<PAGE>
DEAN WITTER
SELECT DIMENSIONS
INVESTMENT SERIES
SELECT
DIMENSIONS [LOGO]
PROSPECTUS
DATED MARCH 2, 1998
REVISED MAY 1, 1998
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PROSPECTUS DATED MARCH 2, 1998, REVISED MAY 1, 1998
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 GROWTH PORTFOLIO
- THE UTILITIES PORTFOLIO
- THE DIVIDEND GROWTH PORTFOLIO
- THE VALUE-ADDED MARKET PORTFOLIO
- THE GROWTH 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) 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
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 March 2, 1998, which
has been filed with the Securities and Exchange Commission, and which is
available at no charge upon request of the Fund at the address or telephone
numbers listed on this page. The Statement of Additional Information is
incorporated herein by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
DEAN WITTER INTERCAPITAL INC. -- Investment Manager
This Prospectus must be accompanied by a current Prospectus for the Variable
Annuity Contracts or Variable Life Policies issued by Hartford Life Insurance
Company or 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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PAGE
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Prospectus Summary 3
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Financial Highlights 8
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The Fund and its Management 12
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Investment Objectives and Policies 13
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The Money Market Portfolio 13
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The North American Government
Securities Portfolio 15
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The Diversified Income Portfolio 17
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The Balanced Growth Portfolio 20
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The Utilities Portfolio 21
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The Dividend Growth Portfolio 23
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The Value-Added Market Portfolio 23
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The Growth Portfolio 24
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The American Value Portfolio 25
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The Mid-Cap Growth Portfolio 26
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The Global Equity Portfolio 27
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The Developing Growth Portfolio 28
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The Emerging Markets Portfolio 29
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General Portfolio Techniques 32
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Investment Restrictions 47
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Determination of Net Asset Value 48
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Purchase of Fund Shares 49
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Redemption of Fund Shares 49
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Dividends, Distributions and Taxes 49
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Performance Information 50
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Additional Information 51
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Appendix--Ratings of Investments 53
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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
FUND an open-end 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 GROWTH PORTFOLIO,
the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the
VALUE-ADDED MARKET PORTFOLIO, the GROWTH 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 13 through 32). 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 49 and 51).
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INVESTMENT Each Portfolio has distinct investment objectives and policies,
OBJECTIVES AND and is subject to various investment restrictions, some of which
POLICIES apply to all the 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 13-15). 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 15-17). 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 17-20). The BALANCED GROWTH
PORTFOLIO seeks to provide capital growth with reasonable
current income by investing, under normal market conditions, at
least 60% of its total assets in a diversified portfolio of
common stocks of companies which have a record of paying
dividends and, in the opinion of the Investment Manager, have
the potential for increasing dividends and in securities
convertible into common stock, and at least 25% of its total
assets in investment grade fixed-income (fixed-rate and
adjustable-rate) securities such as corporate notes and bonds
and obligations issued or guaranteed by the U.S. Government, its
agencies and its instrumentalities (see pages 20-21). 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 21-23). 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 23). The VALUE-ADDED MARKET
PORTFOLIO seeks to achieve a high level of total return on its
assets through a
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3 - PROSPECTUS
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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 23-24). The GROWTH 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 (see pages 24-25). 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 25-26). 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 26-27). The GLOBAL EQUITY PORTFOLIO seeks a
high level of total return on its assets primarily through
long-term capital growth and, to a lesser extent, from income,
through investments in all types of common stocks and
equivalents (such as convertible securities and warrants),
preferred stocks and bonds and other debt obligations of
domestic and foreign companies and governments and international
organizations (see pages 27-28). 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 28-29). 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 29-32).
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 13-47 and "Special Risk
Considerations" below).
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SPECIAL The MONEY MARKET PORTFOLIO invests solely in U.S. Government
RISK securities, high quality corporate debt obligations and
CONSIDERATIONS obligations of banks and 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
GROWTH 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
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4 - PROSPECTUS
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securities. The foreign securities markets in which the
Portfolios may invest pose different and generally greater risks
than those risks customarily associated with domestic securities
and markets including fluctuations in foreign currency exchange
rates, foreign tax rates and foreign securities exchange
controls. The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO may
invest a significant portion of its assets in securities issued
and guaranteed by the governments of Canada and Mexico. The
Canadian mortgage-backed securities market is of recent origin
and is less well developed and less liquid than the U.S. market.
It should be recognized that the Canadian and Mexican debt
securities in which the Portfolio will invest pose 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
GROWTH 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 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
5 - PROSPECTUS
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available to investors investing in emerging market countries
than in the United States. There is also generally less
governmental regulation of the securities industry in emerging
market countries than in the United States. Moreover, it may be
more difficult to obtain a judgment in a court outside the
United States. Many of the emerging market countries in which
the EMERGING MARKETS PORTFOLIO may invest may be subject to a
greater degree of economic, political and social instability
than is the case in the United States and Western European
countries. The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO,
the DIVERSIFIED INCOME PORTFOLIO, the BALANCED GROWTH 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 (other than the
BALANCED GROWTH PORTFOLIO) and the VALUE-ADDED MARKET PORTFOLIO
may write call options on securities held in its portfolio
without limit (the BALANCED GROWTH PORTFOLIO may not write
covered options on portfolio securites exceeding in the
aggregate 5% of the value of its total assets). 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 40), reverse repurchase agreements and dollar
rolls (page 40), mortgage-backed securities (page 32), asset-
backed securities (page 35), foreign securities (page 36),
Canadian government securities (page 16), Mexican government
securities (page 16 ), leveraging (page 29), lower-rated
securities (page 39), "mid-cap" stocks (page 27), public
utilities securities (page 22), forward foreign currency
exchange contracts (page 37), emerging market country securities
(page 31), portfolio trading (page 45), options and futures
transactions (page 42), warrants (page 42), zero coupon
securities (page 41), when-issued and delayed delivery
securities and forward commitments (page 41) and "when, as and
if issued" securities (page 41), 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
MANAGER Fund, and its wholly-owned subsidiary, Dean Witter Services
Company Inc., serve in various investment management, advisory,
management and administrative capacities to 101 investment
companies and other portfolios with assets of approximately
$113.6 billion at March 31, 1998 (see page 12).
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MANAGEMENT The Investment Manager receives monthly fees at the following
FEE annual rates 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 GROWTH PORTFOLIO -- 0.60%;
UTILITIES PORTFOLIO -- 0.65%; DIVIDEND GROWTH PORTFOLIO --
0.625% on assets up to $500 million and 0.50% on assets over
$500 million; VALUE-ADDED MARKET PORTFOLIO -- 0.50%; GROWTH
PORTFOLIO -- 0.80%; 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 GROWTH
PORTFOLIO, the UTILITIES PORTFOLIO, the DIVIDEND GROWTH
PORTFOLIO, the GROWTH 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 12).
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SUB-ADVISERS TCW Funds Management, Inc. ("TCW") has been retained by the
Investment Manager to provide investment advice and manage the
portfolios of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO
and the EMERGING MARKETS PORTFOLIO, subject to the overall
supervision of the Investment Manager. TCW also serves as
adviser to eleven investment companies for which Dean Witter
Services Company Inc. serves as manager, and, at February 28,
1998, had over $50 billion under management or committed to
management in various fiduciary or advisory capacities,
primarily from institutional investors (see page 12).
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6 - PROSPECTUS
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Morgan Stanley Asset Management Inc. ("MSAM"), an affiliate of
the Investment Manager, has been retained by the Investment
Manager to provide investment advice and manage the portfolio of
the GROWTH PORTFOLIO, subject to the overall supervision of the
Investment Manager. MSAM conducts a worldwide investment
advisory business. As of February 28, 1998, MSAM, together with
its institutional investment management affiliates, had
approximately $156.5 billion in assets under management as an
investment manager or as a fiduciary adviser (see page 12).
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SUB-ADVISORY TCW 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 and the
EMERGING MARKETS PORTFOLIO. MSAM receives monthly fees from the
Investment Manager equal to 40% of the Investment Manager's
monthly fee in respect of the GROWTH PORTFOLIO (see page 12).
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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) 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
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. 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 49 and 51).
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PURCHASES AND Shares of the Fund are sold and redeemed at net asset value,
REDEMPTIONS I.E., without sales charge (see page 49).
