BRANDES
[Logo]
Brandes
Institutional
International
Equity
Fund
December 27, 1996
<PAGE>
BRANDES INSTITUTIONAL INTERNATIONAL EQUITY FUND
12750 High Bluff Drive
San Diego, CA 92130
(619) 755-0239
The BRANDES INSTITUTIONAL INTERNATIONAL EQUITY FUND (the "Fund") is a
mutual fund which seeks to achieve long-term capital appreciation by investing
principally in equity securities of foreign issuers. The Fund invests primarily
in equity securities of companies with market capitalizations greater than $1
billion. Brandes Investment Partners, L.P. (the "Advisor") serves as investment
advisor to the Fund.
The Fund is not insured or guaranteed by the U.S. Government or any other
person.
This Prospectus sets forth basic information about the Fund that
prospective investors should know before investing. It should be read and
retained for future reference. The Fund is a series of Brandes Investment Trust.
A Statement of Additional Information dated December 27, 1996, as may be amended
from time to time, has been filed with the Securities and Exchange Commission
and is incorporated herein by reference. This Statement of Additional
Information is available without charge by calling the number listed above or
upon written request to the Fund at the address given above.
TABLE OF CONTENTS
Expense Table........................................................ 2
Investment Objective, Policies and Risks............................. 3
Other Securities and Investment Techniques and Risks................. 6
Investment Restrictions.............................................. 9
Organization and Management.......................................... 9
Purchases............................................................ 10
Shareholder Services................................................. 13
Redeeming Shares..................................................... 13
Dividends, Distributions and Tax Status.............................. 15
Performance Information.............................................. 16
Prior Performance of the Advisor..................................... 16
General Information.................................................. 17
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated December 27, 1996
<PAGE>
The BRANDES INSTITUTIONAL INTERNATIONAL EQUITY FUND (the "Fund") is a
diversified series of Brandes Investment Trust ( the "Trust"), a registered
open-end management investment company or mutual fund. The investment objective
of the Fund is long-term capital appreciation. The minimum initial investment in
the Fund is $1 million; there is no minimum subsequent investment. If a
shareholder reduces its total investment in shares to less than $100,000, the
investment may be subject to redemption. See "Redeeming Shares - Redemption of
Small Accounts," page 13.
Like all equity investments, an investment in the Fund involves certain
risks. The value of the Fund's shares will fluctuate with market conditions, and
an investor's shares when redeemed may be worth more or less than their original
cost. International investing, especially in small capitalization companies,
also is subject to certain additional risks, which are described on page 4. The
Fund may invest in certain options and stock index futures transactions, which
may be regarded as transactions in derivative securities that involve special
risks. These transactions and the related risks are described under "Options"
and "Stock Index Futures" at pages 7 and 8 of the prospectus.
EXPENSE TABLE
Expenses are among several factors to consider when investing in the Fund.
The purpose of the following fee table is to provide an understanding of the
various costs and expenses which may be borne directly or indirectly by an
investment in the Fund. The expenses are estimated for the Fund's first year of
operations. Actual expenses in the future may be more or less than those shown.
Institutional
International
Shareholder Transaction Expenses Equity Fund
-----------
Maximum sales charge on purchases (as % of offering price) None
Sales charge on reinvested dividends None
Maximum contingent deferred sales charge
(as % of redemption proceeds) None
Redemption fee None
Total Annual Fund Operating Expenses
(as a % of average net assets)
Management fees 1.00%
Other expenses (after reimbursement) 0.20%
-------
Total operating expenses (after reimbursement)(1) 1.20%
=======
(1)The Advisor has voluntarily agreed to reimburse the Fund through at least
October 31, 1997 to ensure that the Fund's total operating expenses will not
exceed the percentage set forth above. Shareholders will receive 30 days notice
prior to any change in this policy. In the absence of this reimbursement, "Other
expenses" of the Fund would be estimated to be .78% for the Fund's first year of
operations, and "Total operating expenses" are estimated to be 1.78%. To the
extent that the Advisor reimburses the Fund, the Fund will repay the Advisor
when operating expenses (before reimbursement) are less than the expense
limitation. Thus, overall operating expenses in the future may not fall below
the expense limitation until the Advisor has been fully repaid for all of its
reimbursements to the Fund; see * "Operating Expenses; Expense Limitation," page
10.
The purpose of the preceding table is to assist the investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. For more information regarding costs and expenses,
see "Organization and Management," page 9.
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<TABLE>
<CAPTION>
Example of Effect of Fund Expenses One Year Three Years
-------- -----------
<S> <C> <C>
An investor would directly or indirectly pay the following expenses
on a $1,000 investment in the Fund, assuming a 5% annual return: $12 $38
</TABLE>
The Example shown above should not be considered a representation of past
or future expenses, and actual expenses may be greater or less than those shown.
In addition, although federal regulations require use of an assumed 5% annual
return in preparing the Example, the Fund's actual return may be higher or
lower. See "Organization and Management," page 9.
INVESTMENT OBJECTIVE, POLICIES AND RISKS
The Fund has the investment objective of long-term capital appreciation,
and the Fund seeks to achieve its objective by investing principally in equity
securities of foreign issuers. No assurance can be given that the Fund will
achieve its investment objective. Brandes Investment Partners, L.P. serves as
investment advisor to the Fund.
International Investing
During the past decade, there has been significant growth in foreign
capital markets. Because of this growth, nearly two-thirds of the world's equity
value is located outside of the United States. Accordingly, the Advisor believes
that significant investment opportunities exist throughout the world.
The Fund normally invests at least 65% of its total assets in equity
securities of foreign issuers with market capitalizations greater than $1
billion. However, the Fund may invest up to 25% of its total assets in small
capitalization companies, i.e., those with market capitalizations of $1 billion
or less. Small capitalization companies have historically offered greater growth
potential than larger ones, but they are often overlooked by investors. However,
small capitalization companies often have limited product lines, markets or
financial resources and may be dependent on one person or a few key persons for
management. The securities of such companies may be subject to more volatile
market movements than securities or larger, more established companies, both
because the securities typically are traded in lower value and because the
issuers typically are more subject to changes in earnings and prospects.
Under normal circumstances, the Fund will invest at least 65% of its total
assets in equity securities of issuers located in at least three countries other
than the United States. Countries in which the Fund may invest include, but are
not limited to, the nations of Western Europe, North and South America,
Australia and Asia. Equity securities include common stocks, preferred stocks
and securities convertible into common stocks. It is anticipated that securities
generally will be purchased in the form of common stock, American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") or Global Depositary
Receipts ("GDRs"). ADRs, EDRs and GDRs, which may be sponsored or unsponsored,
are receipts typically issued by a U.S. bank or trust company evidencing
ownership of the underlying foreign securities. The issuers of securities
underlying unsponsored ADRs, EDRs and GDRs are not obligated to disclose
material information in the United States and, accordingly, there may not be a
correlation between such information and the market value of the Depositary
Receipts.
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In seeking out foreign securities for purchase, the Advisor does not
attempt to match the security allocations of foreign stock market indices.
Therefore, the Fund's country weightings may differ significantly from country
weightings found in published foreign stock indices. For example, the Advisor
may choose not to invest the Fund's assets in a country whose stock market, at
any given time, may comprise a large portion of a published foreign stock market
index. At the same time, the Advisor may invest the Fund's assets in countries
whose representation in such an index may be small or non-existent. The Advisor
selects stocks for the Fund based on their individual merits and not necessarily
on their geographic locations.
The Advisor will apply the principles of value investing in the analysis
and selection of securities of foreign companies for the Fund's investment
portfolios.
Value Investing
The Advisor is committed to the use of the Graham and Dodd Value Investing
approach as introduced in the classic book Security Analysis. Utilizing this
philosophy, the Advisor views stocks as parts of businesses which are for sale.
It seeks to purchase a diversified group of these businesses at prices its
research indicates are well below their true long-term, or intrinsic, value. By
purchasing stocks whose current prices are believed to be considerably below
their intrinsic value, the Advisor believes it can buy not only a possible
margin of safety against price declines, but also an attractive opportunity for
profit over the business cycle.
In estimating a company's true long-term value, the Advisor uses sources of
information such as company reports, filings with the Securities and Exchange
Commission (the "SEC"), computer databases, industry publications, general and
business publications, brokerage firm research reports, and interviews with
company management. The Advisor's analysis is focused on fundamental
characteristics of a company, including, but not limited to, book value, cash
flow and capital structure, as well as management's record and broad industry
issues. Once the intrinsic value of a company is estimated, this value is
compared to the price of the stock. If the price is substantially lower than the
estimated intrinsic value, the stock may be purchased. The Advisor believes that
the margin between current price and estimated intrinsic value should provide a
margin of safety against price declines. In addition, over a business cycle of
three to five years, the Advisor believes the market should begin to recognize
the company's value and drive its price up toward its intrinsic value. As a
result, the investor could realize profits. Of course, there can be no assurance
that companies selected using the value investing approach will generate profits
or that the Advisor's assessment of intrinsic value will be correct.
Risks of International Investing
Investments in foreign securities involve special risks. These include
currency fluctuations, a risk which was not addressed by Graham and Dodd, whose
work focused on U.S. stocks. The Advisor has applied the value method of stock
selection to foreign securities. By looking outside the U.S. for investment
opportunities, the Advisor believes that the likelihood of finding undervalued
companies is increased. The Advisor does not believe that currency fluctuation,
over the long term, on a group of broadly diversified companies, representing a
number of currencies and countries, significantly affects portfolio performance.
In having this ability to search world-wide for undervalued companies, rather
than being limited to searching only among U.S. stocks, the Advisor believes
that over the long term the benefits of strict value investing apply just as
well with an added currency risk as they would without such risk.
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There are additional risks in international investing, including political
or economic instability in the country of issue and the possible imposition of
exchange controls or other laws or restrictions. In addition, securities prices
in foreign markets are generally subject to different economic, financial,
political and social factors than are the prices of securities in U.S. markets.
With respect to some foreign countries there may be the possibility of
expropriation or confiscatory taxation, limitations on liquidity of securities
or political or economic developments which could affect the foreign investments
of the Fund. Moreover, securities of foreign issuers generally will not be
registered with the SEC, and such issuers will generally not be subject to the
SEC's reporting requirements. Accordingly, there is likely to be less publicly
available information concerning certain of the foreign issuers of securities
held by the Fund than is available concerning U.S. companies. Foreign companies
are also generally not subject to uniform accounting, auditing and financial
reporting standards or to practices and requirements comparable to those
applicable to U.S. companies. There may also be less government supervision and
regulation of foreign broker-dealers, financial institutions and listed
companies than exists in the U.S. These factors could make foreign investments,
especially those in developing countries, more volatile. All of the above issues
should be considered before investing in the Fund.
