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ALEXANDER HAMILTON VARIABLE INSURANCE TRUST
PROSPECTUS
NOVEMBER 1, 1995
The Alexander Hamilton Variable Insurance Trust (the "Trust") is an
investment company consisting of seven separate investment portfolios or funds
(the "Funds") each of which has different investment objectives.
INVESTMENT GRADE BOND FUND seeks a high level of total return to the extent
consistent with moderate risk of capital and maintenance of liquidity. This Fund
will pursue its objective by investing principally in a diversified portfolio of
high quality and investment grade debt securities.
HIGH YIELD BOND FUND seeks a high level of current income. This Fund will
pursue its objective by investing primarily in corporate obligations with
emphasis on higher-yielding, higher risk, lower-rated or unrated securities.
BALANCED FUND seeks high total return with reduced risk over the long term
by allocating its assets among stocks, bonds and short-term fixed income
instruments.
GROWTH & INCOME FUND seeks growth of capital and income. This Fund will
pursue its objectives by investing primarily in equity securities and various
income producing securities, including, but not limited to, dividend paying
equity securities, fixed income securities, and money market instruments.
GROWTH FUND seeks capital growth. This fund invests primarily in equity
securities that have above-average growth prospects.
EMERGING GROWTH FUND seeks capital appreciation through investment in a
diversified portfolio of equity securities selected for their growth potential;
this Fund does not seek current income. This Fund will pursue its investment
objective by investing primarily in smaller and medium sized companies.
INTERNATIONAL EQUITY FUND seeks long-term growth of capital through
investments in securities whose primary trading markets are outside of the
United States.
These Funds are available to the public only through the purchase of certain
variable annuity contracts issued by Alexander Hamilton Life Insurance Company
of America.
This Prospectus briefly describes the information that investors should know
before investing in these Funds including the risks associated with investing in
each. Investors should read and retain this prospectus for future reference. A
Statement of Additional Information dated November 1, 1995, has been filed with
the Securities and Exchange Commission and is available without charge, by
calling 1-800-289-1776. The Table of Contents of the Statement of Additional
Information is included at the end of this Prospectus. The Statement of
Additional Information, as supplemented from time to time, is incorporated
herein by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, NOR ARE THEY FEDERALLY INSURED BY THE FDIC OR ANY OTHER
GOVERNMENT AGENCY. INVESTING IN THE FUNDS INVOLVES CERTAIN INVESTMENT RISKS,
INCLUDING MARKET FLUCTUATION, AND POSSIBLE LOSS OF PRINCIPAL INVESTED.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE
CONTRACTS.
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TABLE OF CONTENTS
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INTRODUCTION............................................................................................... 1
INVESTMENT OBJECTIVES AND POLICIES......................................................................... 2
Investment Grade Bond Fund............................................................................... 2
High Yield Bond Fund..................................................................................... 4
Balanced Fund............................................................................................ 5
Growth & Income Fund..................................................................................... 7
Growth Fund.............................................................................................. 8
Emerging Growth Fund..................................................................................... 9
International Equity Fund................................................................................ 10
INVESTMENT METHODS AND RISKS............................................................................... 11
Convertible Securities................................................................................... 11
Fixed-Income Securities.................................................................................. 12
Repurchase Agreements.................................................................................... 15
Reverse Repurchase Agreements............................................................................ 15
Swap Transactions........................................................................................ 15
Indexed Securities....................................................................................... 16
Dollar Roll Transactions................................................................................. 16
When-Issued Securities and Forward Commitments........................................................... 17
Lending of Portfolio Securities.......................................................................... 17
Restricted and Illiquid Securities....................................................................... 17
Borrowing................................................................................................ 18
Options on Securities and Securities Indices............................................................. 18
Futures Contracts and Options on Futures Contracts....................................................... 19
Foreign Transactions..................................................................................... 19
Brady Bonds.............................................................................................. 22
Emerging Market Securities............................................................................... 22
Other Investment Companies............................................................................... 22
Non-diversified Status................................................................................... 22
Risks of Investing in Emerging Companies................................................................. 23
Warrants and Rights...................................................................................... 23
Short Sales Against the Box.............................................................................. 23