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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 MONEY MARKET PORTFOLIO, the
NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the BALANCED GROWTH PORTFOLIO (then named the BALANCED PORTFOLIO),
the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the VALUE-ADDED MARKET
PORTFOLIO, the GROWTH PORTFOLIO (then named 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
have been audited by Price Waterhouse LLP, independent accountants. The
financial highlights should be read in conjunction with the financial
statements, notes thereto and the unqualified report of
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NET ASSET
VALUE NET NET REALIZED TOTAL FROM DISTRIBUTIONS TOTAL DIVIDENDS
BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO TO AND
YEAR ENDED DECEMBER 31 OF PERIOD INCOME GAIN (LOSS) OPERATIONS SHAREHOLDERS SHAREHOLDERS DISTRIBUTIONS
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MONEY MARKET
1994 (a) $ 1.00 $ 0.01 -- $ 0.01 $(0.01) -- $(0.01)
1995 1.00 0.06 -- 0.06 (0.06) -- (0.06)
1996 1.00 0.05 -- 0.05 (0.05) -- (0.05)
1997 1.00 0.05 -- 0.05 (0.05) -- (0.05)
NORTH AMERICAN GOVERNMENT SECURITIES
1994 (a) 10.00 0.06 -- 0.06 (0.02) -- (0.02)
1995 10.04 0.53 $ 0.11 0.64 (0.50) -- (0.50)
1996 10.18 0.52 (0.09) 0.43 (0.52) -- (0.52)
1997 10.09 0.48 0.09 0.57 (0.49) -- (0.49)
DIVERSIFIED INCOME
1994 (a) 10.00 0.08 -- 0.08 (0.03) -- (0.03)
1995 10.05 0.57 0.11 0.68 (0.51) -- (0.51)
1996 10.22 0.80 0.13 0.93 (0.82) $(0.01) (0.83)
1997 10.32 0.80 0.02 0.82 (0.83) (0.02) (0.85)
BALANCED
1994 (a) 10.00 0.08 (0.02) 0.06 (0.02) -- (0.02)
1995 10.04 0.40 1.85 2.25 (0.40) -- (0.40)
1996 11.89 0.33 1.25 1.58 (0.33) (0.07) (0.40)
1997 13.07 0.29 2.01 2.30 (0.30) (0.04) (0.34)
UTILITIES
1994 (a) 10.00 0.07 -- 0.07 (0.03) -- (0.03)
1995 10.04 0.45 2.30 2.75 (0.44) -- (0.44)
1996 12.35 0.43 0.60 1.03 (0.43) (0.01) (0.44)
1997 12.94 0.39 2.96 3.35 (0.40) (0.05) (0.45)
DIVIDEND GROWTH
1994 (a) 10.00 0.08 (0.09) (0.01) (0.02) -- (0.02)
1995 9.97 0.36 3.57 3.93 (0.36) -- (0.36)
1996 13.54 0.34 2.94 3.28 (0.35) (0.02) (0.37)
1997 16.45 0.38 3.80 4.18 (0.38) (0.68) (1.06)
VALUE-ADDED MARKET
1994 (a) 10.00 0.06 (0.14) (0.08) (0.02) -- (0.02)
1995 9.90 0.31 2.34 2.65 (0.31) -- (0.31)
1996 12.24 0.23 1.93 2.16 (0.23) (0.01) (0.24)
1997 14.16 0.23 3.43 3.66 (0.23) (0.03) (0.26)
CORE EQUITY
1994 (a) 10.00 0.07 -- 0.07 (0.02) -- (0.02)
1995 10.05 0.26 1.05 1.31 (0.29) -- (0.29)
1996 11.07 0.08 2.52 2.60 (0.08) (0.04) (0.12)
1997 13.55 0.09 3.09 3.18 (0.10) (0.07) (0.17)
</TABLE>
8 - PROSPECTUS
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
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 AVERAGE NET
ASSETS
RATIOS TO AVERAGE NET (AFTER EXPENSES WERE
ASSETS
(BEFORE EXPENSES WERE ASSUMED)
NET ASSETS ASSUMED) ------------------------
NET ASSET TOTAL END OF ------------------------- NET PORTFOLIO AVERAGE
YEAR ENDED VALUE END INVESTMENT PERIOD NET INVESTMENT INVESTMENT TURNOVER COMMISSION
DECEMBER 31 OF PERIOD RETURN+ (000'S) EXPENSES INCOME (LOSS) EXPENSES INCOME RATE RATE PAID
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET
1994 (a) $ 1.00 0.76%(1) $ 1,234 2.50%*(2) 3.33%*(2) -- 5.83%(2) N/A N/A
1995 1.00 6.10 42,089 0.81 5.11 -- 5.92 N/A N/A
1996 1.00 5.07 87,002 0.59 4.94 0.57% 4.96 N/A N/A
1997 1.00 5.21 84,045 0.55 5.08 0.55 5.08 N/A N/A
NORTH AMERICAN
GOVERNMENT
SECURITIES
1994 (a) 10.04 0.61(1) 122 2.50*(2) 1.78*(2) -- 4.28(2) -- N/A
1995 10.18 6.40 1,288 2.50* 3.24* -- 5.74 18% N/A
1996 10.09 4.35 4,172 1.45 4.55 0.50 5.50 48 N/A
1997 10.17 5.91 5,091 1.26 4.75 1.26 4.75 27 N/A
DIVERSIFIED
INCOME
1994 (a) 10.05 0.76(1) 402 2.50*(2) 3.08*(2) -- 5.58(2) -- N/A
1995 10.22 6.96 8,972 1.33 5.95 -- 7.28 33 N/A
1996 10.32 9.54 32,119 0.71 8.26 0.50 8.47 69 N/A
1997 10.29 8.32 62,287 0.55 8.09 0.55 8.09 110 N/A
BALANCED
1994 (a) 10.04 0.60(1) 796 2.50*(2) 2.90*(2) -- 5.40(2) -- --
1995 11.89 22.86 16,311 1.39 2.45 -- 3.84 99 --
1996 13.07 13.54 38,893 0.90 2.35 0.50 2.75 88 $ 0.0580
1997 15.03 17.87 71,323 0.86 2.13 0.86 2.13 64 0.0581
UTILITIES
1994 (a) 10.04 0.65(1) 498 2.50*(2) 2.79*(2) -- 5.29(2) -- --
1995 12.35 28.05 17,959 1.43 3.01 -- 4.44 3 --
1996 12.94 8.48 35,686 0.80 3.16 0.50 3.46 15 0.0500
1997 15.84 26.45 50,766 0.76 2.83 0.76 2.83 34 0.0520
DIVIDEND GROWTH
1994 (a) 9.97 (0.05) (1) 1,378 2.50*(2) 3.28*(2) -- 5.78(2) -- --
1995 13.54 40.13 78,694 0.83 2.80 -- 3.63 4 --
1996 16.45 24.49 258,101 0.67 2.44 0.67 2.44 39 0.0518
1997 19.57 26.12 518,419 0.65 2.11 0.65 2.11 26 0.0545
VALUE-ADDED
MARKET
1994 (a) 9.90 (0.76) (1) 349 2.50*(2) 1.25*(2) -- 3.75(2) -- --
1995 12.24 27.14 23,970 1.46 1.64 -- 3.10 4 --
1996 14.16 17.78 73,516 0.64 1.69 0.56 1.77 4 0.0300
1997 17.56 26.12 141,316 0.58 1.49 0.58 1.49 8 0.0300
CORE EQUITY
1994 (a) 10.05 0.67(1) 316 2.50*(2) 2.32*(2) -- 4.82(2) -- --
1995 11.07 13.29 3,956 2.50* (0.64) * -- 1.86 39 --
1996 13.55 23.56 18,215 1.22 (0.03) 0.50 0.69 47 0.0573
1997 16.56 23.07 40,311 1.01 0.13 1.01 0.13 55 0.0585
</TABLE>
<TABLE>
<C> <S>
- ---------------------
</TABLE>
EMPTY FOOTNOTE
9 - PROSPECTUS
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET ASSET
VALUE NET NET REALIZED TOTAL FROM DISTRIBUTIONS TOTAL DIVIDENDS
BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO TO AND
YEAR ENDED DECEMBER 31 OF PERIOD INCOME GAIN (LOSS) OPERATIONS SHAREHOLDERS SHAREHOLDERS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AMERICAN VALUE
1994 (a) $ 10.00 $ 0.06 $ 0.01 $ 0.07 $(0.02) -- $(0.02)
1995 10.05 0.21 3.66 3.87 (0.21) -- (0.21)
1996 13.71 0.08 1.68 1.76 (0.10) $(0.07) (0.17)
1997 15.30 0.07 4.73 4.80 (0.06) (0.35) (0.41)
MID-CAP GROWTH
1997 (b) 10.00 0.18 1.39 1.57 (0.17) -- (0.17)
GLOBAL EQUITY
1994 (a) 10.00 0.07 (0.10) (0.03) (0.03) -- (0.03)
1995 9.94 0.29 1.05 1.34 (0.29) -- (0.29)
1996 10.99 0.15 1.10 1.25 (0.17) (0.01) (0.18)
1997 12.06 0.12 0.92 1.04 (0.11) (0.02) (0.13)
DEVELOPING GROWTH
1994 (a) 10.00 0.08 0.08 0.16 (0.03) -- (0.03)
1995 10.13 0.24 4.88 5.12 (0.25) -- (0.25)
1996 15.00 0.02 1.92 1.94 (0.04)++ (0.02) (0.06)
1997 16.88 0.05 2.27 2.32 (0.04) -- (0.04)
EMERGING MARKETS
1994 (a) 10.00 0.06 -- 0.06 (0.02) -- (0.02)
1995 10.04 0.29 (0.33) (0.04) (0.31) -- (0.31)
1996 9.69 0.16 1.51 1.67 (0.16) -- (0.16)
1997 11.20 0.06 0.11 0.17 (0.06) -- (0.06)
</TABLE>
<TABLE>
<C> <S>
- ---------------------
(a) For the period November 9, 1994 (commencement of operations) through December 31, 1994.
(b) For the period January 21, 1997 (commencement of operations) through December 31, 1997.
+ Calculated based on the net asset value as of the last business day of the period.
++ Includes distributions from paid-in-capital of $0.01.
* After application of the Fund's expense limitation.
(1) Not annualized.
(2) Annualized.
