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BRANDES
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BRANDES INSTITUTIONAL INTERNATIONAL EQUITY FUND
Prospectus
February 29, 2000
As with all mutual funds, the Securities and Exchange Commission doesn't
guarantee that the information in this prospectus is accurate or complete, nor
has it judged this fund for investment merit. It is a criminal offense to state
otherwise.
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BRANDES INSTITUTIONAL INTERNATIONAL EQUITY FUND
TABLE OF CONTENTS
This important section summarizes the - 1 Risk/Return Summary and
Fund's investments, risks, past Fund Expenses
performance, and fees.
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This section provides details about the - 6 Investment Objectives,
Fund's investment strategies and risks. Policies and Risks
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Review this section for information about Fund Management
the organizations and people who oversee - 11 The Investment Advisor
the Fund. - 12 Other Service Providers
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This section explains how shares are Shareholder Information
valued, how to purchase and sell shares, - 13 Pricing of Fund Shares
and payments of dividends and - 14 Purchasing and Adding to
distributions. Your Shares
- 15 Minimum Initial Investment
- 17 Selling Your Shares
- 18 Dividends, Distributions
and Taxes
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This section provides information about - 19 Prior Performance of the
the past performance of the Fund and Advisor
other international equity accounts
managed by the Advisor
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Review this section for details on selected - 22 Financial Highlights
financial statements of the Fund.
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RISK/RETURN SUMMARY AND FUND EXPENSES
Risk/Return Summary
Investment Objective: Long term capital appreciation
Principal Investment The Fund invests principally in common and
Strategies: preferred stocks of foreign companies and
securities that are convertible into such common
stocks. These companies generally have market
capitalizations (market value of publicly traded
securities) greater than $1 billion. Under normal
conditions, the Fund invests at least 65% of its
total assets measured at the time of purchase in
equity securities of issuers located in at least
three countries outside the U.S. Up to 20% of the
Fund's total assets, measured at the time of
purchase, may be invested in securities of
companies located in countries with emerging
securities markets. Up to 10% of the Fund's total
assets, measured at the time of purchase, may be
invested in securities of small capitalization
companies (those whose market value of publicly
traded securities totals $1 billion or less
measured at the time of purchase). The Investment
Advisor uses the principles of value investing to
analyze and select equity securities for the
Fund's investment portfolio.
Principal Investment Risks: Because the values of the Fund's investments will
fluctuate with market conditions, so will the
value of your investment in the Fund. You could
lose money on your investment in the Fund, or the
Fund could underperform other investments.
The values of the Fund's investments fluctuate in
response to the activities of individual companies
and general stock market and economic conditions.
In addition, the performance of foreign securities
depends on the political and economic environments
and other overall economic conditions in the
countries where the Fund invests. Emerging country
markets involve greater risk and volatility than
more developed markets.
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Risk/Return Summary
Some/emergingumarkets countries may have fixed or
managed currencies that are not free-floating
against the U.S. dollar. Certain of these
currencies have experienced, and may experience in
the future, substantial fluctuations or a steady
devaluation relative to the U.S. dollar. The
values of the Fund's convertible securities are
also affected by interest rates; if rates rise,
the values of convertible securities may fall.
Who May Want to Invest? Consider investing in the Fund if you:
+ want potential capital appreciation and are
willing to accept the higher risks associated
with investing in foreign stocks
+ want professional portfolio management
+ are investing for long-term goals
The Fund is not appropriate for anyone seeking:
+ safety of principal
+ a short-term investment
+ regular income
The Fund is currently closed to new shareholders.
See page 14 for additional information.
Minimum Initial Investment: $1,000,000
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FEES AND EXPENSES
The charts on this page show how the Fund has performed and provide some
indication of the risks of investing in the Fund by showing how its performance
has varied from year to year. The bar chart shows changes in the yearly
performance of the Fund since its inception. The table below it compares the
performance of the Fund over time to the Morgan Stanley Capital International
Europe, Australasia, Far East ("MSCI EAFE") Index, a standard international
equity investment benchmark.
Both charts assume reinvestment of dividends and distributions. Of course,
past performance does not indicate how the Fund will perform in the future.
Performance Bar Chart and Table
Year-by-Year Total Returns as of 12/31/99
for Fund Shares
[bar chart]
1997 1998 1999
---- ---- ----
21.57% 14.65% 56.18%
Best Quarter Q4 1999 27.15%
Worst Quarter Q3 1998 -15.10%
Average Annual Total Returns
(For the periods ending December 31, 1999)
Performance Since
Inception 1999 Inception
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Fund Shares 1/02/97 56.18% 29.66%
MSCI EAFE Index 1/02/97 26.96% 18.89%
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As an investor in the Fund, you will pay the following fees and expenses
based on the Fund's last fiscal year. Annual Fund operating expenses are paid
out of Fund assets, and are reflected in the share price. If you purchase shares
through a bank, broker or other investment representative, they may charge you
an account-level fee for additional services provided to you in connection with
your investment in the Fund.
FEES AND EXPENSES
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed None
on Purchases
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Maximum Contingent Deferred Sales None
Charge
Redemption Fee None
ANNUAL FUND OPERATING EXPENSES
(FEES PAID FROM FUND ASSETS)
Management fees 1.00%
Other expenses 0.30%
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Total Annual Fund operating expenses 1.30%
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Fee Waiver and/or Expense Reimbursement(1) 0.10%
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Net Expenses(1) 1.20%
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(1) The Advisor has agreed with Brandes Investment Trust (the "Trust") to limit
the Fund's annual operating expenses to 1.20% of the Fund's average daily net
assets through the Fund's fiscal year ended October 31, 2000.
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Use this table to compare fees and expenses of the Fund with those of other
funds. It illustrates the amount of fees and expenses you would pay assuming the
following:
* $10,000 investment in the Fund
* 5% annual return
* redemption at the end of each period
* no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual
costs will be different.
Expense Example
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$122 $402 $703 $1,559
INVESTMENT OBJECTIVE, POLICIES AND RISKS
The Fund's investment objective is long-term capital appreciation. It seeks
to achieve this objective by investing principally in a diversified portfolio of
equity securities of foreign companies.
