 1996 1995
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
Operations:
Net investment income..... $ 185,542 $ 219,613 $ 271,005 $ 163,567 $ 23,822 $ 101,922
Net realized gain
(loss).................. 1,441,713 313,562 363,994 (2,717) 499,696 18,572
Net change in unrealized
appreciation/depreciation... 2,311,314 2,867,922 1,493,222 586,787 2,668,045 1,499,356
------------ ------------ ------------ ------------ ------------ ------------
Net increase
(decrease).......... 3,938,569 3,401,097 2,128,221 747,637 3,191,563 1,619,850
------------ ------------ ------------ ------------ ------------ ------------
Dividends from net
investment income......... (242,153) (155,569) (261,082) (137,860) (55,364) (82,425)
------------ ------------ ------------ ------------ ------------ ------------
Transactions in shares of
beneficial interest:
Net proceeds from sales... 40,345,773 34,805,828 24,931,952 16,594,816 29,887,918 18,068,892
Reinvestment of
dividends............... 242,153 155,569 261,082 137,860 55,364 82,425
Cost of shares
repurchased............. (2,283,848) (794,842) (3,897,769) (1,462,568) (8,328,426) (2,657,067)
------------ ------------ ------------ ------------ ------------ ------------
Net increase.......... 38,304,078 34,166,555 21,295,265 15,270,108 21,614,856 15,494,250
------------ ------------ ------------ ------------ ------------ ------------
Total increase........ 42,000,494 37,412,083 23,162,404 15,879,885 24,751,055 17,031,675
NET ASSETS:
Beginning of period......... 38,234,786 822,703 17,074,303 1,194,418 17,411,852 380,177
------------ ------------ ------------ ------------ ------------ ------------
END OF PERIOD............... $ 80,235,280 $ 38,234,786 $ 40,236,707 $ 17,074,303 $ 42,162,907 $ 17,411,852
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
UNDISTRIBUTED NET INVESTMENT
INCOME...................... $ 9,586 $ 66,197 $ 38,701 $ 28,778 $ (10,873) $ 20,669
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
SHARES ISSUED AND REPURCHASED:
Sold........................ 2,844,351 2,757,922 2,174,506 1,558,946 1,814,702 1,316,995
Issued in reinvestment of
dividends................. 17,321 12,349 22,627 13,086 3,587 5,995
Repurchased................. (159,256) (64,214) (340,501) (138,315) (512,494) (199,866)
------------ ------------ ------------ ------------ ------------ ------------
Net increase................ 2,702,416 2,706,057 1,856,632 1,433,717 1,305,795 1,123,124
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
<CAPTION>
EMERGING MARKETS
-------------------------
1996 1995
------------ -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
Operations:
Net investment income..... $ 90,341 $ 45,935
Net realized gain
(loss).................. 83,839 (79,386)
Net change in unrealized
appreciation/depreciation... 696,800 15,784
------------ -----------
Net increase
(decrease).......... 870,980 (17,667)
------------ -----------
Dividends from net
investment income......... (77,850) (39,505)
------------ -----------
Transactions in shares of
beneficial interest:
Net proceeds from sales... 7,936,154 3,782,735
Reinvestment of
dividends............... 77,850 39,505
Cost of shares
repurchased............. (371,913) (120,566)
------------ -----------
Net increase.......... 7,642,091 3,701,674
------------ -----------
Total increase........ 8,435,221 3,644,502
NET ASSETS:
Beginning of period......... 4,092,218 447,716
------------ -----------
END OF PERIOD............... $ 12,527,439 $ 4,092,218
------------ -----------
------------ -----------
UNDISTRIBUTED NET INVESTMENT
INCOME...................... $ 18,789 $ 6,298
------------ -----------
------------ -----------
SHARES ISSUED AND REPURCHASED:
Sold........................ 739,512 386,160
Issued in reinvestment of
dividends................. 7,272 4,031
Repurchased................. (33,524) (12,240)
------------ -----------
Net increase................ 713,260 377,951
------------ -----------
------------ -----------
</TABLE>
177
<PAGE>
Notes to Financial Statements (UNAUDITED)
- --------------------------------------------------------------------------------
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 investment objectives of each Portfolio are as follows:
<TABLE>
<C> <S>
PORTFOLIO INVESTMENT OBJECTIVE
Money Market Seeks high current income, preservation of capital and liquidity by
investing in short-term money market instruments.