</TABLE>
10 - PROSPECTUS
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATIOS TO AVERAGE NET
ASSETS
RATIOS TO AVERAGE NET (AFTER EXPENSES WERE
ASSETS
(BEFORE EXPENSES WERE ASSUMED)
NET ASSETS ASSUMED) ------------------------
NET ASSET TOTAL END OF ------------------------- NET PORTFOLIO AVERAGE
YEAR ENDED VALUE END INVESTMENT PERIOD NET INVESTMENT INVESTMENT TURNOVER COMMISSION
DECEMBER 31 OF PERIOD RETURN+ (000'S) EXPENSES INCOME (LOSS) EXPENSES INCOME RATE RATE PAID
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMERICAN VALUE
1994 (a) $ 10.05 0.69%(1) $ 823 2.50*%(2) 1.60*%(2) -- 4.10%(2) 10%(1) --
1995 13.71 38.95 38,235 0.96 1.11 -- 2.07 174 --
1996 15.30 12.95 120,904 0.71 0.52 0.69% 0.54 232 $ 0.0557
1997 19.69 31.93 230,014 0.68 0.42 0.68 0.42 262 0.0566
MID-CAP GROWTH
1997 (b) 11.40 15.84(1) 19,236 1.12(2) 0.65(2) -- 1.77(2) 104(1) 0.0546
GLOBAL EQUITY
1994 (a) 9.94 (0.30) (1) 1,194 2.50* (2) 2.20* (2) -- 4.70(2) -- --
1995 10.99 13.76 17,074 1.69 1.09 -- 2.78 74 --
1996 12.06 11.43 59,246 1.25 0.69 0.72 1.22 62 0.0451
1997 12.97 8.66 102,229 1.13 0.91 1.13 0.91 87 0.0283
DEVELOPING
GROWTH
1994 (a) 10.13 1.58(1) 380 2.50* (2) 2.31* (2) -- 4.81(2) 3(1) --
1995 15.00 51.26 17,412 1.24 0.86 -- 2.10 80 --
1996 16.88 12.95 61,120 0.68 (0.04) 0.58 0.06 146 0.0537
1997 19.16 13.77 82,690 0.60 0.26 0.60 0.26 149 0.0555
EMERGING
MARKETS
1994 (a) 10.04 0.57(1) 448 2.50* (2) 2.22* (2) -- 4.72(2) -- --
1995 9.69 (0.57) 4,092 2.50* 0.18* -- 2.68 36 --
1996 11.20 17.69 17,240 2.02 (0.10) 0.50 1.42 46 0.0022
1997 11.31 1.27 23,815 1.71 0.49 1.71 0.49 91 0.0007
</TABLE>
<TABLE>
<C> <S>
- ---------------------
</TABLE>
EMPTY FOOTNOTE
11 - 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 Morgan Stanley Dean Witter & Co. ("MSDW"),
a preeminent global financial services firm that maintains leading market
positions in each of its three primary businesses -- securities, asset
management and credit services.
InterCapital and its wholly-owned subsidiary, Dean Witter Services Company Inc.,
serve in various investment management, advisory, management and administrative
capacities to 101 investment companies, 28 of which are listed on the New York
Stock Exchange, with combined total assets of $109.5 billion at March 31, 1998.
The Investment Manager also manages portfolios of pension plans, other
institutions and individuals which aggregated approximately $4.1 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 and the
EMERGING MARKETS PORTFOLIO, under a Sub-Advisory Agreement between TCW Funds
Management, Inc. ("TCW") and the Investment Manager, TCW provides these
Portfolios with investment advice and portfolio management, in each case subject
to the overall supervision of the Investment Manager. TCW, whose address is 865
South Figueroa Street, Suite 1800, Los Angeles, California 90017, also serves as
investment adviser to eleven investment companies for which Dean Witter Services
Company Inc. serves as manager. TCW, which was organized in 1987, is a
wholly-owned subsidiary of The TCW Group, Inc. ("TCW Group"), 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 Group,
may be deemed to be a control person of TCW by virtue of the aggregate ownership
by Mr. Day and his family of more than 25% of the outstanding voting stock of
TCW Group. TCW in turn has entered into further sub-advisory agreements with two
other wholly-owned subsidiaries of TCW Group, 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 16 Charles II Street, London SWIY4QU. As of February
28, 1998, TCW and its affiliates had over $50 billion under management or
committed to management, primarily from institutional investors.
With regard to the GROWTH PORTFOLIO, under a Sub-Advisory Agreement between
Morgan Stanley Asset Management Inc. ("MSAM") and the Investment Manager, MSAM
provides that Portfolio with investment advice and portfolio management, subject
to the overall supervision of the Investment Manager. MSAM, whose address is
1221 Avenue of the Americas, New York, New York 10020, together with its
institutional investment management affiliates had, as of February 28, 1998,
approximately $156.5 billion in assets under management as an investment manager
or as a fiduciary adviser, primarily for U.S. corporate and public employee
benefit plans, investment companies, endowments, foundations and wealthy
individuals. MSAM, like InterCapital, is a wholly-owned subsidiary of MSDW.
TCW and MSAM are sometimes collectively referred to as the "Sub-Advisers" and
individually as a "Sub-Adviser."
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 GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO,
by the applicable 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; 0.60% to the net assets of
the BALANCED GROWTH PORTFOLIO; 0.65% to the net assets of the UTILITIES
PORTFOLIO; 0.625% to the net assets of the DIVIDEND GROWTH PORTFOLIO up to $500
million and 0.50% to the net assets of that Portfolio exceeding $500 million;
0.50% to the net assets of the VALUE-ADDED MARKET PORTFOLIO; 0.80% to the net
assets of the GROWTH PORTFOLIO; 0.625% to the net assets of the AMERICAN VALUE
PORTFOLIO; 0.75% to the net assets of the MID-CAP GROWTH 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 and the EMERGING MARKETS PORTFOLIO pursuant to its
Sub-Advisory Agreement in respect of those Portfolios, the
12 - PROSPECTUS
<PAGE>
Investment Manager pays TCW monthly compensation equal to 40% of its monthly
compensation in respect of each of those Portfolios, and as compensation for its
services provided to the GROWTH PORTFOLIO pursuant to its Sub-Advisory Agreement
in respect of this Portfolio, the Investment Manager pays MSAM 40% of its
monthly compensation in respect of this Portfolio.
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.
For the year ended December 31, 1997, the Fund accrued total compensation to the
Investment Manager amounting to 0.50% of the average daily net assets of the
MONEY MARKET PORTFOLIO, 0.65% of the average daily net assets of the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, 0.40% of the average daily net assets
of the DIVERSIFIED INCOME PORTFOLIO, 0.75% of the average daily net assets of
the BALANCED GROWTH PORTFOLIO, 0.65% of the average daily net assets of the
UTILITIES PORTFOLIO, 0.625% of the average daily net assets of the DIVIDEND
GROWTH PORTFOLIO, 0.50% of the average daily net assets of the VALUE-ADDED
MARKET PORTFOLIO, 0.85% of the average daily net assets of the GROWTH PORTFOLIO,
0.625% of the average daily net assets of the AMERICAN VALUE PORTFOLIO, 1.0% of
the average daily net assets of the GLOBAL EQUITY PORTFOLIO, 0.50% of the
average daily net assets of the DEVELOPING GROWTH PORTFOLIO and 1.25% of the
average daily nets assets of the EMERGING MARKETS PORTFOLIO. The total expenses
of the MONEY MARKET PORTFOLIO amounted to 0.55% of its average daily net assets,
the total expenses of the NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO amounted to
1.26% of its average daily net assets, the total expenses of the DIVERSIFIED
INCOME PORTFOLIO amounted to 0.55% of its average daily net assets, the total
expenses of the BALANCED GROWTH PORTFOLIO amounted to 0.86% of its average daily
net assets, the total expenses of the UTILITIES PORTFOLIO amounted to 0.76% of
its average daily net assets, the total expenses of the DIVIDEND GROWTH
PORTFOLIO amounted to 0.65% of its average daily net assets, the total expenses
of the VALUE-ADDED MARKET PORTFOLIO amounted to 0.58% of its average daily net
assets, the total expenses of the GROWTH PORTFOLIO amounted to 1.01% of its
average daily net assets, the total expenses of the AMERICAN VALUE PORTFOLIO
amounted to 0.68% of its average daily net assets, the total expenses of the
GLOBAL EQUITY PORTFOLIO amounted to 1.13% of its average daily net assets, the
total expenses of the DEVELOPING GROWTH PORTFOLIO amounted to 0.60% of its
average daily net assets, and the total expenses of the EMERGING MARKETS
PORTFOLIO amounted to 1.71% of its average daily net assets.
The MID-CAP GROWTH PORTFOLIO commenced operations on January 21, 1997. The
Investment Manager has undertaken to assume all expenses of the MID-CAP GROWTH
PORTFOLIO (except for any brokerage fees) 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 July 31, 1998, whichever
occurs first.
Prior to March, 1998, the BALANCED GROWTH PORTFOLIO (then named the BALANCED
PORTFOLIO) and the GROWTH PORTFOLIO (then named the CORE EQUITY PORTFOLIO) were
sub-advised by TCW. In October, 1997, TCW indicated its intention to resign as
Sub-Adviser to these Portfolios and, on November 6, 1997, the Board of Trustees
recommended that InterCapital assume the investment management advice and
portfolio management function then being performed by TCW for the BALANCED
GROWTH PORTFOLIO and that a new Sub-Advisory Agreement with MSAM be submitted to
shareholders of the GROWTH PORTFOLIO (then named the CORE EQUITY PORTFOLIO) for
approval. The shareholders of the GROWTH PORTFOLIO approved the new Sub-Advisory
Agreement with MSAM on February 26, 1998 and the new Sub-Advisory Agreement
became effective on March 2, 1998, at which time TCW also resigned as
Sub-Adviser of the GROWTH PORTFOLIO and the BALANCED GROWTH PORTFOLIO. Effective
March 2, 1998, the Investment Manager and the Fund amended the Investment
Management Agreement to reduce the fee paid by the Fund to the Investment
Manager under the Agreement in respect of the BALANCED GROWTH PORTFOLIO from
0.75% to 0.60% of the Portfolio's average daily net assets and to reduce the fee
paid by the Fund to the Investment Manager under the Agreement in respect of the
GROWTH PORTFOLIO from 0.85% to 0.80% of the Portfolio's average daily net
assets.