Emerging Markets and Related Risks
The Fund may invest up to 25% of its assets in securities of companies
located in countries with emerging securities markets. Emerging markets are the
capital markets of any country that in the opinion of the Advisor is generally
considered a developing country by the international financial community.
Currently, these markets include, but are not limited to, the markets of
Argentina, Brazil, Chile, China, Colombia, Czech Republic, Greece, Hungary,
India, Indonesia, Israel, Korea, Malaysia, Mexico, Pakistan, Peru, the
Philippines, Poland, Portugal, Slovak Republic, Sri Lanka, Taiwan, Thailand,
Turkey, Venezuela and countries that comprise the former Soviet Union. As
opportunities to invest in other emerging markets countries develop, the Fund
expects to expand and diversify further the countries in which it invests.
Investing in emerging market securities involves risks which are in
addition to the usual risks inherent in foreign investments. Some emerging
markets countries may have fixed or managed currencies that are not
free-floating against the U.S. dollar. Further, certain currencies may not be
traded internationally. Certain of these currencies have experienced a steady
devaluation relative to the U.S. dollar. Any devaluations in the currencies in
which the Fund's portfolio securities are denominated may have a detrimental
impact on the Fund.
Some countries with emerging securities markets 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 negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some countries may differ
favorably or unfavorably from the U.S. economy in such respects as rate of
growth of gross domestic product, the rate of inflation, capital reinvestment,
resource self-sufficiency, number and depth of industries forming the economy's
base, governmental controls and investment restrictions that are subject to
political change and balance of payments position. Further, there may be greater
difficulties or restrictions with respect to investments made in emerging
markets countries.
Emerging securities markets typically have substantially less volume than
U.S. markets, securities in many of such markets are less liquid, and their
prices often are more volatile than securities of comparable
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U.S. companies. Such markets often have different clearance and settlement
procedures for securities transactions, and in some markets there have been
times when settlements have been unable to keep pace with the volume of
transactions, making it difficult to conduct transactions. Delays in settlement
could result in temporary periods when assets which the Fund desires to invest
in emerging markets may be uninvested. Settlement problems in emerging markets
countries also could cause the Fund to miss attractive investment opportunities.
Satisfactory custodial services may not be available in some emerging markets
countries, which may result in the Fund's incurring additional costs and delays
in the transportation and custody of such securities.
OTHER SECURITIES AND INVESTMENT TECHNIQUES AND RISKS
Short-Term Investments
At times the Fund may invest in short-term cash equivalent securities
either for temporary, defensive purposes, or as part of its overall investment
strategy. These securities consist of high quality debt obligations maturing in
one year or less from the date of purchase, such as U.S. Government securities,
certificates of deposit, bankers' acceptances and commercial paper. High quality
means the obligations have been rated at least A-1 by Standard & Poor's
Corporation ("S&P") or Prime-1 by Moody's Investor's Service, Inc. ("Moody's"),
have an outstanding issue of debt securities rated at least AA by S&P or Aa by
Moody's, or are of comparable quality in the opinion of the Advisor.
Repurchase Agreements
Short-term investments also include repurchase agreements with respect to
the high quality debt obligations listed above. A repurchase agreement is a
transaction in which the Fund purchases a security and, at the same time, the
seller (normally a commercial bank or broker-dealer) agrees to repurchase the
same security (and/or a security substituted for it under the repurchase
agreement) at an agreed-upon price and date in the future. The resale price is
in excess of the purchase price in that it reflects an agreed-upon market
interest rate effective for the period of time during which the Fund holds the
securities. The majority of these transactions run from day to day and not more
than seven days from the original purchase. The Fund's risk is limited to the
ability of the seller to pay the agreed-upon sum on the delivery date; in the
event of bankruptcy or the default by the seller, there may be possible delays
and expenses in liquidating the instrument purchased, decline in its value and
loss of interest. The securities will be marked to market every business day so
that their value is at least equal to the amount due from the seller, including
accrued interest. The Advisor will also consider the credit-worthiness of any
bank or broker-dealer involved in repurchase agreements under procedures adopted
by the Trust's Board of Trustees.
U.S. Government Securities
The Fund may invest in securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. U.S. Government securities
include direct obligations issued by the United States Treasury, such as
Treasury bills, certificates of indebtedness, notes and bonds. U.S. Government
agencies and instrumentalities that issue or guarantee securities include, but
are not limited to, the Federal Home Loan Banks, the Federal National Mortgage
Association, and the Student Loan Marketing Association.
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Except for U.S. Treasury securities, obligations of U.S. Government agencies and
instrumentalities may or may not be supported by the full faith and credit of
the United States. Some, such as those of the Federal Home Loan Banks, are
backed by the right of the issuer to borrow from the Treasury, others by
discretionary authority of the U.S. Government to purchase the agencies'
obligations, while still others, such as the Student Loan Marketing Association,
are supported only by the credit of the instrumentality. In the case of
securities not backed by the full faith and credit of the United States, the
investor must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment.
When-Issued Securities
The Fund may purchase securities on a when-issued or delayed-delivery
basis, generally in connection with an underwriting or other offering.
When-issued and delayed-delivery transactions occur when securities are bought
with payment for and delivery of the securities scheduled to take place at a
future time, beyond normal settlement dates, generally from 15 to 45 days after
the transaction. No interest accrues to the purchaser during the period before
delivery. There is a risk in these transactions that the value of the securities
at settlement may be more or less than the agreed upon price, or that the value
of the securities or settlement may be more or less than the agreed upon price,
or that the party with which the Fund enters into such a transaction may not
perform its commitment. The Fund will segregate liquid assets, such as cash,
U.S. Government securities and other liquid, high quality debt securities in an
amount sufficient to meet its payment obligations with respect to these
transactions.
Securities Lending
The Fund may lend its securities in an amount not exceeding 30% of its
assets to financial institutions such as banks and brokers if the loan is
collateralized in accordance with applicable regulations. Under the present
regulatory requirements which govern loans of portfolio securities, the loan
collateral must, on each business day, at least equal the value of the loaned
securities and must consist of cash, letters of credit of domestic banks or
domestic branches of foreign banks, or securities of the U.S. Government. Loans
of securities involve risks of delay in receiving additional collateral or in
recovering the securities loaned or even loss of rights in the collateral should
the borrower of the securities fail financially. However, such securities
lending will be made only when, in the opinion of the Advisor, the income to be
earned from the loans justifies the attendant risks. Loans are subject to
termination at the option of the Fund or the borrower.
Options
The Fund may write (sell) covered call options on individual securities and
on stock indices and engage in related closing transactions. A covered call
option on a security is an agreement by the Fund, in exchange for a premium, to
sell a particular portfolio security if the option is exercised at a specified
price before a set date. An option on a stock index gives the option holder the
right to receive, upon exercising the option, a cash settlement amount based on
the difference between the exercise price and the value of the underlying stock
index. Risks associated with writing covered options include the possible
inability to effect closing transactions at favorable prices and an appreciation
limit on the securities set aside for settlement. The Fund may also purchase
call options in closing transactions, to terminate option positions
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written by the Fund. There is no assurance of liquidity in the secondary market
for purposes of closing out covered call option positions.
The Fund may purchase put and call options with respect to securities which
are eligible for purchase by the Fund and with respect to various stock indices
for the purpose of hedging against the risk of unfavorable price movements
adversely affecting the value of the Fund's securities or securities the Fund
intends to buy. A put option on a security is an agreement by the writer of the
option, in exchange for a premium, to purchase the security from the Fund, if
the option is exercised, at a specified price before a set date. The Fund may
also sell put and call options in closing transactions.
Special risks are associated with the use of options. There can be no
guarantee of a correlation between price movements in the option and in the
underlying securities or index. A lack of correlation could result in a loss on
both the Fund's portfolio holdings and the option so that the Fund's return
might have been better had the option not been purchased or sold. There can be
no assurance that a liquid market will exist at a time when the Fund seeks to
close out an option position. The Fund may purchase a put or call option only if
the value of its premium, when aggregated with the premiums on all other options
held by the Fund, does not exceed 5% of the Fund's total assets.
Stock Index Futures
The Fund may buy and sell stock index futures contracts for bona fide
hedging purposes, e.g., in order to hedge against changes in prices of the
Fund's securities. No more than 25% of the Fund's assets will be hedged.
A stock index futures contract is an agreement pursuant to which one party
agrees to deliver to the other an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made. If the Advisor
expected general stock market prices to rise, it might purchase a stock index
futures contract as a hedge against an increase in prices of particular equity
securities it wanted ultimately to buy. If in fact the stock index did rise, the
price of the equity securities intended to be purchased might also increase, but
that increase would be offset in part by the increase in the value of the Fund's
futures contract resulting from the increase in the index. On the other hand, if
the Advisor expected general stock market prices to decline, it might sell a
futures contract on the index. If that index did in fact decline, the value of
some or all of the equity securities held by the Fund might also be expected to
decline, but that decrease would be offset in part by the increase in the value
of the futures contract.
There is no assurance that it will be possible at any particular time to
close a futures position. In the event that the Fund could not close a futures
position and the value of the position declined, the Fund would be required to
continue to make daily cash payments to the other party to the contract to
offset the decline in value of the position. There can be no assurance that
hedging transactions will be successful, as there may be an imperfect
correlation between movements in the prices of the futures contracts and of the
securities being hedged, or price distortions due to market conditions in the
futures markets. Successful use of futures contracts is subject to the Advisor's
ability to predict correctly movements in the direction of interest rates,
market prices and other factors affecting the value of securities.
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Illiquid and Restricted Securities; Short Sales Against the Box
The Fund may invest up to 5% of its net assets in illiquid securities,
including (i) securities for which there is no readily available market; (ii)
securities which may be subject to legal restrictions on resale (so-called
"restricted securities") other than Rule 144A securities noted below; (iii)
repurchase agreements having more than seven days to maturity; and (iv) fixed
time deposits subject to withdrawal penalties (other than those with a term of
less than seven days). Illiquid securities do not include those which meet the
requirements of Securities Act Rule 144A and which the Trustees have determined
to be liquid based on the applicable trading markets. The Fund is permitted to
engage in short sales "against the box." Such short sales are a method of
locking in unrealized capital gains without current recognition of such gains.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions, which are described
fully in the Statement of Additional Information. Like the Fund's investment
objectives, certain of these restrictions are fundamental and may be changed
only by a majority vote of the Fund's outstanding shares.
ORGANIZATION AND MANAGEMENT
The Trust is organized as a Delaware business trust, and is registered as
an open-end diversified management investment company. The Trust's Board of
Trustees decides on matters of general policy and reviews the activities of the
Advisor, Distributor and Administrator. The Trust's officers conduct and
supervise its daily business operations.