INTERNATIONAL INVESTING
During the past decade foreign capital markets have grown significantly.
Today, over half of the world's equity value is located outside of the United
States. Brandes Investment Partners, L.P., the investment advisor to the Fund
(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 companies with market capitalizations (market value of
publicly traded securities) greater than $1 billion at the time of purchase. The
Fund does not invest more than 20% of its total assets, measured at the time of
purchase, in securities of companies located in emerging securities markets. The
Fund does not invest more than 10% of its total assets, measured at the time of
purchase, in small capitalization companies (those with market capitalizations
of $1 billion or less measured at the time of purchase).
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Equity securities include common stocks, preferred stocks and securities
convertible into common stocks. The Fund invests in these securities directly,
or indirectly through other investment companies or trusts that invest the
majority of their assets in foreign companies.
Under normal circumstances, the Fund invests at least 65% of its total
assets at the time of purchase in equity securities of companies located in at
least three countries other than the United States. The Fund may invest in
countries in Western Europe, North and South America, Australia, Africa and
Asia. The Fund may invest in any one particular country or industry up to the
greater of either (a) 20% of total Fund assets at the time of purchase, or (b)
150% of the weighting of such country or industry as represented in the Morgan
Stanley Capital International Europe, Australasia, Far East Index at the time of
purchase. However, the Fund may not invest more than 25% of its total assets,
calculated at the time of purchase, in any one industry (other than U.S.
Government securities). In addition, the Fund may not invest more than 20% of
the value of its total assets, measured at the time of purchase, in securities
of companies located in countries with emerging securities markets.
The Advisor selects stocks for the Fund based on their individual merits
and not necessarily on their geographic locations. In selecting foreign
securities, 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 decide not to invest the Fund's assets in
a country whose stock market, at the time, comprises 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 the index is small or
non-existent.
VALUE INVESTING
The Advisor uses the Graham and Dodd Value Investing approach as introduced
in the classic book SECURITY ANALYSIS. Applying this philosophy, the Advisor
views stocks as parts of businesses which are for sale. It seeks to purchase a
diversified group of these businesses when they are undervalued -- at prices its
research indicates are well below their true long-term, or intrinsic, values. By
purchasing stocks whose current prices it believes are considerably below their
intrinsic values, 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.
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MAIN RISKS
The value of your investment in the Fund will go up and down, which means
you could lose money. You should consider an investment in the Fund as a
long-term investment.
STOCKS
The values of stocks fluctuate in response to the activities of individual
companies and general stock market and economic conditions, and stock prices may
go down over short or even extended periods. Stocks are more volatile--likely to
go up or down in price, sometimes suddenly--and are riskier than some other
forms of investment, such as short-term high-grade fixed income securities.
RISKS OF INTERNATIONAL INVESTING
Investments in foreign securities involve special risks. These include
currency fluctuation, 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 it is more likely to find undervalued
companies.
Because most foreign securities are traded primarily in foreign currencies,
foreign investing involves the risk of fluctuation in the value of such
currencies against the U.S. dollar. However, 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. Because the Advisor searches world-wide for
undervalued companies, and is not 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
that risk.
Before investing in the Fund, you should also consider the other risks of
international investing, including political or economic instability in the
country of issue and the possible imposition of currency exchange controls or
other adverse laws or restrictions. In addition, securities prices in foreign
markets are generally subject to different economic, financial, political and
social factors than the prices of securities in U.S. markets. With respect to
some foreign countries there may be the possibility of expropriation or
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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 then 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 than U.S. investments.
The Fund may from time to time invest a substantial portion of the total
value of its assets in securities of issuers located in particular countries
and/or associated with particular industries. During such periods, the Fund may
be more susceptible to risks associated with a single economic, political or
regulatory occurrences than more diversified portfolios.
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EMERGING MARKETS AND RELATED RISKS
The Fund may invest up to 20% of its assets, as measured at time of
purchase, 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. There are currently over 130 such
countries, approximately 40 of which currently have investable stock markets.
Those countries generally include every nation in the world except the United
States, Canada, Japan, Australia, Hong Kong, Singapore, New Zealand and most
nations located in Western Europe. Currently, investing in many emerging market
countries is not feasible or may involve unacceptable risks. 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 substantial
fluctuations or a steady devaluation relative to the U.S. dollar. Any
fluctuations or devaluations in the currencies in which the Fund's portfolio
securities are denominated may reduce the value of your investment in 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, rate of inflation, capital reinvestment,
resource self-sufficiency, number and depth of industries forming the economy's
base, condition and stability of financial institutions, governmental controls
and investment restrictions that are subject to political change and balance of
payments position. Further, investors may face greater difficulties or
restrictions with respect to investments made in emerging markets countries than
in the U.S.
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 of comparable 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
-9-
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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.
SMALL CAPITALIZATION COMPANIES
The Fund may invest up to 10% of its assets, as measured at time of
purchase, in small capitalization companies, i.e., companies with market
capitalizations of $1 billion or less, measured at time of purchase.
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 these companies may be subject to more volatile
market movements than securities of larger, more established companies, both
because the securities typically are traded in lower volume and because the
issuers typically are more subject to changes in earnings and prospects.
SHORT-TERM INVESTMENTS
The Fund may invest from time to time in short-term cash equivalent
securities either as part of its overall investment strategy or for temporary
defensive purposes in response to adverse market, economic, political or other
conditions which in the Advisor's discretion require investments inconsistent
with the Fund's principal investment strategies. As a result of taking such
temporary defensive positions, the Fund may not achieve its investment
objective.
OTHER INVESTMENT TECHNIQUES AND RESTRICTIONS
The Fund will use certain other investment techniques, and has adopted
certain investment restrictions, which are described fully in the Statement of
Additional Information. Like the Fund's investment objective, certain of these
investment restrictions are fundamental and may be changed only by a majority
vote of the Fund's outstanding shares.