North American Seeks to earn a high level of current income while maintaining relatively
Government low volatility of principal by primarily investing in investment grade fixed
Securities income securities issued or guaranteed by the U.S., Canadian or Mexican
governments.
Diversified Seeks, as a primary objective, to earn a high level of current income and,
Income 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.
Balanced 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.
Utilities 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.
Dividend Seeks to provide reasonable current income and long-term growth of income
Growth and capital by investing primarily in common stock of companies with a
record of paying dividends and the potential for increasing dividends.
Value-Added Seeks to achieve a high level of total return on its assets through a
Market 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.
Core Equity Seeks long-term growth of capital by investing primarily in common stocks
and securities convertible into common stocks issued by domestic and foreign
companies.
American Value 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.
Global Equity 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.
Developing Seeks long-term capital growth by investing primarily in common stocks of
Growth 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.
Emerging Seeks long-term capital appreciation by investing primarily in equity
Markets securities of companies in emerging market countries. The 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.
</TABLE>
178
<PAGE>
Notes to Financial Statements (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures. Actual results
could differ from those estimates. 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) an equity security listed or traded on the New York, American 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);
(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
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, if available, 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 and other distributions are recorded on the
ex-dividend date except certain dividends on foreign securities which are
recorded as soon as the Fund is informed after the ex-dividend date. The
Money Market Portfolio amortizes premiums and accretes discounts over the
life of the respective securities; gains and losses realized upon the sale
of securities are based on amortized cost. For all other Portfolios,
discounts are accreted over the life of the respective securities. Interest
income is accrued daily.
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 exchange 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 Statement of Operations as unrealized gain/loss on foreign
exchange transactions. The Portfolios record realized gains or losses on
delivery of the currency or at the time the forward contract is extinguished
(compensated) by entering into a closing transaction prior to delivery.
179
<PAGE>
Notes to Financial Statements (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
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 $96,436 ($8,036
for each respective Portfolio) and was reimbursed for the full amount
thereof, exclusive of amounts waived of $22,075 ($1,840 for each respective
Portfolio except $1,835 for the Money Market Portfolio). 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 Fund expenses are allocated on the basis of relative net assets or
equally among the Portfolios.
2. INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS--Pursuant to an Investment
Management Agreement, the Fund pays the 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 PORTFOLIO ANNUAL RATE
- --------------------------------------- ------------- --------------------------------------- -------------
<S> <C> <C> <C>
Money Market........................... 0.50 % Value-Added Market..................... 0.50 %
North American Government Securities... 0.65 Core Equity............................ 0.85
Diversified Income..................... 0.40 American Value......................... 0.625
Balanced............................... 0.75 Global Equity.......................... 1.00
Utilities.............................. 0.65 Developing Growth...................... 0.50
Dividend Growth........................ 0.625 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.
180
<PAGE>
Notes to Financial Statements (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
At June 30, 1996, included in the Statements of Assets and Liabilities are
receivables from affiliate which represent expense reimbursements due to the
Fund. For the period January 1, 1996 through December 31, 1996, the Investment
Manager will continue to waive the management fee and reimburse expenses to the
extent they exceed 0.50% of daily net assets of the Portfolio or until such time
as the respective Portfolio has $50 million of net assets, 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 six months ended June 30, 1996
were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES OTHER
------------------------------- --------------------------------
PURCHASES SALES/MATURITIES PURCHASES SALES/MATURITIES
----------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Money Market...................................... $15,408,379 $ 10,915,000 $221,552,407 $ 209,304,666
North American Government Securities.............. 2,040,374 588,023 -- --
Diversified Income................................ 2,993,020 47,902 9,199,836 2,522,634
Balanced.......................................... 12,431,898 8,437,674 11,935,724 5,410,279
Utilities......................................... -- -- 9,902,622 433,088
Dividend Growth................................... -- -- 97,276,129 29,628,511
Value-Added Market................................ 162,285 -- 20,738,751 455,554
Core Equity....................................... -- -- 6,216,759 1,677,702
American Value.................................... 2,891,109 6,007,053 102,181,716 67,347,153
Global Equity..................................... 106,095 134,182 28,957,761 9,043,707
Developing Growth................................. -- -- 44,769,835 22,633,828
Emerging Markets.................................. -- -- 9,229,717 1,687,884
</TABLE>
For the six months ended June 30, 1996, the following Portfolios incurred
brokerage commissions with Dean Witter Reynolds Inc. ("DWR"), an affiliate of
the Investment Manager, for portfolio transactions executed on behalf of the
following Portfolios:
<TABLE>
<CAPTION>
DIVIDEND CORE AMERICAN GLOBAL DEVELOPING
BALANCED UTILITIES GROWTH EQUITY VALUE EQUITY GROWTH
----------- --------- --------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Commissions........................... $ 3,751 $ 12,405 $ 83,493 $ 2,555 $ 67,341 $ 15,318 $ 18,426
</TABLE>
Included in the payable for investments purchased for unsettled trades with
DWR at June 30, 1996 were as follows:
<TABLE>
<CAPTION>
DIVIDEND CORE AMERICAN GLOBAL DEVELOPING
GROWTH EQUITY VALUE EQUITY GROWTH
-------------- ----------- ------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Payable for investments purchased... $ 2,000,800 $ 228,963 $ 156,200 $ 227,529 $ 484,443
</TABLE>
Included in Developing Growth's receivable for investments sold is $324,741
for unsettled trades with DWR at June 30, 1996.