The Advisor
The Advisor is a limited partnership organized in May 1995 as the successor
to its general partner, Brandes Investment Partners, Inc., which was founded in
1974. As of September 30, 1996, the Advisor managed over $7.5 billion in assets
for various clients, including corporations, public and corporate pension plans,
foundations and charitable endowments, and individuals. Charles H. Brandes, who
owns a controlling interest in Brandes Investment Partners, Inc., serves as a
Trustee of the Trust. The Advisor's offices are located at 12750 High Bluff
Drive, San Diego, California 92130.
Management Fee. Subject to the direction and control of the Trustees, the
Advisor formulates and implements an investment program for the Fund, including
determining which securities should be bought and sold. The Advisor also
provides certain officers for the Trust. For its services, the Advisor receives
a fee, accrued daily and paid monthly at the annual rate of 1.00% of average net
assets.
Managers of the Fund. The Fund is team-managed by the Advisor's Investment
Committee, whose members are firm principals and/or portfolio managers. Current
members of the Investment Committee are Charles H. Brandes, CFA; Walter J.
Brown, CFA; Jeffrey A. Busby, CFA; Glenn R. Carlson, CFA; Douglas C. Edman;
Robert J. Gallagher; Ann W. Humphreville; Marnelle A. Marchese, CFA; Jeffrey R.
Meyer, CFA; William A. Pickering, CFA; Ann M. Priebe; and Brent V. Woods, J.D.
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Operating Expenses; Expense Limitation
The Fund is responsible for paying its operating expenses, including, but
not limited to, management and administrative fees, legal and auditing fees,
fees and expenses of its custodian, accounting services and shareholder
servicing agents, Trustees' fees, the cost of communicating with shareholders
and registration fees. However, the Advisor has voluntarily agreed through at
least October 31, 1997 to limit the Fund's operating expenses to 1.20% of
average net assets. Any such reductions made by the Advisor in its fees or
reimbursement of expenses are subject to reimbursement by the Fund, provided
that the Fund is able to effect such reimbursement while remaining within the
expense limitation. Shareholders will receive 30 days prior notice in the event
the Advisor determines not to maintain this voluntary limit in the future. The
Board of Trustees has determined that it is possible, but not probable, that the
Fund will be large enough in the future for the expense ratio to be sufficiently
reduced to permit reimbursement of the Advisor.
Portfolio Transactions and Brokerage
The Advisor considers a number of factors in determining which brokers or
dealers to use for the Fund's portfolio transactions. These factors include, but
are not limited to, the reasonableness of commissions, quality of services and
execution, and the availability of research which the Advisor may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Fund receives prompt execution at competitive prices, the Advisor may also
consider the sale of shares of the Fund as a factor in selecting broker-dealers
for the Fund's portfolio transactions. The Advisor does not expect the portfolio
turnover rate of the Fund to exceed, under normal conditions, 50% per year.
The Administrator
Investment Company Administration Corporation (the "Administrator"),
pursuant to an administration agreement with the Trust, supervises the overall
administration of the Fund including, among other responsibilities, the
preparation and filing of documents required for compliance by the Fund with
applicable laws and regulations, arranging for the maintenance of books and
records of the Fund, and supervision of other organizations that provide
services to the Fund. Certain officers of the Trust may be provided by the
Administrator. For its services, the Administrator receives a fee from the Trust
at the annual rate of 0.10% of average net assets, subject to a minimum of
$40,000 per year.
PURCHASES
General
Shares of the Fund are offered on a continuous basis to certain
institutional investors, including qualified retirement and deferred
compensation plans and trusts used to fund those plans, including, but not
limited to, those defined in section 401(a), 403(b), or 457 of the Internal
Revenue Code (the "Code"), "rabbi trusts," foundations, endowments, corporations
and other taxable and tax-exempt investors that would otherwise generally
qualify as advisory clients of the Advisor. Shares may also be purchased by
officers and employees of the Advisor, the Administrator and the Distributor and
their immediate family members, as well as to certain other persons determined
from time to time by the Distributor, including
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investment advisors or financial planners or their clients who may clear
transactions through a broker-dealer, bank or trust company which may maintain
an omnibus account with the Transfer Agent. Investors who purchase or redeem
shares through a trust department, broker, dealer, agent, financial planner,
financial services firm or investment advisor may be charged an additional
service or transaction fee by that institution.
Shares of the Fund are sold without a sales charge. Shares are offered
continuously at the net asset value per share which is next computed (1) after
the investor's selected dealer receives the order which is promptly transmitted
to the Fund, or (2) after receipt of an order by the Transfer Agent from the
shareholder directly in proper form (which generally means a completed
Application Form together with a negotiable check in U.S. dollars or a wire
transfer of funds). The Fund and the Distributor reserve the right to refuse any
order for the purchase of shares. The Fund's Distributor is Worldwide Value
Distributors, L.L.C., an affiliate of the Advisor. The minimum initial
investment in the Fund is $1 million; there is no minimum subsequent investment.
The minimum investment may be waived by the Distributor for institutions making
continuing investments in the Fund and from time to time for other investors,
including retirement plans. Investors may be charged a fee if they effect
transactions in fund shares through a broker or agent.
Purchases through a Securities Dealer
Shares of the Fund may be purchased through a securities dealer which has
executed an agreement with the Distributor or the Fund (a "selected dealer") or
directly from the Fund's Transfer Agent, Investors Bank & Trust Company, acting
as agent for a selected dealer. The Fund and the Distributor reserve the right
to cancel an order for which payment is not received from a selected dealer by
the third business day following the order. An order placed with a selected
dealer may be subject to postage and handling charges imposed by the dealer.
Purchases through the Transfer Agent
An investor who wishes to purchase shares of a Fund directly from the
Transfer Agent may do so by completing the Application form (available from the
Transfer Agent or a selected dealer) and mailing it to the Transfer Agent at the
address shown on the Application Form. Payment may be made by a check that
accompanies the Application Form, or it may be made by a wire transfer of funds,
as described below. Subsequent investments may be made by mailing a check,
together with the investment form from a recent account statement. Subsequent
investments may also be made by wire, as described below.
Payment by Wire
For payment by wire of an initial investment in the Fund, the investor
should first call the Transfer Agent at (617) 946-1945 between the hours of 9:00
a.m. and 4:00 p.m., Eastern time, on a day when the New York Stock Exchange is
open for trading in order to receive an account number. The Transfer Agent will
request the investor's name, address, tax identification number, amount being
wired and wiring bank. The investor should then instruct the wiring bank to
transfer funds by wire to: Investors Bank & Trust Company, ABA # 0110-01438,
DDA # 6691-36913, for credit to Brandes Institutional International Equity Fund,
for further credit to [Investor's name and account number]. The investor should
also ensure that the wiring bank includes the name of the Fund and the account
number with the wire. If the funds are received by the Transfer Agent prior to
the time that the Fund's net asset value is calculated, the funds will be
invested on that day: otherwise, they will be invested on the next business day
at the net asset value next calculated. Finally, the investor should write the
account number provided by the Transfer Agent on the Application Form and mail
the Form promptly to the Transfer Agent.
11
<PAGE>
Subsequent Purchases
To make a subsequent purchase by wire, the investor should call the
Transfer Agent at (617) 946-1945 before the wire is sent. Failure to do so may
cause the purchase to be delayed indefinitely. The investor should wire funds to
the Transfer Agent, care of Investors Bank & Trust Company, in the manner
described above, including the name of the Fund and the investor's account
number with the wire.
Retirement Plans
Individual participants in qualified retirement plans should purchase
shares of the Fund through their plan sponsor or administrator, which is
responsible for transmitting orders. The procedures for investing in the Fund
depend on the provisions of the qualified retirement plan and any arrangements
that the plan sponsor may have made for special processing services, including
subaccounting.
Other
Shares are credited to an investor's account, and certificates are
generally not issued. The Trust and the Distributor each reserve the right to
reject any purchase order or suspend or modify the offering of the Fund's
shares.
In addition to cash purchases, shares of the Fund may be purchased by
tendering payment "in-kind" in the form of securities, provided that any such
securities are of the type which the Fund can or may legally purchase and
consistent with the Fund's investment objective and policies, are acquired for
investment and not for resale, are liquid, unrestricted and have a readily
determinable value by exchange or NASDAQ listing and that such a purchase has
been approved by the Advisor in its sole discretion.
Net Asset Value
To determine the net asset value per share of the Fund, the current value
of the Fund's total assets, less all liabilities, is divided by the total number
of shares outstanding, and the result is rounded to the nearer cent. The Fund
values its investments on the basis of their market value. Securities and other
assets for which market prices are not readily available are valued at fair
value as determined in good faith by the Board of Trustees. Debt securities with
remaining maturities of 60 days or less are normally valued at amortized cost,
unless the Board of Trustees determines that amortized cost does not represent
fair value. Cash and receivables will be valued at their face amounts. Interest
will be recorded as accrued, and dividends will be recorded on their ex-dividend
date.
The Fund will calculate its net asset value once daily at the close of
public trading on the New York Stock Exchange (normally 4:00 p.m. Eastern time)
on days that the Exchange is open for trading, except on days on which no orders
to purchase, sell or redeem shares have been received by the Fund. The New York
Stock Exchange is closed on the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
12
<PAGE>
SHAREHOLDER SERVICES
Automatic Reinvestment
Dividends and capital gain distributions are reinvested without any sales
charge in additional shares unless indicated otherwise on the Application Form.
A shareholder may elect to have dividends or capital gain distributions paid in
cash.
Shareholder Reports
Shareholders will receive an audited annual report and an unaudited
semiannual report, both of which present the financial statements of the Fund.
REDEEMING SHARES
How to Redeem Shares
Shares may be redeemed only by instructions from the registered owner of a
shareholder account. Individuals who are participants in a retirement or other
plan should direct redemption requests to the plan sponsor or administrator,
which may have special procedures for processing such requests and which is
responsible for forwarding requests to the Transfer Agent.
A shareholder may redeem shares of a Fund by contacting the shareholder's
selected dealer. The selected dealer may arrange for the repurchase of the
shares through the Fund's distributor at the net asset value next determined
after receipt by the selected dealer of instructions from the shareholder. The
dealer may charge the shareholder for this service. Shares held in street name
must be redeemed through the dealer holding the shares.
A shareholder may also redeem shares by mailing instructions to the
Transfer Agent, Investors Bank & Trust Company, P.O. Box 1537, Boston, MA
02205-1537 , or by delivering instructions to the Transfer Agent at 89 South
Street, Boston, MA 02111. The instructions must specify the name of the Fund,
the number of shares or dollar amount to be redeemed and the shareholder's name
and account number. If a redemption is requested by a corporation, partnership,
trust or fiduciary, written evidence of authority acceptable to the Transfer
Agent must be submitted before such request will be accepted. If the proceeds of
the redemption exceed $50,000, are to be paid to a person other than the record
owner, are to be sent to an address other than the address on the Transfer
Agent's records, or are to be paid to a corporation, partnership, trust or
fiduciary, the signature(s) on the redemption request and on the certificates,
if any, or stock powers must be guaranteed by an "eligible guarantor," which
includes a bank or savings and loan association that is federally insured or a
member firm of a national securities exchange. The price the shareholder will
receive for the Fund shares redeemed is at the next determined net asset value
for the shares after a completed redemption request is received by the Transfer
Agent.