INVESTMENT RESTRICTIONS.................................................................................... 24
PORTFOLIO TURNOVER......................................................................................... 24
MANAGEMENT................................................................................................. 25
Trustees and Officers.................................................................................... 25
Investment Adviser....................................................................................... 25
Investment Sub-Advisers.................................................................................. 25
PERFORMANCE INFORMATION.................................................................................... 27
DETERMINATION OF NET ASSET VALUE........................................................................... 28
OFFERING, PURCHASE AND REDEMPTION OF SHARES................................................................ 28
INCOME, DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.......................................................... 29
TAXES...................................................................................................... 29
OTHER INFORMATION.......................................................................................... 31
Reports.................................................................................................. 31
Voting and Other Rights.................................................................................. 31
Custody of Assets........................................................................................ 31
Accounting and Administrative Services................................................................... 31
Transfer Agent........................................................................................... 31
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INTRODUCTION
The Alexander Hamilton Variable Insurance Trust (the "Trust") is an
open-end, management investment company established as a Massachusetts business
trust under a Declaration of Trust dated September 16, 1994. The Trust consists
of seven separate investment portfolios or funds (the "Funds" or a "Fund"), each
of which is, in effect, a separate mutual fund. The Trust issues a separate
class of shares for each Fund representing fractional undivided interests in
that Fund. An investor, by investing in a Fund, becomes entitled to a pro rata
share of all dividends and distributions arising from the net income and capital
gains on the investments of that Fund. Likewise, an investor shares pro rata in
any losses of that Fund.
Pursuant to an investment management agreement and subject to the authority
of the Trust's Board of Trustees, Alexander Hamilton Capital Management, Inc.
serves as the Trust's investment adviser (the "Adviser") and conducts the
business and affairs of the Trust. The Adviser has engaged the following
advisers to act as sub-adviser to provide the day-to-day portfolio management
for the respective Fund(s).
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FUND SUB-ADVISER
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Investment Grade Bond Fund........................ J.P. Morgan Investment Management, Inc.
High Yield Bond Fund.............................. Massachusetts Financial Services Company
Balanced Fund..................................... J.P. Morgan Investment Management, Inc.
Growth & Income Fund.............................. Warburg, Pincus Counsellors, Inc.
Growth Fund....................................... Strong Capital Management, Inc.
Emerging Growth Fund.............................. Massachusetts Financial Services Company
International Equity Fund......................... Lombard Odier International Portfolio
Management Limited
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The Trust currently offers each class of its shares to a separate account of
Alexander Hamilton Life Insurance Company of America as funding vehicles for
certain variable annuity contracts (the "Contracts") issued through the
Alexander Hamilton Variable Annuity Separate Account. The Trust does not offer
its shares directly to the general public. A separate prospectus, which
accompanies this prospectus, describes the Separate Account and the Contracts.
The Trust may, in the future, offer its shares to other registered and
unregistered separate accounts of the Alexander Hamilton Life Insurance Company
and its affiliates supporting other variable annuity contracts or variable life
insurance contracts and to qualified pension and retirement plans.
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INVESTMENT OBJECTIVES AND POLICIES
Each Fund has one or more investment objectives and related investment
policies and uses various investment techniques to pursue these objectives and
policies. THERE CAN BE NO ASSURANCE THAT ANY FUND WILL ACHIEVE ITS INVESTMENT
OBJECTIVE OR OBJECTIVES. Investors should not consider any one Fund alone to be
a complete investment program. All of the Funds are subject to the risk of
changing economic conditions, as well as the risk inherent in the ability of the
sub-adviser to make changes in the portfolio composition of the Fund in
anticipation of changes in economic, business, and financial conditions. As with
any security, a risk of loss is inherent in an investment in the shares of any
of the Funds.
The different types of securities, investments, and investment techniques
used by each Fund all have attendant risks of varying degrees. For example, with
respect to equity securities, there can be no assurance of capital appreciation
and there is a substantial risk of decline. With respect to debt securities,
there exists the risk that the issuer of a security may not be able to meet its
obligations on interest or principal payments at the time required by the
instrument. In addition, the value of debt instruments generally rises and falls
inversely with prevailing current interest rates. As described below, an
investment in certain of the Funds entails additional risks as a result of their
ability to invest a substantial portion of their assets in either foreign
investments or small capitalization issuers or both. In addition, the
International Equity Fund is not diversified as defined in the Investment
Company Act of 1940, as amended (the "1940 Act"), and this entails certain
special risks. See "Investment Methods and Risks."