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;
13 - PROSPECTUS
<PAGE>
OBLIGATIONS OF SAVINGS INSTITUTIONS. Certificates of deposit of savings banks
and savings and loan associations, having total assets of $1 billion or more;
FULLY INSURED CERTIFICATES OF DEPOSIT. Certificates of deposit of banks and
savings institutions having total assets of less than $1 billion, if the
principal amount of the obligation is federally insured by the Bank Insurance
Fund or the Savings Association Insurance Fund (each of which is administered by
the Federal Deposit Insurance Corporation), limited to $100,000 principal amount
per certificate and to 10% or less of the Portfolio's total assets in all such
obligations and in all illiquid assets, in the aggregate;
COMMERCIAL PAPER AND CORPORATE OBLIGATIONS. Commercial paper and corporate debt
obligations maturing in thirteen months or less which are rated in one of the
two highest rating categories for short-term debt obligations, or, if not rated,
have been issued by issuers which have another short-term debt obligation that
is comparable in priority and security to such non-rated securities and is so
rated, by at least two nationally recognized statistical rating organizations
("NRSROs") (or one NRSRO if the instrument was rated by only one such
organization) or which, if unrated, are of comparable quality as determined in
accordance with procedures established by the Trustees. The NRSROs currently
rating instruments of the type the Portfolio may purchase are Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff and
Phelps, Inc., Fitch Investors Service, Inc., IBCA Limited and IBCA Inc., and
Thomson BankWatch, Inc. Their rating criteria are described in the Appendix to
the Fund's Statement of Additional Information. See the Appendix to this
Prospectus for an explanation of Moody's and S&P ratings.
The foregoing rating limitations apply at the time of acquisition of a security.
Any subsequent change in any rating by a rating service will not require
elimination of any security from the portfolio. However, in accordance with
procedures adopted by the Fund's Trustees pursuant to federal securities
regulations governing money market funds, if the Investment Manager becomes
aware that a portfolio security has received a new rating from an NRSRO that is
below the second highest rating, then, unless the security is disposed of within
five days, the Investment Manager will perform a creditworthiness analysis of
any such downgraded securities, which analysis will be reported to the Trustees
who will, in turn, determine whether the securities continue to present minimal
credit risks to the MONEY MARKET PORTFOLIO.
The ratings assigned by the NRSROs represent their opinions as to the quality of
the securities they undertake to rate. It should be emphasized, however, that
the ratings are general and not absolute standards of quality.
Subject to the foregoing requirements, the MONEY MARKET PORTFOLIO may invest in
commercial paper which has been issued pursuant to the "private placement"
exemption afforded by Section 4(2) of the Securities Act of 1933 (the
"Securities Act") and which may be sold to institutional investors pursuant to
Rule 144A under the Securities Act. Management considers such legally
restricted, but readily marketable, commercial paper to be liquid. However,
pursuant to procedures approved by the Trustees of the Fund, if a particular
investment in such commercial paper is determined to be illiquid, that
investment will be included within the 10% limitation on illiquid investments.
If at any time the MONEY MARKET PORTFOLIO's investments in illiquid securities
exceed 10% of the Portfolio's total assets, the Portfolio will dispose of
illiquid securities in an orderly fashion to reduce the Portfolio's holdings in
such securities to less than 10% of its total assets.
VARIABLE RATE AND FLOATING RATE OBLIGATIONS. Certain of the types of investments
described above may be variable rate or floating rate obligations. The interest
rates payable on variable rate or floating rate obligations are not fixed and
may fluctuate based upon changes in market rates. The interest rate payable on a
variable rate obligation may be adjusted at predesignated periodic intervals and
on a floating rate obligation whenever there is a change in the market rate of
interest on which the interest rate payable is based.
Although the MONEY MARKET PORTFOLIO will generally not seek profits through
short-term trading, it may dispose of any portfolio security prior to its
maturity if, on the basis of a revised credit evaluation of the issuer or other
circumstances or considerations, it believes such disposition advisable.
The MONEY MARKET PORTFOLIO may enter into repurchase agreements and reverse
repurchase agreements, 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.
14 - PROSPECTUS
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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, TCW
(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 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 25% 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,
15 - PROSPECTUS
<PAGE>
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.
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; and
(iv) 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.
16 - PROSPECTUS
<PAGE>
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. Certificates issued pursuant to this program have some structural
similarities to GNMA securities and benefit from the guarantee of the Canada
Mortgage and Housing Corporation, a federal Crown corporation that is (except
for certain limited purposes) an agent of the Government of Canada.
Canadian private issuers such as banks and trust companies also issue
Mortgage-Backed Securities backed by private insurance or other forms of credit
support. Such Mortgage-Backed Securities are not considered Government
Securities for purposes of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO.
While most Canadian Mortgage-Backed Securities are subject to voluntary
prepayments, some pools are not subject to such prepayments and thus have yield
characteristics similar to bonds.
RISKS OF INVESTING IN CANADIAN AND MEXICAN SECURITIES. The Canadian debt
securities market is significantly smaller than the U.S. debt securities market.
In particular, the Canadian Mortgage-Backed Securities market is of recent
origin, and, although continued growth is anticipated, is less well developed
and less liquid than its U.S. counterpart.
Because the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO intends to invest in
Mexican debt instruments, investors in the Portfolio should be aware of certain
special considerations associated with investing in debt obligations of the
Mexican government.
The Mexican government has exercised and continues to exercise a significant
influence over many aspects of the private sector in Mexico. Mexican government
actions concerning the economy could have a significant effect on market
conditions and prices and yields of Mexican debt obligations, including those in
which the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO invests. Mexico is
currently a major debtor nation (among developing countries) to commercial banks
and foreign governments.
The value of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO's investments
may be affected by changes in oil prices, interest rates, taxation and other
political or economic developments in Mexico, including recent rates of
inflation which have exceeded the rates of inflation in the U.S. and Canada. The
Fund can provide no assurance that future developments in the Mexican economy
will not impair the North American Government Income Portfolio's investment
flexibility, operations or ability to achieve its investment objective.
In September, 1982, Mexico imposed foreign exchange controls and maintained a
dual foreign exchange rate system, with a "controlled" rate and a "free market"
rate. Under economic policy initiatives implemented since December, 1987, the
Mexican government introduced a schedule of gradual devaluation of the
controlled rate which initially amounted to an average depreciation of the
Mexican peso against the U.S. dollar of one Mexican peso per day. The extended
initiatives include an adjustment in the scheduled devaluation rate of the
Mexican peso against the U.S. dollar. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO's net asset value and its computation and distribution of income to
its shareholders will be adversely affected by continued reductions in the value
of the Mexican peso relative to the U.S. dollar because all Portfolio assets
must be converted to U.S. dollars prior to any distributions to shareholders. On
December 22, 1994, the Mexican government determined to allow 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
17 - PROSPECTUS
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any of their political subdivisions, authorities, agencies or instrumentalities
or fixed-income securities issued by a corporation, all of which are rated AAA
or AA by Standard & Poor's Corporation ("S&P") or Aaa or Aa by Moody's Investors
Service, Inc. ("Moody's") or, if unrated, are determined by the Investment
Manager to be of equivalent quality; in certificates of deposit and bankers'
acceptances issued or guaranteed by, or time deposits maintained at, banks
(including foreign branches of U.S. banks or U.S. or foreign branches of foreign
banks) having total assets of more than $500 million and determined by the
Investment Manager to be of high creditworthiness; commercial paper rated A-1 or
A-2 by S&P, Prime-1 or Prime-2 by Moody's or Duff 1 or Duff 2 by Duff & Phelps
Inc. or, if unrated, issued by U.S. or foreign companies having outstanding debt
securities rated A or higher by S&P or Moody's; and in loan participation
interests having a remaining term not exceeding one year in loans extended by
banks to such companies. Certain foreign securities purchased by the Portfolio
will not have received ratings by a recognized U.S. rating agency. In such cases
the Investment Manager will review the issuers of such securities with respect
to the quality of their management, balance sheet and financial ratios, cash
flows and earnings to establish that the securities purchased by the Portfolio
are of a comparable quality to issuers receiving high quality ratings by a
recognized U.S. rating agency. All of the securities described above will have
remaining maturities, at the time of purchase, of not more than three years.
The Investment Manager will actively manage the assets of the DIVERSIFIED INCOME
PORTFOLIO in this grouping in accordance with a global market strategy (see
"Portfolio Trading" below). Consistent with such a strategy, the Investment
Manager intends to allocate the Portfolio's investments among securities
denominated in the currencies of a number of foreign countries and, within each
such country, among different types of debt securities. The Investment Manager
will adjust the Portfolio's exposure to different currencies based on its
perception of the most favorable markets and issuers. In allocating the
DIVERSIFIED INCOME PORTFOLIO's assets among various markets, the Investment
Manager will assess the relative yield and anticipated direction of interest
rates in particular markets, the level of inflation, liquidity and financial
soundness of each market, and the general market and economic conditions
existing in each market as well as the relationship of currencies of various
countries to the U.S. dollar and to each other. In its evaluations, the
Investment Manager will utilize its internal financial, economic and credit
analysis resources as well as information obtained from other sources.
A portion of the DIVERSIFIED INCOME PORTFOLIO's investments in securities of
U.S. issuers is likely to be in commercial paper, bankers' acceptances and other
short-term debt instruments issued by U.S. corporations. However, at times
during which there exists large-scale political or economic uncertainty, the
Portfolio is likely to increase its investments in U.S. Government securities.