Telephone Redemptions. A shareholder may establish telephone redemption
privileges by checking the appropriate box and supplying the necessary
information on the Application Form. Shares may then be redeemed by telephoning
the Transfer Agent at (617) 946-1945, between the hours of 9:00 a.m. and 4:00
p.m.
13
<PAGE>
Eastern time on a day when the New York Stock Exchange is open for trading.
Redemption requests received by the Transfer Agent before 4:00 p.m. Eastern time
on a day when the New York Stock Exchange is open for trading will be processed
that day; otherwise processing will occur on the next business day.
Institutional investors may also make special arrangements with the Transfer
Agent for designating personnel of the investor who are authorized to place
telephone redemption requests.
Special Factors Regarding Telephone Redemptions. The Trust will use
procedures, such as assigned personal identification numbers, designed to
provide reasonable verification of the identity of a person making a telephone
redemption request. The Trust reserves the right to refuse a telephone
redemption request if it believes that the person making the request is neither
the record owner of the shares being redeemed nor otherwise authorized by the
shareholder to request the redemption. Shareholders will be promptly notified of
any refused request for a telephone redemption. If these normal identification
procedures are not followed, the Trust or its agents could be liable for any
loss, liability or cost which results from acting upon instructions of a person
believed to be a shareholder with respect to the telephone redemption privilege.
Redemption Payments
Payment for redemptions will be made within seven days after receipt by the
Transfer Agent of the written or telephone redemption request, any share
certificates, and, if required, a signature guarantee and any other necessary
documents, except as indicated below. Payment may be postponed or the right of
redemption suspended at times when the New York Stock Exchange is closed for
other than customary weekends and holidays, when trading on such exchange is
restricted, when an emergency exists as a result of which disposal by the Trust
of securities owned by the Fund is not reasonably practicable or it is not
reasonably practicable for the Trust fairly to determine the value of the Fund's
net assets, or during any other period when the SEC, by order, so permits.
Redemption proceeds are generally paid by check. However, at the
shareholder's request, redemption proceeds of $300 or more may be wired by the
Transfer Agent to the shareholder's bank account. Requests for redemption by
wire should include the name, location and ABA or bank routing number (if known)
of the designated bank and the shareholder's bank account number.
Redemption of Small Accounts
If the value of a shareholder's investment falls below $100,000 because of
shareholder redemption(s), the Fund may notify the shareholder, and if his
investment value remains below $100,000 for a continuous 60-day period, the
shares are subject to redemption by the Fund, and, if redeemed, the net asset
value of those shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of the shares. The foregoing minimum account size
requirements do not apply to shares held by employees of the Advisor or its
affiliates.
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<PAGE>
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60-days'
notice to shareholders.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
Dividends and Distributions
The Fund expects to pay income dividends annually. Distributions of net
capital gains, if any, will be made at least annually. The Board of Trustees may
determine to declare dividends and make distributions more frequently.
Dividends and capital gain distributions are automatically reinvested in
additional shares at the net asset value per share on the reinvestment date
unless the shareholder has previously requested in writing to the Transfer Agent
that payment be made in cash.
Any dividend or distribution paid by the Fund has the effect of reducing
the net asset value per share on the reinvestment date by the amount of the
dividend or distribution. Investors should note that a dividend or distribution
paid on shares purchased shortly before such dividend or distribution was
declared will be subject to income taxes as discussed below even though the
dividend or distribution represents, in substance, a partial return of capital
to the shareholder.
Tax Status
The Fund intends to qualify and elect to be treated as a regulated
investment company under Subchapter M of the Code. As long as the Fund continues
to qualify, and as long as the Fund distributes all of its income each year to
shareholders, the Fund will not be subject to any federal income or excise
taxes. The distributions made by the Fund will be taxable to shareholders
whether received in shares (through dividend reinvestment) or in cash.
Distributions derived from net investment income, including net short-term
capital gains, are taxable to shareholders as ordinary income. Distributions
designated as capital gains dividends are taxable as long-term capital gains
regardless of the length of time shares of the Fund have been held. Although
distributions are generally taxable when received, certain distributions made in
January are taxable as if received in the prior December. Shareholders will be
informed annually of the amount and nature of the Fund's distributions.
The Trust may be required to impose backup withholding at a rate of 31%
from income dividends and capital gain distributions and upon payment of
redemption proceeds if provisions of the Code relating to the furnishing and
certification of taxpayer identification numbers and reporting of dividends are
not complied with by a shareholder. Any shareholder account without a tax
identification number may be liquidated and distributed to the shareholder, net
of withholding, after the sixtieth day of investment. In addition, dividends and
capital gains distributions to foreign shareholders may be subject to U.S.
withholding at a rate of up to 30%.
Dividends and interest earned by the Fund may be subject to withholding and
other taxes imposed by foreign countries, at rates from 10% to 40%, which taxes
would reduce the Fund's investment income. However, under certain circumstances
shareholders may be able to claim credits against their U.S. taxes
15
<PAGE>
for such foreign taxes. The Trust will also notify shareholders each year as to
the amounts available as credits.
Additional information about taxes is set forth in the Statement of
Additional Information. Shareholders should consult their own advisers
concerning federal, state and local taxation of distributions from the Fund.
PERFORMANCE INFORMATION
From time to time, the Trust may publish the total return of the Fund in
advertisements and communications to investors. Total return information will
include the Fund's average annual compounded rate of return over the four most
recent calendar quarters and over the period from the Fund's inception of
operations. The Trust may also advertise aggregate and average total return
information of the Fund over different periods of time. The Fund's total return
will be based upon the value of the shares acquired through a hypothetical
$1,000 investment at the beginning of the specified period and the net asset
value of those shares at the end of the period, assuming reinvestment of all
distributions. Total return figures will reflect all recurring charges against
Fund income. Investors should note that the investment results of the Fund will
fluctuate over time, and any presentation of a Fund's total return for any prior
period should not be considered as a representation of what an investor's total
return may be in any future period.
In addition to standardized return, performance advertisements and sales
literature may also include other total return performance data
("non-standardized return"). Non-standardized return may be quoted for the same
or different periods as those for which standardized return is quoted and may
consist of aggregate or average annual percentage rate of return, actual
year-by-year rates or any combination thereof. All data included in performance
advertisements will reflect past performance and will not necessarily be
indicative of future results. The Trust may also advertise the Fund's
performance in comparison to the performance of various indices and investments
for which reliable performance data is available, and may advertise relative
rankings or other information prepared by mutual fund ranking services such as
Lipper Analytical Services or Morningstar, Inc. The Fund's annual report may
contain additional performance information and will be available to shareholders
upon request without charge. The investment return and principal value of an
investment in the Fund will fluctuate and an investor's proceeds upon redeeming
Fund shares may be more or less than the original cost of the shares.
PRIOR PERFORMANCE OF THE ADVISOR
Set forth below are certain performance data provided by the Advisor
relating to the composite of international equity accounts of clients of the
Advisor. These accounts had the same investment objective as the Fund and were
managed by the same team that will manage the Fund's securities, using
substantially similar, though not in all cases identical, investment strategies,
policies and techniques as those contemplated for use by the Fund. See
"Investment, Objectives and Policies." The data are provided to illustrate the
past performance of the Advisor in managing similar accounts as measured against
the Morgan Stanley Capital International (MSCI) EAFE Index, a standard
international equity investment benchmark. The data below do not represent the
performance of the Fund. You should not consider this performance data as an
indication of future performance of the Fund or of the Advisor.
16
<PAGE>
The accounts that are included in the Advisor's composite are not subject
to the same types of expenses to which the Fund is subject nor to the
diversification requirements, specific tax restrictions and investment
limitations imposed on the Fund by the Investment Company Act of 1940 (the "1940
Act"). Consequently, the performance results for the Advisor's composite could
have been adversely affected if the accounts included in the composite had been
regulated as investment companies.
For Periods ended June 30, 1996
-------------------------------
Five Years Three Years One Year
---------- ----------- --------
Annualized Total Return*:
Advisor's Composite 16.41% 13.37% 13.30%
MSCI EAFE** 9.99% 10.45% 13.28%
*Investment performance for both the Advisor's composite and the MSCI EAFE
benchmark include the reinvestment of dividends and income, net of (after) any
applicable foreign withholding taxes. The Advisor's performance factors in the
time-weighted effect of contributions and withdrawal of capital, with dividends
accounted for on a cash basis. Also, the Advisor's performance is calculated net
of trading costs and management fees, but before any custodian costs. The
Advisor's results represent the percentage change in the total market value
expressed in U.S. dollars of all its fully discretionary International Equity
accounts, under management for at least one month. Accounts which the Advisor
manages pursuant to a bundled wrap fee agreement are excluded. Unbundled wrap
fee accounts are included in the composite returns above. These accounts may
have paid a single fee for brokerage, search, monitoring, management and other
services. For these accounts, the whole fee was deducted to arrive at the net
performance figure, even though only a portion of such fee was for brokerage and
management. A small number of non-fee paying accounts was included, but had no
material effect on performance results. The Advisor's composite performance
figures meet Level II Verification Standards established by the Association for
Investment Management and Research. Past investment performance should not be
taken as representative of future performance.
**The MSCI EAFE Index is an unmanaged index consisting of securities listed on
exchanges in European, Australian and Far Eastern markets and includes dividends
and distributions, but does not reflect fees, brokerage commission or other
expenses of investing.
GENERAL INFORMATION
The Trust was organized as a Delaware business trust on July 6, 1994. The
Trustees have authority to issue an unlimited number of shares of beneficial
interest of separate series, par value $.01 per share. The Fund is one of three
separate series of the Trust. Although it has no present intention to do so, the
Trust has reserved the right to convert to a master-feeder structure in the
future by investing all of the Fund's assets in the securities of another
investment company, upon notice to and approval of shareholders.
The Trust does not hold annual shareholder meetings of the Fund. There
normally will be no meetings of shareholders to elect Trustees unless fewer than
a majority of the Trustees holding office have been elected by shareholders.
Shareholders of record holding at least two-thirds of the outstanding shares of
the Trust may remove a Trustee by votes cast in person or by proxy at a meeting
called for that purpose. The Trustees are required to call a meeting of
shareholders for the purpose of voting upon the question of removal of any
Trustee when so requested in writing by the shareholders of record owning at
least 10% of the Trust's outstanding shares. Each share of the Fund has equal
voting rights. Each share of the Fund is entitled to participate equally in
dividends and distributions and the proceeds of any liquidation from the Fund.