Certain types of investments and investment techniques common to one or more
Funds are described in greater detail, including the risks of each, under
"Investment Methods and Risks" and in the Statement of Additional Information
("SAI"). The Funds are also subject to certain investment restrictions that are
described under the caption "Investment Restrictions" in either this prospectus
or the SAI.
The investment objective or objectives of each Fund, as well as the
investment policies that are not fundamental, may be changed by the Trust's
Board of Trustees without shareholder approval. Certain of the investment
restrictions of each Fund are fundamental, however, and may not be changed
without the approval of a majority of the votes attributable to the outstanding
shares of that Fund. See "Investment Restrictions."
INVESTMENT GRADE BOND FUND
The Investment Grade Bond Fund's investment objective is to provide a high
total return consistent with moderate risk of capital and maintenance of
liquidity. Total return will consist of income plus realized and unrealized
capital gains and losses. Although the net asset value of the Fund will
fluctuate, the Fund attempts to preserve the value of its investments to the
extent consistent with its objective. The Fund is designed for investors who
seek a total return over time that is higher than that generally available from
a portfolio of shorter-term obligations while recognizing the greater price
fluctuation of longer-term instruments.
J.P. Morgan Investment Management, Inc. ("Morgan"), the sub-adviser,
actively manages the Fund's investments, including their duration, the
allocation of securities across market sectors, and the selection of specific
securities within sectors. Based on fundamental, economic and capital markets
research, Morgan adjusts the duration of the portfolio in light of market
conditions and Morgan's interest rate outlook. For example, if interest rates
are expected to fall, the duration may be lengthened to take advantage of the
expected associated increase in bond prices. Morgan also actively allocates the
Fund's assets among the broad sectors of the fixed income market including, but
not limited to, obligations issued or guaranteed by U.S. Government agencies or
instrumentalities where the Fund must look principally to the issuing or
guaranteeing agency for ultimate repayment ("U.S. Government Securities"),
corporate securities, private placements, asset-backed and mortgage-related
securities. Specific securities which Morgan believes are undervalued are
selected for purchase within the sectors using advanced quantitative tools,
analysis of credit risk, the expertise of a dedicated trading desk, and the
judgment of fixed income portfolio managers and analysts. Under normal
circumstances, Morgan intends to keep the Fund essentially fully invested with
at least 65% of the portfolio's assets invested in bonds.
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Duration is a measure of the weighted average maturity of the bonds held in
the Fund and can be used as a measure of the sensitivity of the Fund's market
value to changes in interest rates. Under normal market conditions the Fund's
duration will range between one year shorter and one year longer than the
duration of the U.S. investment grade fixed income universe, as represented by
Salomon Brothers Broad Investment Grade Bond Index, the Fund's benchmark.
Currently, the Benchmark's duration is approximately 5 years. The maturities of
the individual securities in the Fund may vary widely, however.
The Investment Grade Bond Fund intends to manage its portfolio actively in
pursuit of its investment objective. Portfolio transactions are undertaken
principally to accomplish the Fund's objective in relation to expected movements
in the general level of interest rates, but the Fund may also engage in
short-term trading consistent with its objective. To the extent the Fund engages
in short-term trading, it may incur increased transaction costs.
The Fund may invest in a broad range of debt securities of domestic and
foreign issuers. These include debt securities of various types and maturities,
e.g., debentures, notes, equipment trust certificates and other collateralized
securities and zero coupon securities. The Fund does not intend to invest in
common stock but may invest to a limited extent in convertible debt or preferred
stock. The Fund does not expect to invest more than 25% of its assets in
securities of foreign issuers. If the Fund invests in non-U.S. dollar
denominated securities, it will hedge the foreign currency exposure into the
U.S. dollar. See "Investment Methods and Risks" for further information on
foreign investments and convertible securities.