Included in the aforementioned purchases of portfolio securities of
Value-Added Market are purchases of Dean Witter Discover & Co., an affiliate of
the Investment Manager, of $74,153.
Dean Witter Trust Company, an affiliate of the Investment Manager, is the
Fund's transfer agent.
4. FEDERAL INCOME TAX STATUS--At December 31, 1995, the following Portfolios
had an approximate net capital loss carryover which will be available through
December 31, 2003 to offset future capital gains to the extent provided by
regulations: North American Government Securities -- $1,000 and Emerging Markets
- -- $14,000.
181
<PAGE>
Notes to Financial Statements (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
Net capital and currency losses incurred after October 31 ("post-October
losses") within the taxable year are deemed to arise on the first business day
of the Portfolios' next taxable year. The following Portfolios incurred and will
elect to defer post-October losses during fiscal 1995:
<TABLE>
<CAPTION>
GLOBAL DEVELOPING EMERGING
BALANCED EQUITY GROWTH MARKETS
- --------- ----------- --------------- ---------------
<S> <C> <C> <C>
$16,000 $ 44,000 $ 23,000 $ 64,000
- --------- ----------- ------- -------
- --------- ----------- ------- -------
</TABLE>
At December 31, 1995, the following Portfolios had significant temporary
book/tax differences as follows: post-October losses -- Balanced, Global Equity,
Developing Growth and Emerging Markets; income from mark-to-market of open
forward foreign exchange contracts and compensated forward foreign exchange
contracts -- Diversified; income from mark-to-market of passive foreign
investment companies -- Global Equity and Emerging Markets.
5. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS--Some of the
Portfolios may enter 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 June 30, 1996, Global Equity and Emerging Market Portfolios had
outstanding forward contracts used to facilitate settlement of foreign currency
denominated portfolio transactions and the Diversified Income Portfolio had
outstanding forward contracts used to manage foreign currency exposure.
Forward contracts involve elements of market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The Portfolios bear 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.
182
<PAGE>
(This page has been left blank intentionally.)