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<PAGE>
Custodian and Transfer Agent. Investors Bank & Trust Company is the
custodian of the Fund's assets and employs foreign sub-custodians, approved by
the Board of Trustees in accordance with applicable requirements under the 1940
Act, to provide custody of the Fund's foreign assets. Investors Bank & Trust
Company is the Fund's transfer and dividend disbursing agent.
18
<PAGE>
BRANDES INSTITUTIONAL INTERNATIONAL EQUITY FUND
Statement of Additional Information
Dated December 27, 1996
This Statement of Additional Information is not a prospectus, and it should
be read in conjunction with the prospectus of Brandes Institutional
International Equity Fund (the "Fund") dated December 27, 1996. Brandes
Investment Partners, L.P. (the "Advisor") is the Advisor to the Fund. Copies of
the prospectus may be obtained from the Fund at 12750 High Bluff Drive, Suite
420, San Diego, CA 92130 or by calling 1-800-237-7119.
TABLE OF CONTENTS
Cross-reference
to page in
Page Prospectus:
---- -----------
Investment Objective and Policies............. B-2 3
Investment Restrictions....................... B-2 9
Other Securities and Investment Techniques.... B-4 6
Repurchase Agreements................ B-4 6
When-Issued Securities............... B-4 7
Rule 144A Securities................. B-5 8
Put and Call Options................. B-6 7
Futures Contracts.................... B-8 8
Management.................................... B-9 9
Advisory Agreement................... B-10 9
Administration Agreement............. B-11 10
Portfolio Transactions and Brokerage.......... B-11 10
Net Asset Value............................... B-12 11
Redemptions................................... B-13 12
Taxation...................................... B-13 14
Dividends and Distributions................... B-15 13
Performance Information....................... B-15 14
General Information........................... B-16 15
Appendix...................................... B-16
B-1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Brandes Institutional International Equity Fund (the "Fund") is a
diversified series of Brandes Investment Trust (the "Trust"), a registered
open-end management investment company or mutual fund. The investment objective
is long-term capital appreciation. The Fund seeks to achieve its objective by
investing principally in equity securities of foreign issuers.
Foreign Securities
The U.S. Government has, from time to time, imposed restrictions, through
taxation or otherwise, on foreign investments by U.S. entities such as the Fund.
If such restrictions should be reinstituted, the Board of Trustees of the Trust
would consider alternative arrangements, including reevaluation of the Fund's
investment objective and policies. However, the Fund would adopt any revised
investment objective and fundamental policies only after approval by the holders
of a "majority of the outstanding voting securities" of the Fund, which is
defined in the Investment Company Act of 1940 (the "1940 Act") to mean the
lesser of (i) 67% of the shares represented at a meeting at which more than 50%
of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares.
Investments in foreign securities involve certain inherent risks.
Individual foreign economies may differ from the U.S. economy in such aspects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency, diversification and balance of payments position. The
internal politics of certain foreign countries may not be as stable as those of
the United States. Governments in certain foreign countries also continue to
participate to a significant degree in their respective economies. Action by
these governments could include restrictions on foreign investment,
nationalization, expropriation of property or imposition of taxes, and could
have a significant effect on market prices of securities and payment of
interest. The economies of many foreign countries are heavily dependent on
international trade and are accordingly affected by the trade policies and
economic conditions of their trading partners. Enactment by these trading
partners of protectionist trade legislation could have a significant adverse
effect on the securities markets of such countries.
Because most of the securities in which the Fund will invest are
denominated in foreign currencies, a change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of the Fund's assets which are denominated in that currency. Such changes
will also affect the Fund's income. The values of the Fund's assets may also be
affected significantly by currency restrictions and exchange control regulations
imposed from time to time.
Foreign securities markets may be more volatile than those in the
United States. While growing in volume, they usually have substantially less
volume than U.S. markets, and the Fund's portfolio securities may be less liquid
and more volatile than U.S. securities. Settlement practices for transactions
may differ from those in the United States and may include delays beyond periods
customary in the United States. Such differences and potential delays may expose
the Fund to increased risk of loss in the event of a failed trade or the
insolvency of a foreign broker-dealer.
INVESTMENT RESTRICTIONS
The Trust has adopted the following fundamental investment policies and
restrictions with respect to the Fund in addition to the policies and
restrictions discussed in the prospectus. The policies and restrictions listed
below cannot be changed without approval by the holders of a majority
B-2
<PAGE>
of the outstanding voting securities of the Fund. As a matter of fundamental
policy, the Fund is diversified; i.e., at least 75% of the value of its total
assets is represented by cash and cash items (including receivables), Government
securities, securities of other investment companies, and other securities for
the purposes of this calculation limited in respect of any one issuer to an
amount not greater in value than 5% of the value of the total assets of the Fund
and to not more than 10% of the outstanding voting securities of such issuer.
In addition, the Fund may not:
1. Issue senior securities, borrow money or pledge its assets, except
that the Fund may borrow on an unsecured basis from banks for temporary or
emergency purposes or for the clearance of transactions in amounts not exceeding
10% of its total assets (not including the amount borrowed), provided that it
will not make investments while borrowings in excess of 5% of the value of its
total assets are outstanding;
2. Make short sales of securities or maintain a short position, except
for short sales against the box;
3. Purchase securities on margin, except such short-term credits as may
be necessary for the clearance of transactions;
4. Write put or call options, except that the Fund may (i) write
covered call options on individual securities and on stock indices; (ii)
purchase put and call options on securities which are eligible for purchase by
the Fund and on stock indices; and (iii) engage in closing transactions with
respect to its options writing and purchases, in all cases subject to applicable
federal and state laws and regulations;
5. Act as underwriter (except to the extent the Fund may be deemed to
be an underwriter in connection with the sale of securities in its investment
portfolio);
6. Invest 25% or more of its total assets, calculated at the time of
purchase and taken at market value, in any one industry (other than U.S.
Government securities), except that the Fund reserves the right to invest all of
its assets in shares of another investment company;
7. Purchase or sell real estate or interests in real estate or real
estate limited partnerships (although the Fund may purchase and sell securities
which are secured by real estate, securities of companies which invest or deal
in real estate and securities issued by real estate investment trusts);
8. Purchase or sell commodities or commodity futures contracts, except
that the Fund may purchase and sell stock index futures contracts for hedging
purposes to the extent permitted under applicable federal and state laws and
regulations and except that the Fund may engage in foreign exchange forward
contracts, although it has no current intention to do so;
9. Make loans (except for purchases of debt securities consistent with
the investment policies of the Fund and except for repurchase agreements);
10. Make investments for the purpose of exercising control or
management;
11. Invest in oil and gas limited partnerships or oil, gas or mineral
leases;
The Fund observes the following restrictions as a matter of operating,
but not fundamental, policy, which can be changed by the Board of Trustees
without shareholder approval, pursuant to positions taken by federal and state
regulatory authorities:
B-3
<PAGE>
The Fund may not:
1. Purchase any security if as a result the Fund would then hold more
than 10% of any class of voting securities of an issuer (taking all common stock
issues as a single class, all preferred stock issues as a single class, and all
debt issues as a single class), except that the Fund reserves the right to
invest all of its assets in a class of voting securities of another investment
company;
2. Invest in securities of any issuer if any officer or Trustee of the
Trust or any officer or Director of the Advisor owns more than 1/2 of 1% of the
outstanding securities of such issuer, and such officers, Trustees and Directors
who own more than 1/2 of 1% own in the aggregate more than 5% of the outstanding
securities of such issuer;
3. Invest more than 10% of its assets in real estate investment trusts;
4. Invest more than 5% of the value of its net assets in warrants
(included in that amount, but not to exceed 2% of the value of the Fund's net
assets, may be warrants which are not listed on the New York or American Stock
Exchange), although the Fund does not presently intend to invest in warrants;
5. Invest in any security if, as a result, the Fund would have more
than 5% of its total assets invested in securities of companies which together
with any predecessor have been in continuous operation for fewer than three
years ("unseasoned securities");
6. Invest more than 10% of its assets in the securities of other
investment companies or purchase more than 3% of any other investment company's
voting securities or make any other investment in other investment companies
except as permitted by federal and state law, except that the Fund reserves the
right to invest all of its assets in another investment company;
7. Invest more than 5% of its total assets in restricted securities,
other than restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act of 1933 that have been determined to be liquid;
8. Invest more than 5% in the aggregate of illiquid and unseasoned
securities;
9. Invest more than 15% of its total assets in unseasoned securities
and illiquid securities, including Rule 144A securities.
OTHER SECURITIES AND INVESTMENT TECHNIQUES
Repurchase Agreements
Repurchase agreements are transactions in which the Fund purchases a
security from a bank or recognized securities dealer and simultaneously commits
to resell that security to the bank or dealer at an agreed-upon date and price
reflecting a market rate of interest unrelated to the coupon rate or maturity of
the purchased security. The purchaser maintains custody of the underlying
securities prior to their repurchase; thus the obligation of the bank or dealer
to pay the repurchase price on the date agreed to is, in effect, secured by such
underlying securities. If the value of such securities is less than the
repurchase price, the other party to the agreement will provide additional
collateral so that at all times the collateral is at least equal to the
repurchase price.
Although repurchase agreements carry certain risks not associated with
direct investments in securities, the Fund intends to enter into repurchase
agreements only with banks and dealers believed
B-4
<PAGE>
by the Advisor to present minimum credit risks in accordance with guidelines
established by the Board of Trustees. The Advisor will review and monitor the
creditworthiness of such institutions under the Board's general supervision. To
the extent that the proceeds from any sale of collateral upon a default in the
obligation to repurchase were less than the repurchase price, the purchaser
would suffer a loss. If the other party to the repurchase agreement petitions
for bankruptcy or otherwise becomes subject to bankruptcy or other liquidation
proceedings, there might be restrictions on the purchaser's ability to sell the
collateral and the purchaser could suffer a loss. However, with respect to
financial institutions whose bankruptcy or liquidation proceedings are subject
to the U.S. Bankruptcy Code, the Fund intends to comply with provisions under
such Code that would allow it immediately to resell the collateral.
When-Issued Securities
The Fund may from time to time purchase securities on a "when-issued"
basis. The price of such securities, which may be expressed in yield terms, is
fixed at the time the commitment to purchase is made, but delivery and payment
for the when-issued securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. To the extent that assets of the Fund are
held in cash pending the settlement of a purchase of securities, the Fund would
earn no income. While when-issued securities may be sold prior to the settlement
date, the Fund intends to purchase such securities with the purpose of actually
acquiring them unless a sale appears desirable for investment reasons. At the
time the Fund makes the commitment to purchase a security on a when-issued
basis, it will record the transaction and reflect the value of the security in
determining its net asset value. The market value of the when-issued securities
may be more or less than the purchase price. The Advisor does not believe that
the Fund's net asset value or income will be adversely affected by the purchase
of securities on a when-issued basis. The Fund will establish a segregated
account with the Custodian in which it will maintain cash or liquid assets such
as U.S. Government securities or other high-grade debt obligations equal in
value to commitments for when-issued securities. Such segregated securities
either will mature or, if necessary, be sold on or before the settlement date.