THE MOST RECENT INFORMATION ABOUT THE FUND'S PORTFOLIO HOLDINGS CAN BE FOUND IN
ITS ANNUAL OR SEMI-ANNUAL REPORT. FOR INFORMATION ABOUT RECEIVING THIS REPORT,
SEE THE BACK COVER.
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FUND MANAGEMENT
The Board of Trustees decides 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 INVESTMENT ADVISOR
The Advisor has been in business, through various predecessor entities,
since 1974. As of December 31, 1999, the Advisor managed over $42 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 the Advisor's general partner,
Brandes Investment Partners, Inc., serves as a Trustee of the Trust. The
Advisor's offices are at 12750 High Bluff Drive, San Diego, California 92130.
Subject to the direction and control of the Trustees, the Advisor develops
and implements an investment program for the Fund, including determining which
securities are bought and sold. The Fund's investment portfolio is team-managed
by an investment committee of the Advisor, whose members are senior portfolio
management professionals of the firm. The Advisor also provides certain officers
for the Trust. For its services, during its last fiscal year ended October 31,
1999, the Fund paid the Advisor a fee, accrued daily and paid monthly, of 1.00%
of the Fund's average net assets. The Advisor has signed a contract with the
Trust in which the Advisor has agreed that during the Fund's fiscal years ended
October 31, 1998, 1999 and 2000, the Advisor will waive management fees and
reimburse operating expenses of the Fund to the extent necessary to ensure that
the expenses of the Fund do not exceed during each such fiscal year 1.20% of the
average daily net assets of the Fund (the "Expense Cap"). The Trust has agreed
that the amount of any waiver or reimbursement will be repaid to the Advisor at
any time before the later of (i) December 31, 2003 and (ii) the end of the fifth
full fiscal year of the Fund after the fiscal year in which the waiver or
reimbursement occurred, unless that repayment would cause the aggregate
operating expenses of the fund to exceed the Expense Cap for that fiscal year.
The Advisor's contractual fee (without waivers) is 1.00%.
OTHER SERVICE PROVIDERS
Investment Company Administration, L.L.C. (the "Administrator") is the
Fund's administrator. Its address is 2020 East Financial Way, Suite 100,
Glendora, California 91741. First Fund Distributors, Inc., an affiliate of the
Administrator (the "Distributor") is the Fund's distributor. Its address is 4455
East Camelback Road, Suite 261 E, Phoenix, Arizona 85018.
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Investors Bank & Trust Company is the Custodian of the Fund's assets and
employs foreign sub-custodians to provide custody of the Fund's foreign assets.
Investors Bank & Trust Company is also the Fund's Transfer and Dividend
Disbursing Agent. Its address is 200 Clarendon Street, Boston, Massachusetts
02116.
The Statement of Additional Information has more information about the
Advisor and the Fund's other service providers.
SHAREHOLDER INFORMATION
PRICING OF FUND SHARES
The price of the Fund's shares is based on its per share net asset value
("NAV"). The NAV is calculated by adding the total value of the Fund's
investments and other assets, subtracting its liabilities, and dividing the
result by the number of outstanding shares of the Fund:
NAV= Total Assets-Liabilities
------------------------
Number of Shares
Outstanding
The Fund values its investments at 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 or under the direction of the Board of
Trustees.
The Fund calculates its NAV 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. The Fund invests in securities that are primarily
listed on foreign exchanges which may be open for trading on weekends and other
days when the Fund does not price its shares. As a result, the Fund's NAV may
change on days when you will not be able to purchase or redeem Fund shares.
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PURCHASING AND ADDING TO YOUR SHARES
WHO MAY INVEST IN THE FUND
The Fund is currently closed to new shareholders. Shareholders who owned
shares of the Fund on September 30, 1998 may continue to purchase shares in
their existing accounts. Employer-sponsored retirement plans will be able to
open additional accounts for plan participants. Certain clients and employees of
the Advisor may be allowed to open new accounts in the Fund as the Advisor sees
fit.
The Fund sells shares only to certain institutional investors. Except as
indicated below, individual investors may not purchase shares, either directly
or through brokerage accounts.
Institutions which may invest in the Fund include 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. Others who may invest in
the Fund include Trustees of the Trust, officers and employees of the Advisor,
the Administrator and the Distributor, and their immediate family members, and
certain other persons determined from time to time by the Distributor (including
investment advisors or financial planners or their clients who may clear
transactions through a broker-dealer, bank or trust company which maintains an
omnibus account with the Fund's Transfer Agent). If you purchase or redeem
shares through a trust department, broker, dealer, agent, financial planner,
financial services firm or investment advisor, you may pay an additional service
or transaction fee to that institution.
PRICE OF SHARES
The Fund sells shares without a sales charge at the NAV which is next
computed (1) after your selected dealer or other authorized intermediary
receives the order which is promptly transmitted to the Fund, or (2) after the
Transfer Agent receives your order 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). You may pay a fee if you buy Fund shares
through a broker or agent.
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MINIMUM INITIAL INVESTMENT
The minimum initial investment in the Fund is $1 million; there is no
minimum subsequent investment. The Distributor may waive the minimum investment
for institutions making continuing investments in the Fund and from time to time
for other investors, including retirement plans and employees of the advisor.
PURCHASES THROUGH A SECURITIES DEALER
You may purchase shares of the Fund through a securities dealer which has
an agreement with the Distributor (a "selected dealer"). Selected dealers are
authorized to designate other intermediaries to accept purchase and redemption
orders on the Fund's behalf. The Fund will price your order at the Fund's net
asset value next computed after it is accepted by an authorized dealer or the
dealer's authorized designee. 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. A selected dealer may impose postage and
handling charges on your order.
PURCHASES THROUGH THE TRANSFER AGENT
To purchase shares of the Fund directly from the Transfer Agent, complete
the Application Form (available from the Transfer Agent or a selected dealer)
and mail it to the Transfer Agent at the address shown on the Application Form.
You may pay by a check with the Application Form, or by a wire transfer of funds
as described below. You can make additional investments by wire or by mailing a
check, together with the investment form from a recent account statement.