183
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
NET ASSET NET REALIZED
VALUE NET AND TOTAL FROM LESS NET ASSET TOTAL
YEAR ENDED BEGINNING INVESTMENT UNREALIZED INVESTMENT DIVIDENDS TO VALUE END INVESTMENT
DECEMBER 31 OF PERIOD INCOME GAIN (LOSS) OPERATIONS SHAREHOLDERS OF PERIOD RETURN+
------------ --------- ---------- ------------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Money Market
1994 (a) $ 1.00 $0.01 $ -- $ 0.01 $(0.01) $ 1.00 0.76%(1)
1995 1.00 0.06 -- 0.06 (0.06) 1.00 6.10
1996 (b) 1.00 0.02 -- 0.02 (0.02) 1.00 2.47(1)
North American Government Securities
1994 (a) 10.00 0.06 -- 0.06 (0.02) 10.04 0.61(1)
1995 10.04 0.53 0.11 0.64 (0.50) 10.18 6.40
1996 (b) 10.18 0.24 (0.19) 0.05 (0.24) 9.99 0.55(1)
Diversified Income
1994 (a) 10.00 0.08 -- 0.08 (0.03) 10.05 0.76(1)
1995 10.05 0.57 0.11 0.68 (0.51) 10.22 6.96
1996 (b) 10.22 0.40 0.10 0.50 (0.42) 10.30 4.88(1)
Balanced
1994 (a) 10.00 0.08 (0.02) 0.06 (0.02) 10.04 0.60(1)
1995 10.04 0.40 1.85 2.25 (0.40) 11.89 22.86
1996 (b) 11.89 0.16 0.54 0.70 (0.17) 12.42 5.91(1)
Utilities
1994 (a) 10.00 0.07 -- 0.07 (0.03) 10.04 0.65(1)
1995 10.04 0.45 2.30 2.75 (0.44) 12.35 28.05
1996 (b) 12.35 0.20 0.49 0.69 (0.21) 12.83 5.69(1)
Dividend Growth
1994 (a) 10.00 0.08 (0.09) (0.01) (0.02) 9.97 (0.05) (1)
1995 9.97 0.36 3.57 3.93 (0.36) 13.54 40.13
1996 (b) 13.54 0.15 1.57 1.72 (0.16) 15.10 12.75(1)
Value-Added Market
1994 (a) 10.00 0.06 (0.14) (0.08) (0.02) 9.90 (0.76) (1)
1995 9.90 0.31 2.34 2.65 (0.31) 12.24 27.14
1996 (b) 12.24 0.11 1.00 1.11 (0.12) 13.23 9.10(1)
Core Equity
1994 (a) 10.00 0.07 -- 0.07 (0.02) 10.05 0.67(1)
1995 10.05 0.26 1.05 1.31 (0.29) 11.07 13.29
1996 (b) 11.07 0.04 1.35 1.39 (0.04) 12.42 12.54(1)
American Value
1994 (a) 10.00 0.06 0.01 0.07 (0.02) 10.05 0.69(1)
1995 10.05 0.21 3.66 3.87 (0.21) 13.71 38.95
1996 (b) 13.71 0.05 0.92 0.97 (0.07) 14.61 7.10(1)
Global Equity
1994 (a) 10.00 0.07 (0.10) (0.03) (0.03) 9.94 (0.30) (1)
1995 9.94 0.29 1.05 1.34 (0.29) 10.99 13.76
1996 (b) 10.99 0.10 0.82 0.92 (0.11) 11.80 8.38(1)
Developing Growth
1994 (a) 10.00 0.08 0.08 0.16 (0.03) 10.13 1.58(1)
1995 10.13 0.24 4.88 5.12 (0.25) 15.00 51.26
1996 (b) 15.00 0.02 2.11 2.13 (0.04) 17.09 14.31(1)
Emerging Markets
1994 (a) 10.00 0.06 -- 0.06 (0.02) 10.04 0.57(1)
1995 10.04 0.29 (0.33) (0.04) (0.31) 9.69 (0.57)
1996 (b) 9.69 0.11 1.34 1.45 (0.11) 11.03 15.11(1)
</TABLE>
- -----------------
(a) For the period November 9, 1994 (commencement of operations) through
December 31, 1994. The per share amounts reported are not necessarily
consistent with the corresponding amounts reported on the Statement of
Operations due to the fluctuations in capital stock activity during the
period.
(b) For the six months ended June 30, 1996 (unaudited).
+ Calculated based on the net asset value as of the last business day of the
period.