In such cases, the securities which the Portfolio is most likely to purchase are
U.S. Treasury bills and U.S. Treasury notes with remaining maturities of under
three years, both of which are direct obligations of the U.S. Government. The
DIVERSIFIED INCOME PORTFOLIO may also purchase securities issued by various
agencies and instrumentalities of the U.S. Government. These will include
obligations backed by the full faith and credit of the United States (such as
those issued by the Government National Mortgage Association); obligations whose
issuing agency or instrumentality has the right to borrow, to meet its
obligations, from an existing line of credit with the U.S. Treasury (such as
those issued by the Federal National Mortgage Association); and obligations
backed by the credit of the issuing agency or instrumentality (such as those
issued by the Federal Farm Credit System).
The securities in which the DIVERSIFIED INCOME PORTFOLIO will be investing may
be denominated in any currency or multinational currency, including the U.S.
dollar. In addition to the U.S. dollar, such currencies will include, among
others; the Australian dollar; Deutsche mark; Japanese yen; French franc;
British pound; Canadian dollar; Swiss franc; Dutch guilder; Austrian schilling;
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
18 - PROSPECTUS
<PAGE>
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 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
19 - PROSPECTUS
<PAGE>
when-issued or delayed delivery basis or a "when, as and if issued" basis, and
purchase or sell securities on a forward commitment basis, in each case in
accordance with the description of these investments and techniques (and subject
to the risks) set forth under "General Portfolio Techniques" below and in the
Statement of Additional Information. Investors should carefully consider the
risks of investing in securities of foreign issuers and securities denominated
in non-U.S. currencies (see "General Portfolio Techniques" below for a
discussion of the characteristics and risks of investments in foreign
securities).
COMMON STOCKS. The DIVERSIFIED INCOME PORTFOLIO may invest in common stocks in
an amount up to 20% of its total assets in the circumstances described below
when consistent with the Portfolio's investment objectives.
The DIVERSIFIED INCOME PORTFOLIO may acquire common stocks when attached to or
included in a unit with fixed-income securities, or when acquired upon
conversion of fixed-income securities or upon exercise of warrants attached to
fixed-income securities and may purchase common stocks directly when such
acquisitions are determined by the Investment Manager to further the Portfolio's
investment objectives (see the discussions of warrants and convertible
securities under "General Portfolio Techniques" below).
For example, the DIVERSIFIED INCOME PORTFOLIO may purchase the common stock of
companies involved in takeovers or recapitalizations where the issuer, or a
controlling stockholder, has offered, or pursuant to a "going private"
transaction is effecting, an exchange of its common stock for newly-issued
fixed-income securities. By purchasing the common stock of the company issuing
the fixed-income securities prior to the consummation of the transaction or
exchange offer, the DIVERSIFIED INCOME PORTFOLIO will be able to obtain the
fixed-income securities directly from the issuer at their face value,
eliminating the payment of a dealer's mark-up otherwise payable when
fixed-income securities are acquired from third parties, thereby increasing the
net yield to the shareholders of the Portfolio. While the Portfolio will incur
brokerage commissions in connection with its purchase of common stocks, it is
anticipated that the amount of such commissions will be significantly less than
the amount of such mark-up.
Fixed-income securities acquired by the DIVERSIFIED INCOME PORTFOLIO through the
purchase of common stocks under the circumstances described in the preceding
paragraph are subject to the general credit risks and interest rate risks to
which all fixed-income securities purchased by the Portfolio are subject. Such
securities generally will be rated Baa/BBB or lower as are the other high yield,
high risk fixed-income securities in which the Portfolio may invest. In
addition, since corporations involved in take-over situations are often highly
leveraged, that factor will be evaluated by the Investment Manager as part of
its credit risk determination with respect to the purchase of particular common
stocks for the Portfolio's investment portfolio. In the event the Portfolio
purchases common stock of a corporation in anticipation of a transaction
(pursuant to which the common stock is to be exchanged for fixed-income
securities) which fails to take place, the Investment Manager will continue to
hold such common stock for the Portfolio only if it determines that continuing
to hold such common stock under those circumstances is consistent with the
Portfolio's investment objectives.
SPECIAL INVESTMENT CONSIDERATIONS. Because of the special nature of the
DIVERSIFIED INCOME PORTFOLIO's investment in high yield securities, commonly
known as "junk bonds," the Investment Manager must take account of certain
special considerations in assessing the risks associated with such investments.
Investors should carefully consider the risks of investing in high yield
securities (see "General Portfolio Techniques" below and in the Statement of
Additional Information for a discussion of the risks of investments in high
yield securities).
During the fiscal year ended December 31, 1997, the monthly dollar weighted
average ratings of the debt obligations held by the DIVERSIFIED INCOME
PORTFOLIO, expressed as a percentage of the Portfolio's total investments, were
as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
RATINGS TOTAL INVESTMENTS
- -------------------------------------------- -----------------
<S> <C>
AAA/Aaa..................................... 57.5%
AA/Aa....................................... 2.5
A/A......................................... 1.0
BBB/Baa..................................... 0.2
BB/Ba....................................... 3.3
B/B......................................... 17.2
CCC/Caa..................................... 1.2
CC/Ca....................................... 0.0
C/C......................................... 0.0
D........................................... 0.0
Unrated..................................... 17.1
-----
100.0%
</TABLE>
THE BALANCED GROWTH PORTFOLIO
The investment objective of the BALANCED GROWTH PORTFOLIO is to provide capital
growth with a reasonable current income. This objective may not be changed
without the approval of the shareholders of the BALANCED GROWTH 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 GROWTH PORTFOLIO seeks to obtain its objective by investing, under
normal market conditions, at least 60% of its total assets in common stock of
companies which have a record of paying dividends and, in the opinion of the
Investment Manager, have the potential for increasing dividends and in
securities convertible into common stock (see "General Portfolio Techniques"
below for a discussion of convertible securities), and at least 25% of its total
assets in investment grade fixed-income (fixed-rate and adjustable-rate)
securities such as corporate notes and bonds and obligations issued or
guaranteed by the U.S. Government, its agencies and its instrumentalities ("U.S.
Government securities"). A portion of the fixed-income securities purchased by
the BALANCED GROWTH PORTFOLIO may be
20 - PROSPECTUS
<PAGE>
zero coupon securities (see "General Portfolio Techniques" below).
Subject to the above percentage limitations, the BALANCED GROWTH PORTFOLIO may
hold equity securities, fixed-income securities, cash and money market
instruments in whatever proportion deemed desirable at any given time depending
upon the Investment Manager's assessment of business, economic and investment
conditions. Money market instruments in which the BALANCED GROWTH PORTFOLIO may
invest include securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities (Treasury bills, notes and bonds), bank
obligations, Eurodollar certificates of deposit, obligations of savings
institutions, fully insured certificates of deposit, and commercial paper rated
within the four highest grades by Moody's Investors Service Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P") or, if not rated, issued by a company
having an outstanding debt issue rated at least Aa by Moody's or AA by S&P. Such
securities may be used to invest uncommitted cash balances. When market
conditions dictate a "defensive" investment strategy, the BALANCED GROWTH
PORTFOLIO may invest without limit in money market instruments.
The BALANCED GROWTH PORTFOLIO may enter into futures contracts provided that not
more than 5% of its total assets are required as a futures contract deposit. In
addition, the BALANCED GROWTH PORTFOLIO may enter into futures contracts and
options transactions only to the extent that obligations under such contracts or
transactions represent not more than 30% of the Portfolio's total assets (see
"General Portfolio Techniques" below for a description of options and futures
transactions).
The non-governmental debt securities in which the BALANCED GROWTH PORTFOLIO will
invest will include: (a) corporate debt securities, including bonds, notes and
commercial paper, rated in the four highest categories (i.e., investment grade)
by a nationally recognized statistical rating organization ("NRSRO"), including
Moody's, S&P, Duff and Phelps, Inc. and Fitch Investors Service, Inc.; (b) bank
obligations, including CDs, bankers' acceptances and time deposits, issued by
banks with a long-term CD rating in one of the four highest categories by a
NRSRO; and (c) investment grade fixed-rate and adjustable rate mortgage-backed
and asset-backed securities of corporate issuers (see "General Portfolio
Techniques" below for a description of the characteristics and risks of
investments in mortgage-backed and asset-backed securities and securities rated
within the fourth highest rating by an NRSRO (i.e., securities rated Baa by
Moody's or BBB by S&P), and for a discussion of credit risk and interest rate
risk, to which risks all fixed-income securities are subject.)
The U.S. Government securities in which the BALANCED GROWTH PORTFOLIO may invest
include securities which are direct obligations of the United States Government,
such as United States treasury bills, notes and bonds, and which are backed by
the full faith and credit of the United States; securities which are backed by
the full faith and credit of the United States but which are obligations of a
United States agency or instrumentality (e.g., obligations of the Government
National Mortgage Association); securities issued by a United States agency or
instrumentality which has the right to borrow, to meet its obligations, from an
existing line of credit with the United States Treasury (e.g., obligations of
the Federal National Mortgage Association); securities issued by a United States
agency or instrumentality which is backed by the credit of the issuing agency or
instrumentality (e.g., obligations of the Federal Farm Credit System); and
governmentally issued mortgage-backed securities.
The BALANCED GROWTH PORTFOLIO may invest in warrants, invest in securities of
foreign issuers in the form of American Depository Receipts, invest in real
estate investment trusts, lend its portfolio securities, enter into repurchase
agreements, 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 UTILITIES PORTFOLIO
The investment objective of the UTILITIES PORTFOLIO is to provide current income
and long-term growth of income and capital, by investing primarily in equity and
fixed-income securities of companies engaged in the public utilities industry.