PAYMENT BY WIRE
To pay for an initial investment in the Fund by wire, 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 for an
account number. The Transfer Agent will want to know your name, address, tax
identification number, amount being wired and wiring bank. You can 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 [your name and account number].
Make sure that the wiring bank includes the name of the Fund and the account
number with the wire. If the Transfer Agent receives your funds before the
Fund's net asset value is calculated, your funds will be invested on that day at
the net asset value next calculated; otherwise, they will be invested on the
next business day at the net asset value next calculated. Finally, you should
write your new account number on the Application Form and mail the Form promptly
to the Transfer Agent.
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To make an additional purchase by wire, call the Transfer Agent at (617)
946-1945 before the wire is sent. Otherwise, your purchase may be delayed
indefinitely. Wire funds to the Transfer Agent, care of Investors Bank & Trust
Company, as described above, including the name of the Fund and your account
number with the wire.
RETIREMENT PLAN PARTICIPANTS
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 plan and any arrangements that the plan sponsor
may have made for special processing services.
AUTOMATIC REINVESTMENT
The Fund reinvests dividends and capital gain distributions on your shares
without any sales charge in additional shares unless you indicate otherwise on
the Application Form. You may elect to have dividends or capital gain
distributions paid in cash on your Application Form or by written request to the
Transfer Agent.
OTHER
The Transfer Agent credits shares to your account, and does not issue stock
certificates unless you request them. 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.
You may also purchase shares of the Fund by paying "in-kind" in the form of
securities, provided that such securities are of the type which the Fund may
legally purchase and are consistent with the Fund's investment objective and
policies, are liquid, unrestricted and have a readily determinable value by
exchange or NASDAQ listing, and that the purchase has been approved by the
Advisor.
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SELLING YOUR SHARES
HOW TO REDEEM SHARES
Your shares may be redeemed only by instructions from the registered owner
of your shareholder account. If you are a participant in a retirement or other
plan, direct your redemption requests to the plan sponsor or administrator,
which may have special procedures for processing such requests and is
responsible for forwarding requests to the Transfer Agent.
You may redeem shares by contacting your selected dealer or authorized
intermediary. The selected dealer can arrange for the repurchase of the shares
through the Fund's distributor at the net asset value next determined after the
selected dealer receives your instructions. The dealer may charge you for this
service. If your shares are held in a dealer's "street name," you must redeem
them through the dealer.
You may also redeem shares by mailing instructions to the Transfer Agent,
Investors Bank & Trust Company, P.O. Box 9130, Boston, MA 02117-9130, or by
delivering instructions to the Transfer Agent at 200 Clarendon Street, 16th
Floor, Boston, MA 02116. The instructions must specify the name of the Fund, the
number of shares or dollar amount to be redeemed and your name and account
number. A corporation, partnership, trust or fiduciary redeeming shares must
submit written evidence of authority acceptable to the Transfer Agent. The price
you will receive for the Fund shares redeemed is the next determined net asset
value for the shares after the Transfer Agent has received a completed
redemption request.
TELEPHONE REDEMPTIONS. You may establish telephone redemption privileges by
checking the appropriate box and supplying the necessary information on the
Application Form. You can then redeem shares by telephoning 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. If the Transfer
Agent receives your redemption request before 4:00 p.m. Eastern time on a day
when the New York Stock Exchange is open for trading, it will process your
request that day; otherwise, it will process your request on the next business
day. Institutional investors may also make special arrangements with the
Transfer Agent for designating personnel 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
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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. You 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 telephone redemption.
REDEMPTION PAYMENTS
Redemption payments 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 your request,
the Transfer Agent will wire redemption proceeds of $300 or more to your 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 your investment in the Fund falls below $100,000 because of
redemptions, the Trust may notify you, and if your investment value remains
below $100,000 for a continuous 60-day period, the Trust may redeem your shares.
However, the Fund will not redeem shares based solely upon changes in the market
that reduce the net asset value of your shares. The minimum account size
requirements do not apply to shares held by officers or employees of the Advisor
or its affiliates or Trustees of the Trust. The Trust reserves the right to
modify or terminate these involuntary redemption features at any time upon
60-days' notice.
-17-
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
The Fund expects to pay income dividends annually, and to make
distributions of net capital gains, if any, at least annually. The Board of
Trustees may decide to pay dividends and distributions more frequently.
The Fund automatically reinvests dividends and capital gain distributions
in additional shares at the net asset value per share on the reinvestment date
unless you have previously requested cash payment in writing to the Transfer
Agent.
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. If you purchase shares shortly before the record date
of a dividend or distribution, the shares will be subject to income taxes as
discussed below even though the dividend or distribution represents, in
substance, a partial return of your capital.
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. The Fund will inform you annually of the amount
and nature of its distributions.
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%. However,
under certain circumstances you may be able to claim credits against your U.S.
taxes for such foreign taxes. The Trust will also notify you each year of the
amounts available as credits.
The Statement of Additional Information contains information about taxes.
Consult your own advisers about federal, state and local taxation of
distributions from the Fund.
-18-
<PAGE>
PRIOR PERFORMANCE OF THE ADVISOR
The table below contains performance data provided by the Advisor relating
to the historical performance of its clients and the Fund. The Advisor's
composite results include all actual, fee-paying and non-fee-paying, fully
discretionary international equity accounts that had the same investment
objective as the Fund and were managed by the same team that manages the Fund's
portfolio, using substantially similar, though not identical, investment
strategies, policies and techniques as those used in managing the Fund. This
composite information illustrates 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 accounts included in the Advisor's composite are not subject to
the same types of expenses as the Fund nor to the diversification requirements,
specific tax restrictions and investment limitations imposed on the Fund by the
Investment Company Act of 1940, as amended, (the "1940 Act"), or Subchapter M of
the Internal Revenue Code. 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. The data below regarding the Advisor's
composite of international equity accounts 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.
The results presented below may not necessarily equate with the return
experienced by any particular account of the Advisor or shareholder of the Fund
as a result of timing of investments and redemptions. In addition, the effect of
taxes on any client or shareholder depends on such person's tax status, and the
results have not been reduced to reflect any income tax which may have been
payable.