* After application of the Fund's expense limitation.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
184
<PAGE>
Financial Highlights (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATIOS TO RATIOS TO
AVERAGE NET ASSETS AVERAGE NET ASSETS
(BEFORE EXPENSES WERE (AFTER EXPENSES WERE
ASSUMED)* ASSUMED)
----------------------- -----------------------
NET ASSETS END NET NET PORTFOLIO AVERAGE
OF PERIOD INVESTMENT INVESTMENT TURNOVER COMMISSION
(000'S) EXPENSES INCOME EXPENSES INCOME RATE RATE PAID
-------------- ----------- ---------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Money Market
1994 (a) $1,234 2.50%(2) 3.33 %(2 -- % 5.83%(2) N/A N/A
1995 42,089 0.81 5.11 -- 5.92 N/A N/A
1996 (b) 60,185 0.61(2) 4.85(2) 0.56(2) 4.90(2) N/A N/A
North American Government Securities
1994 (a) 122 2.50(2) 1.78(2) -- 4.28(2) -- %(1) N/A
1995 1,288 2.50 3.24 -- 5.74 18 N/A
1996 (b) 2,747 1.83(2) 3.97(2) 0.50(2) 5.29(2) 34(1) N/A
Diversified Income
1994 (a) 402 2.50(2) 3.08(2) -- 5.58(2) -- (1) N/A
1995 8,972 1.33 5.95 -- 7.28 33 N/A
1996 (b) 20,602 0.67(2) 8.43(2) 0.50(2) 8.60(2) 20(1) N/A
Balanced
1994 (a) 796 2.50(2) 2.90(2) -- 5.40(2) -- (1) --
1995 16,311 1.39 2.45 -- 3.84 99 --
1996 (b) 26,307 0.90(2) 2.34(2) 0.50(2) 2.74(2) 67(1) $ 0.0101
Utilities
1994 (a) 498 2.50(2) 2.79(2) -- 5.29(2) -- (1) --
1995 17,959 1.43 3.01 -- 4.44 3 --
1996 (b) 29,130 0.84(2) 3.07(2) 0.50(2) 3.41(2) 2(1) 0.0493
Dividend Growth
1994 (a) 1,378 2.50(2) 3.28(2) -- 5.78(2) -- (1) --
1995 78,694 0.83 2.80 -- 3.63 4 --
1996 (b) 158,351 0.66(2) 2.29(2) 0.66(2) 2.29(2) 25(1) 0.0500
Value-Added Market
1994 (a) 349 2.50(2) 1.25(2) -- 3.75(2) -- (1) --
1995 23,970 1.46 1.64 -- 3.10 4 --
1996 (b) 46,764 0.70(2) 1.67(2) 0.50(2) 1.87(2) 1(1) 0.0300
Core Equity
1994 (a) 316 2.50(2) 2.32(2) -- 4.82(2) -- (1) --
1995 3,956 2.50 (0.64) -- 1.86 39 --
1996 (b) 8,965 1.46(2) (0.25) (2) 0.50(2) 0.71(2) 30(1) 0.0560
American Value
1994 (a) 823 2.50(2) 1.60(2) -- 4.10(2) 10(1) --
1995 38,235 0.96 1.11 -- 2.07 174 --
1996 (b) 80,235 0.73(2) 0.58(2) 0.67(2) 0.64(2) 133(1) 0.0518
Global Equity
1994 (a) 1,194 2.50(2) 2.20(2) -- 4.70(2) -- (1) --
1995 17,074 1.69 1.09 -- 2.78 74 --
1996 (b) 40,237 1.32(2) 1.12(2) 0.50(2) 1.94(2) 37(1) 0.0501
Developing Growth
1994 (a) 380 2.50(2) 2.31(2) -- 4.81(2) 3(1) --
1995 17,412 1.24 0.86 -- 2.10 80 --
1996 (b) 42,163 0.67(2) 0.01(2) 0.50(2) 0.18(2) 87(1) 0.0526
Emerging Markets
1994 (a) 448 2.50(2) 2.22(2) -- 4.72(2) -- (1) --
1995 4,092 2.50 0.18 -- 2.68 36 --
1996 (b) 12,527 1.97(2) 0.81(2) 0.49(2) 2.29(2) 25(1) 0.0015
</TABLE>
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APPENDIX -- RATINGS
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Description of the highest commercial paper, bond and other short- and
long-term rating categories assigned by Standard & Poor's Corporation ("S&P"),
Moody's Investors Service, Inc. ("Moody's"), Fitch Investors Service, Inc.
("Fitch"), Duff and Phelps, Inc. ("Duff"), IBCA Limited and IBCA Inc. ("IBCA")
and Thomson BankWatch, Inc. ("Thomson"):
COMMERCIAL PAPER AND SHORT-TERM RATINGS
The designation A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus sign (+)
designation. Capacity for timely payment on issues with an A-2 designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
The rating Prime-1 (P-1) is the highest commercial paper rating assigned by
Moody's. Issuers of P-1 paper must have a superior capacity for repayment of
short-term promissory obligations and ordinarily will be evidenced by leading
market positions in well established industries, high rates of return of funds
employed, conservative capitalization structures with moderate reliance on debt
and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate liquidity.
Issues rated Prime-2 (P-2) have a strong capacity for repayment of short-term
promissory obligations. This ordinarily will be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
The rating Fitch-1 (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is
the second highest commercial paper rating assigned by Fitch which reflects an
assurance of timely payment only slightly less in degree than the strongest
issues.