Rule 144A Securities
As noted in the prospectus, the Fund may invest no more than 5% of its
net assets in securities that at the time of purchase have legal or contractual
restrictions on resale, are otherwise illiquid or do not have readily available
market quotations. Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered under the Securities Act of 1933 ("restricted securities"),
securities which are otherwise not readily marketable such as over-the-counter,
or dealer traded, options, and repurchase agreements having a maturity of more
than seven days. Mutual funds do not typically hold a significant amount of
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities, and the Fund might not be
able to dispose of such securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions. The Fund might also have
to register such restricted securities in order to dispose of them, resulting in
additional expense and delay.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act of 1933,
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors
B-5
<PAGE>
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for repayment.
The fact that there are contractual or legal restrictions on resale to the
general public or to certain institutions may not be indicative of the liquidity
of such investments. If such securities are subject to purchase by institutional
buyers in accord with Rule 144A promulgated by the Securities and Exchange
Commission, the Trustees may determine that such securities, up to a limit of 5%
of the Fund's total net assets, are not illiquid notwithstanding their legal or
contractual restrictions on resale.
Put and Call Options
Purchasing Options. By purchasing a put option, the Fund obtains the
right (but not the obligation) to sell the option's underlying instrument at a
fixed "strike" price. In return for this right, the Fund pays the current market
price for the option (known as the option premium). Options have various types
of underlying instruments, including specific securities, indices of securities
prices, and futures contracts. The Fund may terminate its position in a put
option it has purchased by allowing it to expire or by exercising the option. If
the option is allowed to expire, the Fund will lose the entire premium it paid.
If the Fund exercises the option, it completes the sale of the underlying
instrument at the strike price. The Fund also may terminate a put option
position by closing it out in the secondary market at its current price (i.e.,
by selling an option of the same series as the option purchased), if a liquid
secondary market exists.
The buyer of a typical put option can expect to realize a gain if
security prices fall substantially. However, if the underlying instrument's
price does not fall enough to offset the cost of purchasing the option, a put
buyer can expect to suffer a loss (limited to the amount of the premium paid,
plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to suffer
a loss if the underlying prices do not rise sufficiently to offset the cost of
the option.
Writing Options. When the Fund writes a call option, it takes the
opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the Fund assumes the obligation to sell or deliver the
option's underlying instrument, in return for the strike price, upon exercise of
the option. The Fund may seek to terminate its position in a call option it
writes before exercise by closing out the option in the secondary market at its
current price (i.e., by buying an option of the same series as the option
written). If the secondary market is not liquid for a call option the Fund has
written, however, the Fund must continue to be prepared to deliver the
underlying instrument in return for the strike price while the option is
outstanding, regardless of price changes, and must continue to segregate assets
to cover its position. The Fund will establish a segregated account with the
Custodian in which it will maintain the security underlying the option written,
or securities convertible into that security, or cash or liquid assets such as
U.S. Government securities or other high-grade debt obligations equal in value
to commitments for options written.
Writing a call generally is a profitable strategy if the price of the
underlying security remains the same or falls. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in the underlying price
increases.
B-6
<PAGE>
Combined Positions. The Fund may purchase and write options in
combination with each other to adjust the risk and return characteristics of the
overall position. For example, the Fund may purchase a put option and write a
call option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
Correlation of Price Changes. Because there are a limited number of
types of exchange-traded options contracts, it is likely that the standardized
contracts available will not match the Fund's current or anticipated investments
exactly. The Fund may invest in options contracts based on securities with
different issuers, maturities, or other characteristics from the securities in
which it typically invests.
Options prices also can diverge from the prices of their underlying
instruments, even if the underlying instruments match the Fund's investments
well. Options prices are affected by such factors as current and anticipated
short-term interest rates, changes in volatility of the underlying instrument,
and the time remaining until expiration of the contract, which may not affect
the security prices the same way. Imperfect correlation also may result from:
differing levels of demand in the options markets and the securities markets,
structural differences in how options are traded, or imposition of daily price
fluctuation limits or trading halts. The Fund may purchase or sell options with
a greater or lesser value than the securities it wishes to hedge or intends to
purchase in order to attempt to compensate for differences in volatility between
the contract and the securities, although this may not be successful in all
cases. If price changes in the Fund's options positions are poorly correlated
with its other investments, the positions may fail to produce anticipated gains
or result in losses that are not offset by gains in other investments.
Liquidity of Options. There is no assurance a liquid secondary market
will exist for any particular options contract at any particular time. Options
may have relatively low trading volume and liquidity if their strike prices are
not close to the underlying instrument's current price. In addition, exchanges
may establish daily price fluctuation limits for options contracts, and may halt
trading if a contract's price moves upward or downward more than the limit in a
given day. On volatile trading days when the price fluctuation limit is reached
or a trading halt is imposed, it may be impossible for the Fund to enter into
new positions or close out existing positions. If the secondary market for a
contract is not liquid because of price fluctuation limits or otherwise, it
could prevent prompt liquidation of unfavorable positions, and potentially could
require the Fund to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, the Fund's access to other
assets held to cover its options positions also could be impaired.
OTC Options. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size, and
strike price, the terms of over-the-counter options, i.e., options not traded on
exchanges ("OTC options"), generally are established through negotiation with
the other party to the option contract. While this type of arrangement allows
the Fund greater flexibility to tailor an option to its needs, OTC options
generally involve greater credit risk than exchange-traded options, which are
guaranteed by the clearing organization of the exchanges where they are traded.
OTC options are considered to be illiquid, since these options generally can be
closed out only by negotiation with the other party to the option.
B-7
<PAGE>
Stock Index Options. The distinctive characteristics of options on
stock indices create certain risks that are not present with stock options
generally. Because the value of an index option depends on movements in the
level of the index rather than the price of a particular stock, whether the Fund
will realize a gain or loss on an options transaction depends on movements in
the level of stock prices generally rather than movements in the price of a
particular stock. Accordingly, successful use of options on a stock index will
be subject to the Advisor's ability to predict correctly movements in the
direction of the stock market generally. Index prices may be distorted if
trading in certain stocks included in the index is interrupted. Trading of index
options also may be interrupted in certain circumstances, such as if trading
were halted in a substantial number of stocks included in the index. If this
were to occur, the Fund would not be able to close out positions it holds. It is
the policy of the Fund to engage in options transactions only with respect to an
index which the Advisor believes includes a sufficient number of stocks to
minimize the likelihood of a trading halt in the index.
Futures Contracts
The Fund may buy and sell stock index futures contracts. Such a futures
contract is an agreement between two parties to buy and sell an index for a set
price on a future date. Futures contracts are traded on designated "contract
markets" which, through their clearing corporations, guarantee performance of
the contracts. A stock index futures contract does not require the physical
delivery of securities, but merely provides for profits and losses resulting
from changes in the market value of the contract to be credited or debited at
the close of each trading day to the respective accounts of the parties to the
contract. On the contract's expiration date, a final cash settlement occurs.
Changes in the market value of a particular stock index futures contract
reflects changes in the specified index of equity securities on which the future
is based.
There are several risks in connection with the use of futures
contracts. In the event of an imperfect correlation between the index and the
portfolio position which is intended to be protected, the desired protection may
not be obtained and the Fund may be exposed to risk of unlimited loss. Further,
unanticipated changes in stock price movements may result in a poorer overall
performance for the Fund than if it had not entered into any futures on stock
indexes.
In addition, the market prices of futures contracts may be affected by
certain factors. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
securities and futures markets. Second, from the point of view of speculators,
the deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation by
speculators in the futures market may also cause temporary price distortions.
Finally, positions in futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
There is no assurance that a liquid secondary market on an exchange or board of
trade will exist for any particular contract or at any particular time.
The Fund will engage in futures transactions only as a hedge against
the risk of unexpected changes in the values of securities held or intended to
be held by the Fund. As a general rule, the Fund will not purchase or sell
futures if, immediately thereafter, more than 25% of its net assets would be
hedged. In addition, the Fund will not purchase or sell futures or related
options if, immediately thereafter, the sum of the amount of margin deposits on
the Fund's existing futures positions and premiums paid for such options would
exceed 5% of the market value of the Fund's net assets.
B-8
<PAGE>
MANAGEMENT
The overall management of the business and affairs of the Trust is
vested with its Board of Trustees. The Board approves all significant agreements
between the Trust and persons or companies furnishing services to it, including
the agreements with the Advisor, Administrator, Custodian and Transfer Agent.
The day-to-day operations of the Trust are delegated to its officers, subject to
the Fund's investment objectives and policies and to general supervision by the
Board of Trustees.
The Trustees and officers of the Trust, their business addresses and
principal occupations during the past five years are:
<TABLE>
<S> <C>
Barry P. O'Neil,* (age 48) President and Trustee Managing Partner of the Advisor since May
12750 High Bluff Drive 1996, and Managing Director of its
San Diego, CA 92130 predecessor since 1991; formerly Vice
President, Investment Brokerage of Dean
Witter & Co. Director, RCM Equity Funds, Inc.
DeWitt F. Bowman, C.F.A, (age 65) Trustee Pension investment consultant; formerly Chief
79 Eucalyptus Knoll Investment Officer of the California Public
Mill Valley, CA 94941 Employees Retirement System.
Charles H. Brandes,* (age 52) Trustee Managing Partner of the Advisor since May
12750 High Bluff Drive 1996 and Managing Director of its
San Diego, CA 92130 predecessor prior thereto.
Gordon Clifford Broadhead, (age 71) Trustee Marine biologist and consultant in fisheries.
P.O. Box 1427
Rancho Santa Fe, CA 92067
Joseph E. Coberly, Jr., (age 78) Trustee Managing Partner, Red Tail Golf Association
P.O. Box 944 (real estate developer).
Rancho Santa Fe, CA 92067
W. Daniel Larsen, (age 68) Trustee Retired. Honorary Danish Consul for San
1405 Savoy Circle Diego.
San Diego, CA 92107
Betsy M. Blodgett, (age 38) Vice President Partner of the Advisor since May 1996 and Vice
121 Corte Ramon President of its predecessor since 1994.
Greenbrae, CA 94904 Formerly Principal, Cameron Capital
Management (investment adviser) from 1992
to 1994 and consultant in 1994; Vice
President, Van Kasper & Co. (broker-dealer)
from 1991 to 1992; Vice President, Prudential
Capital Corporation (investments) prior
thereto.
Glenn R. Carlson, (age 34) Secretary Managing Partner of the Advisor since May
12750 High Bluff Drive 1996 and Managing Director of its
San Diego, CA 92130 predecessor prior thereto.