The investment objective of the UTILITIES PORTFOLIO may not be changed without
the approval of the shareholders of the Portfolio. There can be no assurance
that the objective will be achieved. The term "public utilities industry"
consists of companies engaged in the manufacture, production, generation,
transmission, sale and distribution of gas and electric energy, as well as
companies engaged in the communications field, including telephone, telegraph,
satellite, microwave and other companies providing communication facilities for
the public, but excluding public broadcasting companies. For purposes of the
UTILITIES PORTFOLIO, a company will be considered to be in the public utilities
industry if, during the most recent twelve month period, at least 50% of the
company's gross revenues, on a consolidated basis, is derived from the public
utilities industry. The following investment policies may be changed by the
Trustees of the Fund without shareholder approval:
In seeking to achieve its objective, the UTILITIES PORTFOLIO will normally
invest at least 65% of its total assets in securities of companies in the public
utilities industry. The Investment Manager believes the UTILITIES PORTFOLIO's
investment policies are suited to benefit from certain characteristics and
historical performance of the securities of public utility companies. Many of
these companies have historically set a pattern of paying regular dividends and
increasing their common stock dividends over time, and the average common stock
dividend yield of utilities historically has substantially exceeded that of
industrial stocks. The Investment Manager believes that these factors may not
only provide current income but also generally tend to moderate risk
21 - PROSPECTUS
<PAGE>
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 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.
22 - PROSPECTUS
<PAGE>
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 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
23 - PROSPECTUS
<PAGE>
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.
THE GROWTH PORTFOLIO
The investment objective of the GROWTH PORTFOLIO is long-term growth of capital.
This objective may not be changed without the approval of the shareholders of
the GROWTH 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:
24 - PROSPECTUS
<PAGE>
The GROWTH 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, MSAM, invests the assets of the GROWTH PORTFOLIO by pursuing
its "equity growth" philosophy. That strategy involves a two-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 emphasizes
individual security selection. Individual companies are chosen for investment by
the GROWTH 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
a second step, the Sub-Adviser determines the weightings that the selected
companies and industries will have in the portfolio.
The GROWTH 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 GROWTH 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 GROWTH 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 GROWTH
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 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 is invested in money
market instruments or cash.
The GROWTH 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 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 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 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 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
25 - PROSPECTUS
<PAGE>
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 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).
26 - PROSPECTUS
<PAGE>
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 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.
27 - PROSPECTUS
<PAGE>
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 three separate countries.
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. 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.
28 - PROSPECTUS
<PAGE>
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
fixed-income securities issued or guaranteed by the United States Government,
its agencies or 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, 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, there are approximately 158 countries
considered to be emerging market countries. 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.
29 - PROSPECTUS
<PAGE>
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. Under normal circumstances, the
Portfolio will invest in at least five emerging market countries. Substantially
all of the Portfolio's investments may be denominated in currencies other than
the U.S. dollar. 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, TCW,
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, Global 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,
Global or other types of Depository Receipts.
The fixed-income securities (including convertible securities) of government or
corporate issuers located in emerging market countries, the United States or
other developed countries in which the EMERGING MARKETS PORTFOLIO may invest may
consist of fixed-income securities that are unrated or rated Ba or lower by
Moody's Investors Service, Inc. ("Moody's") or BB or lower by Standard & Poor's
Corporation ("S&P"), including zero coupon securities. There is no limit on the
percentage of the Portfolio's total assets which may be invested in fixed-income
securities which are unrated or rated below investment grade. Since the EMERGING
MARKETS PORTFOLIO does not have any minimum quality rating standard for such
investments, the Portfolio may invest in fixed-income securities rated as low as
C by Moody's or D by S&P. See "General Portfolio Techniques" below for a
discussion of the special investment considerations involved in investment in
lower-rated securities, commonly known as "junk bonds," a discussion of zero
coupon securities, and a discussion of credit risk and interest rate risk, to
which risks all fixed-income securities are subject. The Portfolio is not
subject to any restrictions on the maturities of the fixed-income securities it
holds. A description of Moody's and S&P ratings is set forth in the Appendix.
The EMERGING MARKETS PORTFOLIO's investments in debt obligations of government
issuers in emerging market countries will consist of: (i) debt securities or
obligations issued or guaranteed by governments, governmental agencies or
instrumentalities and political subdivisions located in emerging market
countries (including participations in loans between governments and financial
institutions), (ii) debt securities or obligations issued by government owned,
controlled or sponsored entities located in emerging market countries, and (iii)
interests in issuers organized and operated for the purpose of restructuring the
investment characteristics of instruments issued by any of the entities
described above ("Sovereign Debt"). The Sovereign Debt held by the Portfolio
will take the form of bonds (including Brady Bonds), notes, bills, debentures,
warrants, short-term paper, loan participations, loan assignments and securities
or interests issued by entities organized and operated for the purpose of
restructuring the investment characteristics of such Sovereign Debt. Certain
Sovereign Debt held by the Portfolio will not be traded on any securities
exchange. See the discussion of Sovereign Debt and Brady Bonds below and in the
Statement of Additional Information.
U.S. and non-U.S. corporate fixed-income securities in which the EMERGING
MARKETS PORTFOLIO may invest include debt securities, convertible securities and
preferred stocks of corporate issuers.
The EMERGING MARKETS PORTFOLIO may also enter into repurchase agreements and
forward foreign currency exchange contracts, engage in various futures and
options transactions, purchase securities which are issued in private placements
or are otherwise not readily marketable, 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 utilizes a top-down/ bottom-up
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
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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 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
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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"), Global Depository Receipts ("GDRs") (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, GDRs 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 GROWTH PORTFOLIO may invest in
fixed-rate and adjustable rate United States mortgage-backed securities
("Mortgage-Backed Securities"). There are currently three basic types of U.S.
Mortgage-Backed Securities: (i) those issued or guaranteed by the United States
Government or one of its agencies or instrumentalities, such as the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC")
(securities issued by GNMA, but not those issued by FNMA or FHLMC, are backed by
the "full faith and credit" of the United States); (ii) those issued by private
issuers that represent an interest in or are collateralized by Mortgage-Backed
Securities issued or guaranteed by the United States Government or one of its
agencies or instrumentalities; and (iii) those issued by private issuers that
represent an interest in or are collateralized by whole mortgage loans or
Mortgage-Backed Securities without a government guarantee but usually having
some form of private credit enhancement. (Mortgage-
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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 GROWTH 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 GROWTH
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 and the DIVERSIFIED INCOME
PORTFOLIO may invest in collateralized mortgage obligations or "CMOs," which are
debt obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC
Certificates, but also may be collateralized by whole loans or private mortgage
pass-through securities (such collateral collectively hereinafter referred to as
"Mortgage Assets"). Multiclass pass-through securities are equity interests in a
trust composed of Mortgage Assets. Payments of principal of and interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the United States government, or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing. The issuer of a series of CMOs may elect to be treated
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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 and the DIVERSIFIED INCOME 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,
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 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 and the DIVERSIFIED INCOME
PORTFOLIO also may invest in, among other things, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
STRIPPED MORTGAGE-BACKED SECURITIES. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO and the DIVERSIFIED INCOME PORTFOLIO may invest in Stripped
Mortgage-Backed Securities, which are derivative multiclass mortgage securities.
Stripped Mortgage-Backed Securities may be issued by agencies or
instrumentalities of the United States Government, or by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing.
Stripped Mortgage-Backed Securities usually are structured with two classes that
receive different proportions of the interest and principal distribution on a
pool of Mortgage Assets. A common type of Stripped Mortgage-Backed Securities
will have one class receiving some of the interest and most of the principal
from the Mortgage Assets, while the other class will receive most of the
interest and the remainder of the principal. In the most
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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 GROWTH PORTFOLIO may invest in
Asset-Backed Securities. Asset-Backed Securities represent the securitization
techniques used to develop Mortgage-Backed Securities applied to a broad range
of other assets. Through the use of trusts and special purpose corporations,
various types of assets, primarily automobile and credit card receivables and
home equity loans, are being securitized in pass-through structures similar to
the mortgage pass-through structures described above or in a pay-through
structure similar to the CMO structure.
RISKS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Mortgage-Backed and
Asset-Backed Securities have certain different characteristics than traditional
debt securities. Among the major differences are that interest and principal
payments are made more frequently, usually monthly, and that principal may be
prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. As a result, if a Portfolio purchases such
a security at a premium, a prepayment rate that is faster than expected may
reduce yield to maturity, while a prepayment rate that is slower than expected
may have the opposite effect of increasing yield to maturity. Alternatively, if
a Portfolio purchases these securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments may reduce,
yield to maturity. Each of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO
and the DIVERSIFIED INCOME PORTFOLIO may invest a portion of its assets in
derivative Mortgage-Backed Securities such as Stripped Mortgage-Backed
Securities which are highly sensitive to changes in prepayment and interest
rates. The Investment Manager and/or the Sub-Adviser will seek to manage these
risks (and potential benefits) by investing in a variety of such securities.
Mortgage-Backed and Asset-Backed Securities, like all fixed-income securities,
generally decrease in value as a result of increases in interest rates. In
addition, although generally the value of fixed-income securities increases
during periods of falling interest rates and decreases during periods of rising
interest rates, as a result of prepayments and other factors, this is not always
the case with respect to Mortgage-Backed and Asset-Backed Securities.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of
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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, 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 and the DIVERSIFIED INCOME
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 and the
DIVERSIFIED INCOME 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, 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 GROWTH
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 GROWTH PORTFOLIO may invest up to 25% of
the value of its total assets, and the DEVELOPING GROWTH PORTFOLIO may invest up
to 10% of the value of its total assets, in each case at the time of purchase,
in foreign securities (other than securities of Canadian issuers registered
under the Securities Exchange Act of 1934 or American Depository Receipts
("ADRs") (described below), on which there is no such limit). 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 BALANCED GROWTH PORTFOLIO and 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
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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
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 GLOBAL EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO may engage in transactions
involving forward foreign currency exchange contracts ("forward contracts"). A
forward contract involves an obligation to purchase or sell a currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
Portfolios may enter into forward contracts as a hedge against fluctuations in
future foreign exchange rates.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also limit the opportunity
for gain if the value of the hedged currency should rise. Moreover, it may not
be possible for the Portfolio to hedge against a devaluation that is so
generally anticipated that the Portfolio is not able to contract to sell the
currency at a price above the devaluation level it anticipates.