-19-
<PAGE>
Annualized Total Return
For Periods Ended December 31, 1999
Inception Five Years Three Years One Year
--------- ---------- ----------- --------
Brandes Institutional 29.66%(2) N/A N/A 56.18%
International Equity Fund(1)
Advisor's Composite*** 19.94%**** 22.90% 28.44% 53.42%
MSCI EAFE Index***** 8.86% 12.83% 15.75% 26.96%
- ----------
(1) The net annual returns presented above for the Brandes Institutional
International Equity Fund were calculated as described above under
"Performance Information."
(2) Inception date for the Brandes Institutional International Equity Fund is
1/2/97.
*** The net annualized returns presented above for the Advisor's international
equity composite were calculated on a time-weighted and asset-weighted
total return basis, including investment of all dividends, interest and
income, realized and unrealized gains or losses and are net of applicable
investment advisory fees, brokerage commissions and execution costs,
custodial fees and any applicable foreign withholding taxes, without
provision for federal and state income taxes, if any. The Advisor's
composite results include all actual, fee-paying and non-fee-paying, fully
discretionary international equity accounts under management by the
Advisor for at least one month beginning 6/30/90, having substantially the
same investment objectives, policies, techniques and restrictions, other
than client accounts denominated in currencies other than U.S. dollars.
The net annual total returns were calculated in accordance with AIMR
standards. The weighted annualized management fee during the period from
6/30/90 through 12/31/97 was 0.91% per year. Securities transactions are
accounted for on the trade date. Cash and cash equivalents are included in
performance returns. Starting with calendar year 1992 through calendar
year 1998, the net annual total returns for the Advisor's composite have
been examined by a Big Five accounting firm in accordance with AIMR Level
II verification standards. Copies of the auditors' reports and a complete
list and description of the Advisor's composites are available on request.
The results for individual accounts and for different periods may vary.
The asset-weighted standard deviation measure of dispersion of the annual
periods 1991 through 1998 are 5.09%, 3.03%, 4.97%, 2.28%, 2.01%, 2.27%,
2.48%, and 4.13% respectively. Investors should not rely on prior
performance results as a reliable indication of future results. Total
return calculations made in compliance with AIMR standards for the
Advisor's composite may vary from the results obtained utilizing standards
set forth by the Securities and Exchange Commission for calculating the
total return for mutual funds.
**** Inception date for the Advisor's composite and MSCI EAFE Index is 6/30/90.
***** The MSCI EAFE Index is an unmanaged index consisting of securities listed
on exchanges in European, Australasian and Far Eastern markets and
includes dividends and distributions, but does not reflect fees, brokerage
commission or other expenses of investing.
-20-
<PAGE>
FINANCIAL HIGHLIGHTS
This financial highlights table is intended to help you understand the
Fund's financial performance since its commencement of operations. Certain
information reflects financial results for a single Fund share. The total return
in the table represents the rate that an investor would have earned on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Ernst & Young LLP, whose
report, along with the Fund's financial statements, is included in the Fund's
Annual Report, which is available upon request.
For a share outstanding throughout the period
Year Ended Year Ended January 2, 1997*
October 31, October 31, Through
1999 1998 October 31, 1997
-------- -------- --------
Net asset value, beginning of period $ 16.22 $ 14.57 $ 12.50
Income from investment operations:
Net investment income 0.20 0.21 0.17
Net realized and unrealized
gain on investments 4.91 1.66 1.90
Total from investment operations 5.11 1.87 2.07
Less distributions:
From net investment income (0.23) (0.07) 0.00
From net capital gains (1.26) (0.15) 0.00
-------- -------- --------
Total distributions (1.49) (0.22) 0.00
-------- -------- --------
Net asset value, end of period $ 19.84 $ 16.22 $ 14.57
======== ======== ========
Total Return 34.23% 13.01% 16.56%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $235,123 $160,015 $ 51,130***
Ratio of expenses to average net assets:
Before expense reimbursement 1.30% 1.37% 1.76%***
After expense reimbursement 1.20% 1.20% 1.19%***
Ratio of net investment income
to average net assets:
Before expense reimbursement 1.09% 1.75% 0.84%***
After expense reimbursement 1.19% 1.92% 1.40%***
Portfolio turnover rate 32.31% 50.08% 27.40%
- ----------
* Commencement of operations.
** Not Annualized.
*** Annualized.
-21-
<PAGE>
FOR MORE INFORMATION ABOUT THE BRANDES INSTITUTIONAL INTERNATIONAL EQUITY FUND,
THE FOLLOWING DOCUMENTS ARE AVAILABLE FREE UPON REQUEST:
ANNUAL/SEMIANNUAL REPORTS:
The Fund's annual and semi-annual reports to shareholders contain detailed
information on the Fund's investments. The annual report includes a discussion
of the market conditions and investment strategies that significantly affected
the Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI provides more detailed information about the Fund, including operations
and investment policies. It is incorporated by reference and is legally
considered a part of this prospectus.
You can get free copies of the Reports and the SAI, or request other information
and discuss your questions about the Fund, by contacting us at:
BRANDES INSTITUTIONAL INTERNATIONAL EQUITY FUND
12750 HIGH BLUFF DRIVE
SAN DIEGO, CA 92130
800-331-2979
You can also review the Fund's reports and SAI at the Public Reference Room of
the Securities and Exchange Commission. You can obtain information on the
operation of the Public Reference Room by calling 1-202-942-8090. In addition,
you can get text-only copies:
* For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009 or e-mailing the Commission at:
[email protected].
* Free from the Commission's Website at http://www.sec.gov.
Investment Company Act file No. 811-8614.
<PAGE>
BRANDES INVESTMENT TRUST
BRANDES INSTITUTIONAL INTERNATIONAL EQUITY FUND
Statement of Additional Information
Dated February 29, 2000
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 February 29, 2000. The Fund is a
diversified series of Brandes Investment Trust (the "Trust"), a registered
open-end management investment company or mutual fund. Brandes Investment
Partners, L.P. (the "Advisor") is the investment advisor to the Fund. Copies of
the prospectus may be obtained from the Fund at 12750 High Bluff Drive, San
Diego, CA 92130 or by calling 1-800-237-7119.