Gregory S. Houck, (age 34) Treasurer Partner and Operations Officer of the Advisor
12750 High Bluff Drive since May 1996 and Vice President of its
San Diego, CA 92130 predecessor since 1994. Formerly Senior
Consultant, Ernst & Young.
</TABLE>
______________________________________
*Denotes "interested person" as defined in the 1940 Act.
B-9
<PAGE>
The table below illustrates the compensation paid to each Trustee for
the Trust's most recently completed fiscal year:
<TABLE>
<CAPTION>
Aggregate Pension or Estimated Total
Compensation Retirement Benefits Annual Compensation
from the Accrued as Part of Benefits Upon from the Trust
Name of Person Trust Fund Expenses Retirement Paid to Trustees
- -------------- ----- ------------- ---------- ----------------
<S> <C> <C> <C> <C>
DeWitt F. Bowman $3,200 $0 $0 $3,200
Gordon Clifford Broadhead $3,200 $0 $0 $3,200
Joseph E. Coberly Jr. $3,200 $0 $0 $3,200
W. Daniel Larsen $3,200 $0 $0 $3,200
</TABLE>
The Trust pays a fee of $800 per meeting to Trustees who are not
"interested persons" of the Trust. Trustees also receive a fee of $800 for any
committee meetings held on dates other than scheduled Board meeting dates. Such
Trustees are reimbursed for any expenses incurred in attending meetings. For the
period ended October 31, 1996, the Trust paid $12,800 to the Trustees.
Mr. O'Neil is the President, and Ms. Blodgett is Vice President and
Secretary, of Worldwide Value Distributors, L.L.C., the Distributor of the
Fund's shares.
Advisory Agreement
Subject to the supervision of the Board of Trustees, investment
management and services are provided to the Fund by the Advisor, pursuant to an
Investment Advisory Agreement (the "Advisory Agreement"). Under the Advisory
Agreement, the Advisor provides a continuous investment program for the Fund and
makes decisions and place orders to buy, sell or hold particular securities. In
addition to the fees payable to the Advisor and the Administrator, the Fund is
responsible for its operating expenses, including: (i) interest and taxes; (ii)
brokerage commissions; (iii) insurance premiums; (iv) compensation and expenses
of Trustees other than those affiliated with the Advisor or the Administrator;
(v) legal and audit expenses; (vi) fees and expenses of the custodian,
shareholder service and transfer agents; (vii) fees and expenses for
registration or qualification of the Fund and its shares under federal and state
securities laws; (viii) expenses of preparing, printing and mailing reports and
notices and proxy material to shareholders; (ix) other expenses incidental to
holding any shareholder meetings; (x) dues or assessments of or contributions to
the Investment Company Institute or any successor; (xi) such non-recurring
expenses as may arise, including litigation affecting the Trust or the Fund and
the legal obligations with respect to which the Trust or the Fund may have to
indemnify the Trust's officers and Trustees; and (xii) amortization of
organization costs.
Under the Advisory Agreement, the Advisor and its officers, directors,
agents, employees, controlling persons, shareholders and other affiliates will
not be liable to the Fund for any error of judgment by the Advisor or any loss
sustained by the Fund, except in the case of a breach of fiduciary duty with
respect to the receipt of compensation for services (in which case any award of
damages will be limited as provided in the 1940 Act) or of willful misfeasance,
bad faith, gross negligence or reckless disregard of duty. In addition, the Fund
will indemnify the Advisor and such other persons from any such liability to the
extent permitted by applicable law.
The Advisory Agreement with respect to the Fund will remain in effect
for two years from its execution. Thereafter, if not terminated, it will
continue automatically for successive annual periods, provided that such
continuance is specifically approved at least annually (i) by a majority vote of
the Trustees who are not parties to the Agreement or "interested persons" of the
Fund as defined in the 1940 Act, cast in person at a meeting called for the
purpose of voting on such approval, and (ii) by the Board of Trustees or by vote
of a majority of the outstanding voting securities.
The Advisory Agreement with respect to the Fund is terminable by vote
of the Board of Trustees or by the holders of a majority of the outstanding
voting securities of the Fund at any time without penalty, on 60 days written
notice to the Advisor. The Advisory Agreement also may be terminated by the
Advisor on 60 days written notice to the Fund. The Advisory Agreement terminates
automatically upon its assignment (as defined in the 1940 Act).
As required by state regulation, the Advisor will reimburse the Fund if
and to the extent that the aggregate operating expenses of the Fund exceed
applicable limits in any fiscal year. Currently, the most restrictive such limit
applicable to the Fund is 2.5% of the first $30 million of the Fund's
B-10
<PAGE>
average daily net assets, 2.0% of the next $70 million of its average daily net
assets and 1.5% of its average daily net assets in excess of $100 million.
Certain expenses, such as brokerage commissions, taxes, interest, distribution
fees, certain expenses attributable to investing outside the U.S. and
extraordinary items, are excluded from this limitation. The Board of Trustees
approved reimbursement of Fund expenses.
The Fund does not invest in a security for the purpose of exercising
control or management. When the Fund receives a proxy in connection with matters
to be voted on by holders of securities in which it invests, that proxy will be
voted by the Advisor in accordance with the Advisor's judgment as to the best
interests of the Fund, considering the effect of any such vote on the value of
the Fund's investment. The Advisor does not solicit or consider the views of
individual shareholders of the Fund in voting proxies. Because voting proxies of
foreign securities may entail additional costs to the Fund, the Advisor
considers the costs and benefits to the Fund in deciding whether or not to vote
a particular proxy.
Administration Agreement
Investment Company Administration Corporation serves as Administrator
for the Fund, subject to the overall supervision of the Trustees. The
Administrator is responsible for providing such services as the Trustees may
reasonably request, including but not limited to (i) maintaining the Fund's
books and records (other than financial or accounting books and records
maintained by any custodian, transfer agent or accounting services agent); (ii)
overseeing the Fund's insurance relationships; (iii) preparing for the Fund (or
assisting counsel and/or auditors in the preparation of) all required tax
returns, proxy statements and reports to the Fund's shareholders and Trustees
and reports to and other filings with the Securities and Exchange Commission and
any other governmental agency; (iv) preparing such applications and reports as
may be necessary to register or maintain the Fund's registration and/or the
registration of the shares of the Fund under the blue sky laws of the various
states; (v) responding to all inquiries or other communications of shareholders;
(vi) overseeing all relationships between the Fund and any custodian(s),
transfer agent(s) and accounting services agent(s); and (vii) authorizing and
directing any of the Administrator's directors, officers and employees who may
be elected as Trustees or officers of the Trust to serve in the capacities in
which they are elected. The Trust's Agreement with the Administrator contains
limitations on liability and indemnification provisions similar to those of the
Advisory Agreement described above. For its services, the Administrator receives
a fee at the annual rate of 0.10% of the Fund's average net assets, subject to a
$40,000 annual minimum.
PORTFOLIO TRANSACTIONS AND BROKERAGE
In all purchases and sales of securities for the Fund, the primary
consideration is to obtain the most favorable price and execution available.
Pursuant to the Advisory Agreement, the Advisor determines which securities are
to be purchased and sold by the Fund and which broker-dealers are eligible to
execute portfolio transactions, subject to the instructions of and review by the
Trust's Board of Trustees.
Purchases of portfolio securities may be made directly from issuers or
from underwriters. Where possible, purchase and sale transactions are effected
through dealers (including banks) which specialize in the types of securities
which the Fund will be holding, unless better executions are available
elsewhere. Dealers and underwriters usually act as principals for their own
accounts. Purchases from underwriters include a commission paid by the issuer to
the underwriter and purchases from dealers include the spread between the bid
and the asked price.
B-11
<PAGE>
In placing portfolio transactions, the Advisor uses its best efforts to
choose a broker-dealer capable of providing the services necessary to obtain the
most favorable price and execution available. The full range and quality of
services available are considered in making these determinations, such as the
size of the order, the difficulty of execution, the operational facilities of
the firm involved, the firm's risk in positioning a block of securities, and
other factors.
In those instances where it is reasonably determined that more than one
broker-dealer can offer the services needed to obtain the most favorable price
and execution available and the transaction involves a brokerage commission,
consideration may be given to those broker-dealers which furnish or supply
research and statistical information to the Advisor that it may lawfully and
appropriately use in its investment advisory capacity for the Fund and for other
accounts, as well as provide other services in addition to execution services.
The Advisor considers such information, which is in addition to, and not in lieu
of, the services required to be performed by it under the Agreement, to be
useful in varying degrees, but of indeterminable value. The Board of Trustees
reviews brokerage allocations where services other than best price/execution
capabilities are a factor to ensure that the other services provided meet the
tests outlined above and produce a benefit to the Fund.
The placement of portfolio transactions with broker-dealers who sell
shares of the Fund is subject to rules adopted by the National Association of
Securities Dealers, Inc. ("NASD"). Provided the Trust's officers are satisfied
that the Fund is receiving the most favorable price and execution available, the
Advisor may also consider the sale of the Fund's shares as a factor in the
selection of broker-dealers to execute its portfolio transactions.
Investment decisions for the Fund are made independently from those of
other client accounts of the Advisor. Nevertheless, it is possible that at times
the same securities will be acceptable for the Fund and for one or more of such
client accounts. To the extent any of these client accounts and the Fund seek to
acquire the same security at the same time, the Fund may not be able to acquire
as large a portion of such security as it desires, or it may have to pay a
higher price or obtain a lower yield for such security. Similarly, the Fund may
not be able to obtain as high a price for, or as large an execution of, an order
to sell any particular security at the same time. If one or more of such client
accounts simultaneously purchases or sells the same security that the Fund is
purchasing or selling, each day's transactions in such security will be
allocated between the Fund and all such client accounts in a manner deemed
equitable by the Advisor, taking into account the respective sizes of the
accounts, the amount being purchased or sold and other factors deemed relevant
by the Advisor. It is recognized that in some cases this system could have a
detrimental effect on the price or value of the security insofar as the Fund is
concerned. In other cases, however, it is believed that the ability of the Fund
to participate in volume transactions may produce better executions for the
Fund.
The Fund does not effect securities transactions through broker-dealers
in accordance with any formula, nor do they effect securities transactions
through such broker-dealers solely for selling shares of the Fund. However, as
stated above, broker-dealers who execute transactions for the Fund may from time
to time effect purchases of shares of the Fund for their customers.
NET ASSET VALUE
The net asset value of the Fund's shares will fluctuate and is
determined as of the close of trading on the New York Stock Exchange (normally
4:00 p.m. Eastern time) each business day. The Exchange annually announces the
days on which it will not be open for trading. The most recent announcement
indicates that it will not be open on the following days: New Year's Day,
Presidents'
B-12
<PAGE>
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. However, the Exchange may close on days not included in that
announcement.