The Portfolios will enter into forward contracts under various circumstances.
When a Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may, for example, desire to "lock in" the
price of the security in U.S. dollars or some other foreign currency which the
Portfolio is temporarily holding in its portfolio. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars or other
currency, of the amount of foreign currency involved in the underlying security
transactions, the Portfolio will be able to protect itself against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar or other currency which is being used for the security purchase and the
foreign currency in which the security is denominated during the period between
the date on which the security is purchased or sold and the date on which
payment is made or received.
At other times, when, for example, it is believed that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar or some other foreign currency, a Portfolio may enter into a forward
contract to sell, for a fixed amount of dollars or other currency, the amount of
foreign currency approximating the value of some or all of the Portfolio's
securities (or securities which the Portfolio has purchased for its
37 - PROSPECTUS
<PAGE>
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
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, EUROPEAN DEPOSITORY RECEIPTS AND GLOBAL DEPOSITORY
RECEIPTS. The DIVERSIFIED INCOME PORTFOLIO, the UTILITIES PORTFOLIO, the GROWTH
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 BALANCED GROWTH PORTFOLIO,
the DIVIDEND GROWTH PORTFOLIO, the VALUE-ADDED MARKET PORTFOLIO and the AMERICAN
VALUE PORTFOLIO may invest in ADRs. In addition, the EMERGING MARKETS PORTFOLIO
may invest in Global Depository Receipts ("GDRs"). 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. GDRs are typically
issued in bearer form by a foreign bank or trust company which evidence
ownership of the underlying foreign securities and which are designed for use in
European and other foreign securities markets. Generally, ADRs, in registered
form, are designed for use in the United States securities markets and EDRs, in
bearer form, are designed for use in European securities markets. Generally,
issuers of the stock of unsponsored ADRs are not obligated to distribute
material information in the United States and, therefore, there may not be a
correlation between such information and the market value of such ADRs.
SECURITIES OF OTHER INVESTMENT COMPANIES. Each of the GLOBAL EQUITY PORTFOLIO
and the EMERGING MARKETS PORTFOLIO may invest up to 10% of its total assets in
securities issued by other investment companies. Such investments are necessary
in order to participate in certain foreign markets where foreigners are
prohibited from investing directly in the securities of individual issuers. The
Portfolio will incur any indirect expenses incurred through investment in an
investment company, such as the payment of a management fee (which may result in
the payment of an additional advisory fee). Furthermore, it should be noted that
foreign investment companies are not subject to the U.S. securities laws and may
be subject to fewer or less stringent regulations than U.S. investment
companies.
INVESTMENTS IN FIXED-INCOME SECURITIES. Each Portfolio may invest in
fixed-income securities. All fixed-income securities are subject to two types of
risks: the credit risk and the interest rate risk. The credit risk relates to
the ability of the issuer to meet interest or principal payments or both as they
come due. Generally, higher yielding fixed-income securities are subject to a
credit risk to a greater extent than lower yielding fixed-income securities (see
below). The interest rate risk refers to the fluctuations in the net asset value
of any portfolio of fixed-income securities resulting from the inverse
relationship between price and yield of fixed-income securities; that is, when
the general level of interest rates rises, the prices of outstanding
fixed-income securities generally decline, and when interest rates fall, prices
generally rise.
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INVESTMENTS IN SECURITIES RATED BAA BY MOODY'S OR BBB BY S&P. The NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the BALANCED GROWTH 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, 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, 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 GROWTH
PORTFOLIO, the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the GROWTH
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
39 - PROSPECTUS
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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 GROWTH 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, the BALANCED GROWTH 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, the BALANCED GROWTH PORTFOLIO
and the DIVERSIFIED INCOME PORTFOLIO may invest are described above under "The
Money Market Portfolio," "The Diversified Income Portfolio" and "The Balanced
Growth 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 ("collateral") 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, 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 GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO, the Sub-Adviser,
subject to procedures established by the Trustees of the Fund, and specifying
the required value of the collateral underlying the agreement.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. Each of the MONEY MARKET
PORTFOLIO, the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the
DIVERSIFIED INCOME PORTFOLIO may also use reverse repurchase agreements, and
each of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the DIVERSIFIED
INCOME 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
40 - PROSPECTUS
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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 and the
DIVERSIFIED INCOME 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 GROWTH 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
GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the
GROWTH 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
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 GROWTH
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
41 - PROSPECTUS
<PAGE>
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 GROWTH PORTFOLIO, the
UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the GROWTH 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, 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 GROWTH 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 BALANCED GROWTH 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 BALANCED GROWTH PORTFOLIO, 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 BALANCED GROWTH PORTFOLIO, the
UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO,
the GLOBAL EQUITY PORTFOLIO and the EMERGING
42 - PROSPECTUS
<PAGE>
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, and the BALANCED GROWTH PORTFOLIO is
permitted to write covered call options on portfolio securities, in an amount
not exceeding, in the aggregate with covered put options, 5% of the value of its
total assets, 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 BALANCED
GROWTH 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 a Portfolio will be exercisable by the purchaser only on a specific
date). The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
INCOME PORTFOLIO, the BALANCED GROWTH 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 (in the case of the BALANCED GROWTH PORTFOLIO, 30% of the Portfolio's
total 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, the
DIVERSIFIED INCOME PORTFOLIO and the BALANCED GROWTH 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
43 - PROSPECTUS
<PAGE>
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 (the BALANCED GROWTH
PORTFOLIO may purchase put and call options on stock indexes in amounts
equalling up to 5% of its total assets). 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 BALANCED GROWTH PORTFOLIO, 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 BALANCED GROWTH 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 BALANCED GROWTH 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 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 BALANCED GROWTH 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
BALANCED GROWTH 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 stock index futures contracts
for the purpose of hedging their equity portfolio (or anticipated portfolio)
securities against changes in their prices or, in the case of the UTILITIES
PORTFOLIO, to facilitate asset reallocations into and out of the equity area.
The VALUE-ADDED MARKET PORTFOLIO will purchase stock index futures contracts as
a temporary substitute for the purchase of individual stocks which may then be
purchased in orderly fashion, and may sell such contracts to effect closing
transactions. The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING
MARKETS PORTFOLIO will purchase or sell currency futures on currencies in which
their portfolio securities (or anticipated portfolio securities) are denominated
for the purposes of hedging against anticipated changes in currency exchange
rates.
OPTIONS ON FUTURES CONTRACTS. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the BALANCED GROWTH PORTFOLIO, the
UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO,
the GLOBAL EQUITY
44 - PROSPECTUS
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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
BALANCED GROWTH 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 BALANCED GROWTH 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 BALANCED GROWTH
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 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 GROWTH 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 GROWTH 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 GROWTH PORTFOLIO
and the EMERGING MARKETS PORTFOLIO, the Sub-Adviser's own analysis of factors
they deem relevant.
45 - PROSPECTUS
<PAGE>
Personnel of the Investment Manager and, in the case of the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the GROWTH 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"), Morgan Stanley & Co. Incorporated and other
broker-dealer affiliates of InterCapital and MSAM. 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, Morgan Stanley &
Co. Incorporated and other brokers and dealers that are affiliates of
InterCapital and MSAM.
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 GROWTH PORTFOLIO: 100%; UTILITIES PORTFOLIO:
100%; DIVIDEND GROWTH PORTFOLIO: 90%; VALUE-ADDED MARKET PORTFOLIO: 100%; GROWTH
PORTFOLIO: 200%; 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 or the designated Portfolio: Philip A. Barach, James M. Goldberg, Frederick
H. Horton and Jeffrey E. Gundlach, Managing Directors of TCW, are the primary
portfolio managers of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO.
Messrs. Barach, Gundlach and Goldberg have been portfolio managers with
affiliates of TCW Group for over five years. Mr. Horton has been a portfolio
manager with affiliates of TCW Group 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
Anne Pickrell and Peter J. Seeley, Vice Presidents of InterCapital, are the
primary portfolio co-managers of the DIVERSIFIED INCOME PORTFOLIO, Messrs.
Avelar and Gupta since the inception of the Portfolio and Ms. Pickrell and Mr.