The rating Duff-1 is the highest commercial paper rating assigned by Duff.
Paper rated Duff-1 is regarded as having very high certainty of timely payment
with excellent liquidity factors which are supported by good fundamental
protection factors. Risk factors are minor. Duff applies the modifiers (+) and
(-) to the rating Duff-1 in recognition of significant quality differences
within the highest tier. Paper rated Duff-2 is regarded as having good certainty
of timely payment, good access to capital markets and sound liquidity factors
and company fundamentals. Risk factors are small.
The designation A1 by IBCA indicates that the obligation is supported by a
very strong capacity for timely repayment. Those obligations rated A1+ are
supported by the highest capacity for timely repayment. The designation A2 by
IBCA indicates that the obligation is supported by a strong capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
The rating TBW-1 is the highest short-term rating assigned by Thomson and
indicates a very high degree of likelihood that principal and interest will be
paid on a timely basis. The rating TBW-2 by Thomson is its second highest
rating; while the degree of safety regarding timely repayment of principal and
interest is strong, the relative degree of safety is not as high as for issues
rated TBW-1.
BOND AND LONG-TERM RATINGS
Bonds rated AAA are considered by S&P to be the highest grade obligations
and possess an extremely strong capacity to pay interest and repay principal.
Bonds rated AA by S&P are judged by S&P to have a very strong capacity to pay
interest and repay principal, and differ only in small degrees from issues rated
AAA.
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Bonds which are rated Aaa by Moody's are judged to be of the best quality.
Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. Aa bonds are rated lower than Aaa bonds because margins of
protection may not be as large or fluctuations of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa rated bonds. Moody's applies
numerical modifiers 1, 2 and 3 in the Aa rating category. The modifier 1
indicates a ranking for the security in the higher end of this rating category,
the modifier 2 indicates a mid-range ranking, and the modifier 3 indicates a
ranking in the lower end of the rating category.
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions and liable to but slight market fluctuation other than through
changes in the money rate. The prime feature of an AAA bond is a showing of
earnings several times or many times interest requirements, with such stability
of applicable earnings that safety is beyond reasonable question whatever
changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be
of safety virtually beyond question and are readily salable, whose merits are
not unlike those of the AAA class, but whose margin of safety is less strikingly
broad. The issue may be the obligation of a small company, strongly secured but
influenced as to rating by the lesser financial power of the enterprise and more
local type of market.
Bonds rated AAA by Duff are considered to be of the highest credit quality
with negligible risk factors that are only slightly more than for risk-free U.S.
Treasury debt. Bonds rated AA are judged by Duff to be of high credit quality
with strong protection factors; risk is modest but may vary slightly from time
to time because of economic conditions. Duff applies modifiers of (+) and (-) to
the AA category.
Obligations rated AAA by IBCA have the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk significantly. Obligations rated AA have a
very low expectation of investment risk. Capacity for timely repayment of
principal and interest is substantial. Adverse changes in business, economic or
financial conditions may increase investment risk albeit not very significantly.
IBCA also assigns a rating to certain international and U.S. banks. An IBCA
bank rating represents IBCA's current assessment of the strength of the bank and
whether such bank would receive support should it experience difficulties. In
its assessment of a bank, IBCA uses a dual rating system comprised of Legal
Ratings and Individual Ratings. In addition, IBCA assigns banks Long- and
Short-Term Ratings as used in the corporate ratings discussed above. Legal
Ratings, which range in gradation from 1 through 5, address the question of
whether the bank would receive support by central banks or shareholders if it
experienced difficulties, and such ratings are considered by IBCA to be a prime
factor in its assessment of credit risk. Individual Ratings, which range in
gradations from A through E, represent IBCA's assessment of a bank's economic
merits and address the question of how the bank would be viewed if it were
entirely independent and could not rely on support from state authorities or its
owners.
Companies rated A are considered by Thomson to possess an exceptionally
strong balance sheet and earnings record, translating into an excellent
reputation and unquestioned access to their natural money markets; if weakness
or vulnerability exists in any aspect of a company's business, it is entirely
mitigated by the strengths of the organization. Companies rated A/B- by Thomson
are judged by Thomson to be financially very solid with a favorable track record
and no readily apparent weakness; their overall risk profiles, while low, are
not quite as favorable as for companies in the highest rating category.
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