Options and futures contracts which are traded on exchanges are valued
at their last sale or settlement price as of the close of such exchanges or, if
no sales are reported, at the mean between the last reported bid and asked
prices. However, if an exchange closes later than the New York Stock Exchange,
the options or futures traded on it are valued based on the sales price, or the
mean between bid and asked prices, as the case may be, as of the close of the
New York Stock Exchange.
Trading in securities in foreign securities markets is normally
completed well before the close of the New York Stock Exchange. In addition,
foreign securities trading may not take place on all days on which the New York
Stock Exchange is open for trading, and may occur in certain foreign markets on
days on which the Fund's net asset value is not calculated. Events affecting the
values of portfolio securities that occur between the time their prices are
determined and the close of the New York Stock Exchange will not be reflected in
the calculation of net asset value unless the Board of Trustees deems that the
particular event would materially affect net asset value, in which case an
adjustment will be made. Assets or liabilities expressed in foreign currencies
are translated, in determining net asset value, into U.S. dollars based on the
spot exchange rates at 1:00 p.m., Eastern time, or at such other rates as the
Advisor may determine to be appropriate.
The Fund may use a pricing service approved by the Board of Trustees.
Prices provided by such a service represent evaluations of the mean between
current bid and asked prices, may be determined without exclusive reliance on
quoted prices, and may reflect appropriate factors such as institution-size
trading in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, individual trading characteristics, indications of values from
dealers and other market data. Such services also may use electronic data
processing techniques and/or a matrix system to determine valuations.
Securities and other assets for which market quotations are not readily
available, or for which the Board of Trustees or its designate determines the
foregoing methods do not accurately reflect current market value, are valued at
fair value as determined in good faith by or under the direction of the Board of
Trustees. Such valuations and procedures, as well as any pricing services, are
reviewed periodically by the Board of Trustees.
REDEMPTIONS
The Fund intends to pay cash (U.S. dollars) for all shares redeemed,
but, under abnormal conditions which make payment in cash unwise, the Fund may
make payment partly in readily marketable securities with a current market value
equal to the redemption price. Although the Fund does not anticipate that it
will make any part of a redemption payment in securities, if such payment were
made, an investor may incur brokerage costs in converting such securities to
cash. The Fund has elected to be governed by the provisions of Rule 18f-1 under
the 1940 Act, which commits the Fund to paying redemptions in cash, limited in
amount with respect to each shareholder during any 90-day period to the lesser
of $250,000 or 1% of the Fund's total net assets at the beginning of such 90-day
period.
TAXATION
The Fund intends to elect to qualify for treatment as a regulated
investment company ("RIC") under Subchapter M of the Internal Revenue Code (the
"Code"). In each taxable year that the Fund qualifies, the Fund (but not its
shareholders) will be relieved of federal income tax on that part of its
B-13
<PAGE>
investment company taxable income (consisting generally of interest and dividend
income, net short-term capital gain and net realized gains from currency
transactions) and net capital gain that is distributed to shareholders.
In order to qualify for treatment as a RIC, the Fund must distribute
annually to shareholders at least 90% of its investment company taxable income
and must meet several additional requirements. Among these requirements are the
following: (1) at least 90% of the Fund's gross income each taxable year must be
derived from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of securities or foreign currencies, or
other income derived with respect to its business of investing in securities or
currencies; (2) less than 30% of the Fund's gross income each taxable year may
be derived from the sale or other disposition of securities held for less than
three months; (3) at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. Government securities, securities of other RICs and other
securities, limited in respect of any one issuer to an amount that does not
exceed 5% of the value of the Fund and that does not represent more than 10% of
the outstanding voting securities of such issuer; and (4) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its assets
may be invested in securities (other than U.S. Government securities or the
securities of other RICs) of any one issuer.
The Fund will be subject to a nondeductible 4% excise tax to the extent
it fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus certain other amounts.
Dividends and interest received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes.
Shareholders may be able to claim U.S. foreign tax credits with respect to such
taxes, subject to provisions and limitations contained in the Code. For example,
certain retirement accounts cannot claim foreign tax credits on investments in
foreign securities held by the Fund. If more than 50% in value of the Fund's
total assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate share of such withholding taxes in the
U.S. income tax returns as gross income, treat such proportionate share as taxes
paid by them, and deduct such proportionate share in computing their taxable
incomes or, alternatively, use them as foreign tax credits against their U.S.
income taxes. No deductions for foreign taxes, however, may be claimed by
noncorporate shareholders who do not itemize deductions. A shareholder that is a
nonresident alien individual or foreign corporation may be subject to U.S.
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder.
The Fund will report annually to its shareholders the amount per share of such
withholding taxes.
Many of the options, futures and forwards contracts used by the Fund
are "section 1256 contracts." Any gains or losses on section 1256 contracts are
generally treated as 60% long-term and 40% short-term capital gains or losses
("60/40") although gains and losses from hedging transactions, certain mixed
straddles and certain foreign currency transactions from such contracts may be
treated as ordinary in character. Also section 1256 contracts held by the Fund
at the end of its fiscal year (and, for purposes of the 4% excise tax, on
certain other dates as prescribed under the Code) are "marked to market" with
the result that unrealized gains or losses are treated as though they were
realized, and the resulting gain or loss is treated as ordinary or 60/40 gain or
loss, depending on the circumstances.
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Generally, the transactions in options, futures and forward contracts
undertaken by the Fund may result in "straddles" for federal income tax
purposes. The straddle rules may affect the character of gains or losses
realized by the Fund. In addition, losses realized on positions that are part of
a straddle may be deferred under the rules, rather than being taken into account
in the fiscal year in which the losses were realized. Because only a few
regulations implementing the straddle rules have been promulgated, the tax
consequences of transactions in options, futures and forward contracts are not
entirely clear. These transactions may increase the amount of short-term capital
gain realized by the Fund and taxed as ordinary income when distributed to
shareholders. The Fund may make certain elections available under the Code which
are applicable to straddles. If the Fund makes such elections, recognition of
gains or losses from certain straddle positions may be accelerated.
The tests which the Fund must meet to qualify as a RIC, described
above, may limit the extent to which the Fund will be able to engage in
transactions in options, futures contracts or forward contracts.
Under the Code, fluctuations in exchange rates which occur between the
dates various transactions are entered into or accrued and subsequently settled
may cause gains or losses, referred to as "section 988" gains or losses. Section
988 gains or losses may increase or decrease the amount of income taxable as
ordinary income distributed to shareholders.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the Fund's investment company taxable income (whether
paid in cash or invested in additional shares) will be taxable to shareholders
as ordinary income to the extent of the Fund's earnings and profits.
Distributions of the Fund's net capital gain (whether paid in cash or invested
in additional shares) will be taxable to shareholders as long-term capital gain,
regardless of how long they have held their Fund shares. Dividends declared by
the Fund in October, November or December of any year and payable to
shareholders of record on a date in one of such months will be deemed to have
been paid by the Fund and received by the shareholders on the record date if the
dividends are paid by the Fund during the following January. Accordingly, such
dividends will be taxed to shareholders for the year in which the record date
falls.
The Fund is required to withhold 31% of all dividends, capital gain
distributions and repurchase proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number. The Fund also is required to withhold 31% of all
dividends and capital gain distributions paid to such shareholders who otherwise
are subject to backup withholding.
PERFORMANCE INFORMATION
Total Return
Average annual total return quotations used in the Fund's advertising
and promotional materials are calculated according to the following formula:
n
P(1 + T) = ERV
where P equals a hypothetical initial payment of $1000; T equals average annual
total return; n equals the number of years; and ERV equals the ending redeemable
value at the end of the period of a hypothetical $1000 payment made at the
beginning of the period.
The time periods used in advertising will be updated to the last day of
the most recent quarter prior to submission of the advertising for publication.
Average annual total return, or "T" in the above formula, is computed by finding
the average annual compounded rates of return over the period that
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<PAGE>
would equate the initial amount invested to the ending redeemable value. Average
annual total return assumes the reinvestment of all dividends and distributions.
Any performance information used in advertising and sales literature will
include information based on this formula for the most recent one, five and ten
year periods, or for the life of the Fund, whichever is available.
Other Information
Performance data of the Fund quoted in advertising and other
promotional materials represents past performance and is not intended to predict
or indicate future results. The return and principal value of an investment in
the Fund will fluctuate, and an investor's redemption proceeds may be more or
less than the original investment amount. In advertising and promotional
materials the Fund may compare its performance with data published by Lipper
Analytical Services, Inc. ("Lipper"), Morningstar, Inc. ("Morningstar") or CDA
Investment Technologies, Inc.("CDA"). The Fund also may refer in such materials
to mutual fund performance rankings and other data, such as comparative asset,
expense and fee levels, published by Lipper, CDA or Morningstar. Advertising and
promotional materials also may refer to discussions of the Fund and comparative
mutual fund data and ratings reported in independent periodicals including, but
not limited to, The Wall Street Journal, Money Magazine, Forbes, Business Week,
Financial World and Barron's
GENERAL INFORMATION
The Trust's custodian, Investors Bank & Trust Company, is responsible
for holding the Fund's assets and also acts as the Fund's accounting services
agent. Investors Bank & Trust Company acts as the Fund's transfer agent. The
Trusts independent accountants, Ernst & Young, LLP, examine the Fund's financial
statements annually and prepare the Fund's tax returns.
The Trust's Declaration of Trust provides that obligations of the Trust
are not binding on the Trustees, officers, employees and agents individually and
that the Trustees, officers, employees and agents will not be liable to the
Trust or its investors for any action or failure to act, but nothing in the
Declaration of Trust protects a Trustee, officer, employee or agent against any
liability to the Trust, the Fund or their investors to which the Trustee,
officer, employee or agent would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of his or her
duties.
The Trust's Registration Statement on Form N-1A may be examined at the
office of the Securities and Exchange Commission in Washington, DC. Statements
contained in the prospectus and this Statement of Additional Information as to
the contents of any contract or other document are not necessarily complete and,
in each instance, reference is made to the copy of such contract or document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
APPENDIX
Description of Ratings
Moody's Investors Service, Inc.: Corporate Bond Ratings
Aaa--Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. 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
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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.
Moody's applies numerical modifiers "1", "2" and "3" to both the Aaa
and Aa rating classifications. 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 the modifier "3" indicates that the issue
ranks in the lower end of its generic rating category.
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 period of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Standard & Poor's Corporation: Corporate Bond Ratings
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
Commercial Paper Ratings
Moody's commercial paper ratings are assessments of the issuer's
ability to repay punctually promissory obligations. Moody's employs the
following three designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers: Prime 1--highest quality; Prime
2--higher quality; Prime 3--high quality.
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment. Ratings are graded into four categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers "1", "2" and "3" to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A- 1" which possess extremely strong safety characteristics. Capacity for
timely payment on issues with the designation "A-2" is strong. However, the
relative degree of safety is not as high as for issues designated A-1. Issues
carrying the designation "A-3" have a satisfactory capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effect of changes in
circumstances than obligations carrying the higher designations.
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