Seeley since February 1998. Messrs. Avelar and Gupta and Ms. Pickrell have been
portfolio managers at InterCapital for over five years. Prior to joining
InterCapital in July 1994, Mr. Seeley was a portfolio manager at Nikko Capital
Management. Mr. Gupta and Paul D. Vance, Senior Vice Presidents of InterCapital,
have been the primary portfolio co-managers of the BALANCED GROWTH PORTFOLIO
since March 1998. Mr. Vance has been a portfolio manager with InterCapital for
over five years and is also the primary portfolio manager of the DIVIDEND GROWTH
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. Kurt Feuerman, a Managing
Director of MSAM in its Institutional Equity Group, and Margaret Johnson, a
Principal of MSAM and a portfolio manager in its Institutional Equity Group,
have been the primary portfolio co-managers of the GROWTH PORTFOLIO since March
1998. Ms. Johnson has been a portfolio manager with MSAM for over five years.
Prior to joining MSAM in July 1993, Mr. Feuerman was a Managing Director of
Drexel Burnham Lambert. 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 assisted by
Michelle Kaufman since March 1998. Ms. Kolleeny has been a portfolio manager
with InterCapital for over five years. Prior to joining InterCapital in
September 1993, Ms. Kaufman was a securities analyst with Woodward and
Associates (March-August 1993). Peter Hermann, Vice President of InterCapital,
has been the primary portfolio manager of the MID-CAP GROWTH PORTFOLIO since
January 1998. Prior to joining InterCapital in March 1994, Mr. Hermann was a
portfolio manager at The Bank of New York. Mark Bavoso, Senior Vice President of
InterCapital, has been the primary portfolio manager of the GLOBAL EQUITY
PORTFOLIO
46 - PROSPECTUS
<PAGE>
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 and has been assisted by
Armon Bar-Tur since May 1998. Ms. Stevlingson has been a portfolio manager of
the DEVELOPING GROWTH PORTFOLIO since the inception of the Fund, has been the
sole portfolio manager of the Portfolio since May 1996 and has been a portfolio
manager with InterCapital for over five years. Mr. Bar-Tur has been a portfolio
manager with InterCapital since October 1996, prior to which time he was a
research analyst with Merrill Lynch Asset Management (February 1994-October
1996) and prior thereto was Assistant to the Chief Strategist of Citibank Global
Asset Management (July 1992-July 1993). Shaun C.K. Chan, Managing Director of
TCW and TCW Asia Ltd., Terence F. Mahony, Managing Director of TCW, and Michael
P. Reilly, a Managing Director of TCW, are the primary portfolio managers of the
EMERGING MARKETS PORTFOLIO. Mr. Chan has been a portfolio manager with
affiliates of TCW Group 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 TCW 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 TCW Group 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 GROWTH 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 GROWTH 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 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
47 - PROSPECTUS
<PAGE>
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 GROWTH 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
48 - PROSPECTUS
<PAGE>
service approved by the Fund's Trustees. The pricing service 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) 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 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 acquisition, 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
49 - PROSPECTUS
<PAGE>
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 GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the DIVIDEND GROWTH
PORTFOLIO, the VALUE-ADDED MARKET PORTFOLIO, the GROWTH PORTFOLIO, the AMERICAN
VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO, the
DEVELOPING GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO will be declared
and paid monthly, and any net realized capital gains will be declared and paid
at least once per calendar year.
TAXES. Because the Fund intends to distribute substantially all of the net
investment income and capital gains of each Portfolio and otherwise qualify each
Portfolio as a regulated investment company under Subchapter M of the Internal
Revenue Code (the "Code"), it is not expected that any Portfolio of the Fund
will be required to pay any Federal income tax on such income and capital gains.
Gains or losses on a Portfolio's transactions in certain listed options and on
futures and options on futures generally are treated as 60% long-term and 40%
short-term 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.
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 GROWTH 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).
50 - PROSPECTUS
<PAGE>
From time to time the Fund may quote the "total return" of each Portfolio in
advertisements and sales literature. The total return of a Portfolio is based on
historical earnings and is not intended to indicate future performance. The
"average annual total return" of a Portfolio refers to a figure reflecting the
average annualized percentage increase (or decrease) in the value of an initial
investment in the Portfolio of $1,000 over the life of the Portfolio. Average
annual total return reflects all income earned by the Portfolio, any
appreciation or depreciation of the Portfolio's assets and all expenses incurred
by the Portfolio for the stated periods. It also assumes reinvestment of all
dividends and distributions paid by the Portfolio. However, average annual total
return does not reflect the deduction of any charges which
may be imposed on the Contracts by the 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
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 and Hartford Life and
Annuity Insurance Company, pursuant to the instructions of Contract Owners.
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. Morgan Stanley Dean Witter Trust
FSB, an affiliate of the Investment Manager and MSAM, 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
51 - PROSPECTUS
<PAGE>
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, 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-Advisers of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO also each have 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.
YEAR 2000. The investment management services provided to the Fund by the
Investment Manager and the Sub-Advisers and the services provided to
shareholders by the Transfer Agent depend on the smooth functioning of their
computer systems. Many computer software systems in use today cannot recognize
the year 2000, but revert to 1900 or some other date, due to the manner in which
dates were encoded and calculated. That failure could have a negative impact on
the handling of securities trades, pricing and account services. The Investment
Manager, the Sub-Advisers and the Transfer Agent have been actively working on
necessary changes to their own computer systems to prepare for the year 2000 and
expect that their systems will be adapted before that date, but there can be no
assurance that they will be successful, or that interaction with other
non-complying computer systems will not impair their services at that time. In
addition, it is possible that the markets for securities in which the Fund
invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues. In
addition, corporate and governmental data processing errors may result in
production problems for individual companies and overall economic uncertainties.
Earnings of individual issuers will be affected by remediation costs, which may
be substantial and may be reported inconsistently in U.S. and foreign financial
statements. Accordingly, the Fund's investments may be adversely affected.
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.
52 - 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.
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.
53 - PROSPECTUS
<PAGE>
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
conditions to meet timely payments of interest and repayments of
principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal.
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating.
CI The rating CI is reserved for income bonds on which no interest is
being paid.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless Stan-
dard & 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.
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
successful 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
54 - PROSPECTUS
<PAGE>
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>
55 - PROSPECTUS
<PAGE>
DEAN WITTER SELECT DIMENSIONS
INVESTMENT SERIES
Two World Trade Center
New York, New York 10048
BOARD OF TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Barry Fink
VICE PRESIDENT, SECRETARY AND
GENERAL COUNSEL
Thomas F. Caloia
TREASURER
CUSTODIANS
The Bank of New York
90 Washington Street
New York, New York 10286
The Chase Manhattan Bank
One Chase Plaza
New York, New York 10081
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
SUB-ADVISERS
(NORTH AMERICAN GOVERNMENT SECURITIES
AND EMERGING MARKETS PORTFOLIOS)
TCW Funds Management, Inc.
(GROWTH PORTFOLIO)
Morgan Stanley Asset
Management Inc.
#40419 5/98
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
SUPPLEMENT
TO THE
STATEMENT OF ADDITIONAL INFORMATION
DATED MARCH 2, 1998
The third paragraph on the cover page is hereby deleted and replaced by the
following:
A Prospectus for the Fund dated March 2, 1998, revised May 1, 1998,
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 Hartford Life and Annuity Insurance Company.
The section of the Statement of Additional Information entitled "The Fund
and Its Management" is hereby supplemented by the following:
On March 24, 1998, Morgan Stanley, Dean Witter, Discover & Co., the
parent company of the Fund's Investment Manager, changed its name to
Morgan Stanley Dean Witter & Co. All references in the Statement of
Additional Information to "Morgan Stanley, Dean Witter, Discover & Co."
or "MSDWD" apply to Morgan Stanley Dean Witter & Co.
At their meeting held on April 30, 1998, the Fund's Trustees amended
the Investment Management Agreement between the Fund and Dean Witter
InterCapital Inc. to lower management fees charged on daily net assets
of the DIVIDEND GROWTH PORTFOLIO in excess of $500 million to 0.50%, so
that the management fee payable by that Portfolio is now calculated by
applying the annual rate of 0.625% to the net assets of the DIVIDEND
GROWTH PORTFOLIO not exceeding $500 million and the annual rate of 0.50%
to the net assets of that Portfolio exceeding $500 million.
The section of the Statement of Additional Information entitled "Trustees
and Officers" is hereby supplemented by the addition of the following:
<TABLE>
<S> <C>
Armon Bar-Tur (29) Assistant Vice President (since February 1998)
Assistant Vice President and portfolio manager (since October 1996) with
Two World Trade Center InterCapital; previously Research Analyst with
New York, New York Merrill Lynch Asset Management (February
1994-January 1996) and prior thereto Assistant to
the Chief Strategist of Citibank Global Asset
Management (July 1992-July 1993).
</TABLE>
The third sentence in the fourth paragraph in the subsection entitled
"Compensation of Independent Trustees" within the section of the Statement of
Additional Information entitled "Trustees and Officers" is hereby replaced by
the following:
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 29.41% of his or her Eligible
Compensation plus 0.4901667% 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 58.82% after ten years
of service.
The table entitled "Retirement Benefits From All Dean Witter Funds" in the
subsection entitled "Compensation of Independent Trustees" within the section of
the Statement of Additional Information entitled "Trustees and Officers,"
illustrating the retirement benefits accrued to the Fund's Independent Trustees
by the 57 Dean Witter Funds (not including the Fund) that have adopted the
retirement program
<PAGE>
for the Independent Trustees as of December 31, 1997, and the estimated
retirement benefits for the Fund's Independent Trustees, to commence upon their
retirement, from the 57 Dean Witter Funds as of December 31, 1997, is hereby
replaced by the following:
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(2)
- ----------------------------------------------------- ------------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Michael Bozic........................................ 10 58.82% $ 20,499 $ 55,026
Edwin J. Garn........................................ 10 58.82 30,878 55,026
John R. Haire........................................ 10 58.82 (19,823)(3) 132,002
Wayne E. Hedien...................................... 9 50.00 0 46,772
Dr. Manuel H. Johnson................................ 10 58.82 12,832 55,026
Michael E. Nugent.................................... 10 58.82 22,546 55,026
John L. Schroeder.................................... 8 49.02 39,350 46,123
</TABLE>
- ------------------------------
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1) in the
Statement of Additional Information.
(3) This number reflects the effect of the extension of Mr. Haire's term as
Director or Trustee until May 1, 1999.
The section of the Statement of Additional Information entitled "Custodians
and Transfer Agent" is hereby supplemented by the following:
On March 24, 1998, Dean Witter Trust FSB, the Fund's Transfer Agent,
was renamed Morgan Stanley Dean Witter Trust FSB. All references in the
Statement of Additional Information to "Dean Witter Trust FSB" apply to
Morgan Stanley Dean Witter Trust FSB.
May 1, 1998