TABLE OF CONTENTS
Page
----
Investment Objective and Policies........................................ B-2
Investment Restrictions.................................................. B-2
Other Securities and Investment Techniques............................... B-4
Management............................................................... B-9
Principal Holders of Securities.......................................... B-11
Investment Advisory and other Services................................... B-12
Advisory Agreement..................................................... B-12
Administration Agreement............................................... B-13
Portfolio Transactions and Brokerage..................................... B-13
Net Asset Value.......................................................... B-14
Redemptions.............................................................. B-15
Taxation................................................................. B-15
Performance Information.................................................. B-17
Financial Statements..................................................... B-17
Custodian, Transfer and Dividend Disbursing Agent,
Independent Auditors and Legal Counsel................................. B-17
General Information...................................................... B-18
B-1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The following discussion supplements the discussion of the Fund's
investment objective and policies as set forth in the Fund's prospectus. No one
can ensure that the Fund's investment objective will be achieved.
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, or other adverse developments
affecting these trading partners, could have a significant adverse effect on the
securities markets of such countries.
Because most of the securities in which the Fund invests 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 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, and
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.
B-2
<PAGE>
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 use such contracts except to
settle transactions in securities requiring foreign currency;
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.
OPERATING RESTRICTIONS
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.
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 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;
B-3
<PAGE>
3. Invest more than 15% of its net assets in unseasoned securities and
illiquid securities, including Rule 144A securities.
OTHER SECURITIES AND INVESTMENT TECHNIQUES
CONVERTIBLE SECURITIES
The Fund may purchase convertible securities that are fixed-income debt
securities or preferred stocks, and which may be converted at a stated price
within a specific period of time into a certain quantity of common stock of the
same or other issuers. Convertible securities are usually subordinated in right
of payment to nonconvertible debt securities of the same issuer, but are senior
to common stocks in an issuer's capital structure. Their prices tend to be
influenced by changes in interest rates (in the same manner as for debt
securities) as well as changes in the market value of the common stock into
which they can be converted.
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, as it reflects an agreed-upon market interest
rate effective for the period of time during which the Fund holds the
securities. 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 is required to provide additional collateral so
that all times the collateral is at least equal to the repurchase price.
The majority of these transactions run from day to day and not more than
seven days from the original purchase. 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 Fund's risk is limited to the
ability of the seller to pay the agreed-upon sum on the delivery date.
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 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, the
purchaser's ability to sell the collateral might be restricted 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.
B-4
<PAGE>
U.S. GOVERNMENT SECURITIES
The Fund may, but is not obligated under any circumstances to, 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. 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 obligations of 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 from time to time purchase securities on a "when-issued" or
delayed delivery basis, generally in connection with an underwriting or other
offering. 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, beyond normal
settlement dates, generally from 15 to 45 days after the transaction. During the
period between purchase and settlement, the Fund does not pay the issuer and no
interest accrues to the Fund. To the extent that the Fund holds assets in cash
pending the settlement of a purchase of securities, the Fund would earn no
income. These transactions involve the risk that the value of the securities at
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. While the Fund may sell when-issued securities 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 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.
ILLIQUID AND RESTRICTED SECURITIES
The Fund may invest up to 15% of its net assets at the time of purchase in
illiquid securities, including (i) securities with no readily available market;
(ii) securities 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.
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
B-5
<PAGE>
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 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 affect 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 Advisor may
determine that such securities, up to a limit of 10% of the Fund's total net
assets, are not illiquid notwithstanding their legal or contractual restrictions
on resale.
SECURITIES LENDING
The fund may lend its securities in an amount up to 30% of its total assets
at the time of the loan to financial institutions such as banks and brokers if
the loan is collateralized in accordance with applicable regulations. Under
present regulatory requirements, 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
U.S. Government securities. 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 if the borrower of the securities fails
financially. However, the Fund will lend securities only when, in the Advisor's
opinion, the income to be earned from the loans justifies the risks involved.
The Fund or the borrower may terminate Loans.
OPTIONS
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
to hedge against the risk of unfavorable price movements adversely affecting the
value of the Fund's securities or securities the Fund intends to buy. The Fund
may also purchase call options in closing transactions, to terminate option
positions written by the Fund. The Fund may write (sell) covered call options on
individual securities and on stock indices and engage in related closing
transactions.
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 selling the option, 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 will 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 will 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
B-6
<PAGE>
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.
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 at the time of purchase.
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.
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 write a put option and purchase 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. 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 the types of exchange-traded options
contracts are limited, the standardized contracts available likely 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 succeed 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. No one can assure that 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
B-7
<PAGE>
establish daily price fluctuation limits for options contracts, and may halt
trading if a contract's price moves up or down 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, the Fund may not be able 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 organizations 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.
STOCK INDEX OPTIONS. Options on stock indices have 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, to successfully
use options on a stock index, the Advisor must be able 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. The Fund's policy is 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.
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 total assets at the time of
any such transaction will be hedged with stock index futures contracts.
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. Futures contracts are traded on designated "contract markets"
which, through their clearing corporations, guarantee performance of the
contracts. No physical delivery of securities is made, but profits and losses
resulting from changes in the market value of the contract are credited or
debited at the close of each trading day to the 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 reflect
changes in the specified index of equity securities on which the future is
based. If the Advisor expects general stock market prices to rise, it might
purchase a stock index future contract as a hedge against an increase in prices
of particular equity securities it wants 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 expects 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 future contract.
No one can ensure that it will be possible at any particular time to close
a futures position. If the Fund could not close a futures position and the value
of the position declined, the Fund would have to continue to make daily cash
payments to the other party to the contract to offset the decline in value of
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<PAGE>
the position. No one can ensure 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.
The use of futures contracts includes several risks. If the index 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, a variety of factors may affect the market prices of futures
contracts. 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.
No one can ensure 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 amount of margin deposits on the Fund's existing
futures positions would exceed 5% of the market value of the Fund's net assets.
MANAGEMENT
The Board of Trustees is responsible for the overall management of the
Trust's business. 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
Board of Trustees delegates the day-to-day operations of the Trust to its
officers, subject to the Fund's investment objective and policies and to general
supervision by the Board.
The Trustees and officers of the Trust, their business addresses and
principal occupations during the past five years are:
Jeffery A. Busby, C.F.A.* (age 39) PRESIDENT AND TRUSTEE. Managing Partner
12750 High Bluff Drive since May 1996 and Managing Director of
San Diego, CA 92130 its predecessor.
DeWitt F. Bowman, C.F.A, (age 69) TRUSTEE. Principal, Pension Investment
79 Eucalyptus Knoll Consulting, since 1994. Director,
Mill Valley, CA 94941 Dresdner RCM Capital Funds, Inc. and
Dresdner RCM Global Funds, Inc.(mutual
funds) since 1996; RREEF America REIT,
Inc. since 1995; Wilshire Target Funds,
Inc. (mutual fund) since 1996. Trustee,
Pacific Gas and Electric Nuclear
Decommissioning Trust since 1995.
Formerly Chief Investment Officer of the
California Public Employees Retirement
System (1989 to 1994).
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<PAGE>
Charles H. Brandes * (age 56) TRUSTEE. Managing Partner of the Advisor
12750 High Bluff Drive since May 1996 and Managing Director of
San Diego, CA 92130 its predecessor.
Gordon Clifford Broadhead (age 75) TRUSTEE. Marine biologist and consultant
P.O. Box 1427 in fisheries.
Rancho Santa Fe, CA 92067
Joseph E. Coberly, Jr. (age 81) TRUSTEE. Former Managing Partner, Red
P.O. Box 944 Tail Golf Association (real estate
Rancho Santa Fe, CA 92067 developer).
W. Daniel Larsen (age 72) TRUSTEE. Retired. Former Honorary
1405 Savoy Circle Danish Consul for San Diego.
San Diego, CA 92107
Debra McGinty-Poteet (age 44) VICE PRESIDENT. Mutual Fund/Sub-
12750 High Bluff Advisory Group Manager. Formerly Chief
San Diego, CA 92130 Operating Officer for North American
Trust Company; Senior Vice President
and Managing Director for Bank of
America Funds Management.
Glenn R. Carlson (age 38) SECRETARY. Managing Partner of the
12750 High Bluff Advisor since May 1996 and Managing
San Diego, CA 92130 Director of its predecessor prior thereto.
Gary Iwamura (age 43) TREASURER. Financial Resources Officer of
12750 High Bluff Drive the Advisor since 1997. Formerly Chief
San Diego, CA 92130 Administrative Officer, National Mutual
Funds Management from 1992 to 1996 and
Chief Operating Officer, Axe-Houghton
Management from 1991 to 1992.
- ----------
* Denotes "interested person" of the Trust as defined in the 1940 Act.
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<PAGE>
The Trust pays a fee of $800 per meeting to Trustees who are not
"interested persons" of the Trust. They also receive a fee of $800 for any
committee meetings held on dates other than scheduled Board meeting dates, and
are reimbursed for any expenses incurred in attending meetings.
The table below shows the compensation paid to each Trustee for the fiscal
year ended October 31, 1999:
<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>
PRINCIPAL HOLDERS OF SECURITIES
As of January 31, 2000, the following persons held of record more than 5% of the
outstanding shares of the Fund:
Name and Address Percentage Owned
- ---------------- ----------------
Charles Schwab & Co., Inc.(1) 30.41%
101 Montgomery Street
San Francisco, CA 94104
Wells Fargo Bank TTEE fbo 17.09%
Deseret Mutual Benefits Administration 401(k)
26610 West Agoura Road
Calabasas, CA 91302
Wells Fargo Bank TTEE fbo 7.28%
Deseret Mutual Benefits Administration 403(b)
26610 West Agoura Road
Calabasas, CA 91302
The Wortham Foundation, Inc. 6.01%
2727 Allen Parkway, Suite 2000
Houston, TX 77019-2125
B-11
<PAGE>
- ----------
(1) Charles Schwab & Co. Inc. is the nominee account for many individual
shareholder accounts; the Fund is not aware of the size or identity of any
individual accounts.
As of such date, the Trustees and officers of the Trust, as a group, owned
beneficially and of record less than 1% of the outstanding shares of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
ADVISORY AGREEMENT
Subject to the supervision of the Board of Trustees, the Advisor provides
investment management and services to the Fund, 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.
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<PAGE>
The Board of Trustees or the holders of a majority of the outstanding
voting securities of the Fund can terminate the Advisory Agreement with respect
to the Fund at any time without penalty, on 60 days written notice to the
Advisor. The Advisor may also terminate the Advisory Agreement on 60 days
written notice to the Fund. The Advisory Agreement terminates automatically upon
its assignment (as defined in the 1940 Act).
During the fiscal years ended October 31, 1997, October 31, 1998 and
October 31, 1999, the Advisor earned an advisory fee at the rate of 1.00% of the
average net assets of the Fund. That fee amounted to $260,518, $1,204,81 and
$2,012,004, respectively. The Advisor agreed to limit the total operating
expenses of the Fund during each such fiscal year to 1.20% of average net
assets. As a result of that limitation, the Advisor waived $150,810, $200,868
and $199,584 of the advisory fee it earned during fiscal years ended October 31,
1997, October 31, 1998 and October 31, 1999, respectively.
The Advisor has signed a contract with the Trust in which the Advisor has
agreed that during the Fund's fiscal years ended October 31, 1998, 1999 and 2000
the Advisor will waive management fees and reimburse operating expenses of the
Fund to the extent necessary to ensure that the expenses of the Fund do not
exceed during each such fiscal year 1.20% of the average daily net assets of the
Fund (the "Expense Cap"). The Trust has agreed that the amount of any waiver or
reimbursement will be repaid to the Advisor without interest at any time before
the later of (i) December 31, 2003, and (ii) the end of the fifth full fiscal
year of the Fund after the fiscal year in which the waiver or reimbursement
occurred, unless that repayment would cause the aggregate operating expenses of
the Fund to exceed the Expense Cap for that fiscal year.
The Fund does not invest in any security for the purpose of exercising
control or management. When the Fund receives a proxy from a company in which it
invests, the Advisor will vote that proxy 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, L.L.C. ("ICA") 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
B-13
<PAGE>
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 0.05% of the first $250 million of the Fund's
average daily net assets, 0.04% of the next $250 million of average daily net
assets and 0.03% thereafter, subject to a $40,000 annual minimum. As a result,
for the fiscal year ended October 31, 1999, ICA received compensation of
$147,876 from the Fund.
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.
The Fund may purchase portfolio securities directly from issuers or from
underwriters. Where possible, it makes purchases and sales through dealers
(including banks) which specialize in the types of securities involved, 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.
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. It considers the full range and
quality of services available 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 the Advisor concludes 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, it
may consider 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 it is required to perform 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.
B-14
<PAGE>
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.
The Advisor makes investment decisions for the Fund independently from
those of the Advisor's other client accounts. Nevertheless, at times the same
securities may 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 the Fund and one or more of
such other client accounts simultaneously purchases or sells the same security,
the Advisor allocates each day's transactions in such security between the Fund
and all such client accounts as it decides is fair, taking into account the
respective sizes of the accounts, the amount being purchased or sold and other
factors it deems relevant. 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, the ability of the Fund to participate in volume
transactions may produce better executions for the Fund.
The Fund paid total brokerage commissions during the fiscal years ended
October 31, 1997, October 31, 1998 and October 31, 1999, of $149,540, $346,776
and $232,101, respectively.
NET ASSET VALUE
The net asset value of the Fund's shares fluctuates 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. Currently, the Exchange is not open on the following
days: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Fund values options and futures contracts which are traded on exchanges
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 Fund values the options or futures traded on it 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.
Foreign securities markets normally complete trading 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
B-15
<PAGE>
value is not calculated. Calculations of net asset value will not reflect 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 unless the
Board of Trustees deems that the particular event would materially affect net
asset value, in which case the Fund will make an adjustment. The Fund translates
assets or liabilities expressed in foreign currencies 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.
The Fund values 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,
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 expect to make any
part of a redemption payment in securities, if such payment were made, an
investor would 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
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.
B-16
<PAGE>
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) 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 (3) 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. 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.
B-17
<PAGE>
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 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.
B-18
<PAGE>
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 Fund will update the time periods used in advertising 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 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.
FINANCIAL STATEMENTS
The Annual Report to shareholders of the Fund for the period ended October
31, 1999 is a separate document and the financial statements appearing in it are
incorporated by reference in this Statement of Additional Information. Those
financial statements have been audited by Ernst & Young LLP, whose report
appears in the Annual Report. The financial statements have been incorporated in
this Statement of Additional Information in reliance on their authority as
experts in accounting and auditing.
B-19
<PAGE>
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT,
INDEPENDENT AUDITORS AND LEGAL COUNSEL
The Trust's custodian, Investors Bank & Trust Company, 200 Clarendon
Street, 16th Floor, Boston, Massachusetts 02116, 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 and dividend disbursing agent.
The Trust's independent auditors, Ernst & Young LLP, 725 South Figueroa, Los
Angeles, California 90017, examine the Fund's financial statements annually and
prepare the Fund's tax returns. Paul, Hastings, Janofsky & Walker LLP, 555 South
Flower Street, Los Angeles, California 90071, acts as legal counsel for the
Trust and the Advisor.
GENERAL INFORMATION
The Trust was organized as a Delaware business trust on July 6, 1994 and is
an open-end management investment company. The Board of Trustees of the Trust
has authority to issue an unlimited number of shares of beneficial interest of
separate series. The Fund is currently one of two series of the Trust. The Fund
commenced operation January 2, 1997. 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'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.
You can examine the Trust's Registration Statement on Form N-1A 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.
SHARES OF BENEFICIAL INTEREST
Rule 18f-2 under the Investment Company Act provides that any matter
required to be submitted to the holders of the outstanding voting securities of
an investment company such as the Trust will not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding shares
of the series of the Trust affected by the matter. Thus, on any matter submitted
to a vote of shareholders of the Trust, all shares of the affected series will
vote unless otherwise permitted by the Investment Company Act, in which case all
shares of the Trust will vote in the aggregate. For example, a change in the
Fund's fundamental investment policies would be voted upon by shareholders of
the Fund, as would the approval of any advisory or distribution contract for the
Fund. However, all shares of the Trust will vote together in the election or
selection of Trustees and accountants for the Trust.
B-20
<PAGE>
As used in the Fund's prospectus and in this Statement of Additional
Information, the term "majority," when referring to approvals to be obtained
from shareholders of the Fund, means the vote of the lesser of (i) 67% of the
shares of the Fund represented at a meeting if the holders of more than 50% of
the outstanding shares of the Fund are present in person or by proxy, or (ii)
more than 50% of the outstanding shares of the Fund. The term "majority," when
referring to the approvals to be obtained from shareholders of the Trust, means
the vote of the lesser of (i) 67% of the Trust's shares represented at a meeting
if the holders of more than 50% of the Trust's outstanding shares are present in
person or by proxy, or (ii) more than 50% of the Trust's outstanding shares.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held. Unless otherwise provided by law (for example,
by Rule 18f-2 discussed above) or by the Trust's Declaration of Trust or Bylaws,
the Trust may take or authorize any action upon the favorable vote of the
holders of more than 50% of the outstanding shares of the Trust.
The Trust does not hold annual shareholder meetings of the Fund. The Trust
will not normally hold 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 requested in writing by the shareholders of record owning at
least 10% of the Trust's outstanding shares Trust and to assist in communicating
with other shareholders as required by Section 16(c) of the Investment Company
Act.
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. Shareholders are not entitled to any
preemptive rights. All shares, when issued, will be fully paid and nonassessable
by the Trust.
B-21