The Investment Grade Bond Fund may invest in obligations issued or
guaranteed by the U.S. Government and backed by the full faith and credit of the
United States. These securities include Treasury securities, obligations of the
Government National Mortgage Association ("GNMA Certificates"), the Farmers Home
Administration and the Export Import Bank. The Fund may also invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities where the Fund must look principally to the issuing or
guaranteeing agency for ultimate repayment; some examples of agencies or
instrumentalities issuing these securities are the Federal Farm Credit System,
the Federal Home Loan Banks and the Federal National Mortgage Association.
Although these governmental issuers are responsible for payments on their
securities, they do not guarantee their market value.
The Fund may also invest in municipal obligations which may be general
obligations of the issuer or payable only from specific revenue sources.
However, the Fund will invest only in municipal obligations that have been
issued on a taxable basis or have an attractive yield excluding tax
considerations. In addition, the Fund may invest in debt securities of foreign
issuers. See "Investment Methods and Risks" for information on foreign
investments.
The Investment Grade Bond Fund may purchase money market instruments to
invest temporary cash balances or to maintain liquidity to meet withdrawals.
However, the fund may also invest in money market instruments or hold cash as a
temporary defensive measure taken during, or in anticipation of, adverse market
conditions. The money market investments permitted for the Fund include the
following: (1) U.S. Government Securities; (2) commercial paper (unsecured
promissory notes including variable amount master demand notes) issued or
guaranteed by U.S. corporations or other entities; (3) corporate debt securities
and obligations issued or guaranteed by U.S. banks (including certificates of
deposit, bank notes, loan participation interests, commercial paper, unsecured
promissory notes, time deposits, and bankers' acceptances); (4) unrated
corporate debt securities, commercial paper and bank obligations; (5) unrated
notes, paper, obligations or other instruments; and (6) repurchase agreements
with banks and government securities dealers that are recognized as primary
dealers by the Federal Reserve System.
It is a policy of the Investment Grade Bond Fund that under normal
circumstances at least 65% of its total assets will consist of securities that
are rated at least A by Moody's Investors Service, Inc. ("Moody's") or Standard
& Poor's Corporation ("Standard & Poors") or that are unrated but in Morgan's
opinion are of comparable quality. In the case of 30% of the Fund's investments,
the Fund may purchase debt securities that are rated Baa or better by Moody's or
BBB or better by Standard & Poor's or are unrated and in sub-adviser's opinion
are of comparable quality. The remaining 5% of the Fund's assets may be invested
in debt securities that are rated Ba or better by Moody's or BB or better by
Standard & Poor's or are unrated and in
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Morgan's opinion of comparable quality. Securities rated Baa by Moody's or BBB
by Standard & Poor's are considered investment grade, but have some speculative
characteristics. Securities rated Ba by Moody's or BB by Standard & Poor's are
below investment grade and considered to be speculative with regard to payment
of interest and principal. These standards must be satisfied at the time an
investment is made. If the quality of the investment later declines, the Fund
may continue to hold the investment. A more detailed discussion of the risks
associated with lower rated corporate debt obligations is found in "Investment
Methods and Risks" under "Lower Rated Corporate Debt Obligations" and in the
SAI. See Appendix A to the SAI for a description of corporate bond ratings
assigned by Standard & Poor's and Moody's.
The Investment Grade Bond Fund may invest in certain instruments or utilize
investment techniques that involve special risks. These include: convertible
securities, when-issued and delayed delivery securities, repurchase agreements,
reverse repurchase agreements, dollar roll transactions, lending portfolio
securities, borrowing from a bank, American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs"), foreign currency, forward foreign
currency exchange transactions, option contracts, futures contracts and options
on futures contracts. The Fund may invest in obligations issued or guaranteed by
foreign national governments, their agencies, instrumentalities, or political
subdivisions (including any entity which is majority owned by such government,
agency, instrumentality, or political subdivision) and debt securities issued or
guaranteed by certain supranational entities such as the World Bank, Asian
Development Bank and European Investment Bank. The Fund may also invest in
collateralized mortgage obligations ("CMO's"), parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date. PAC Bonds generally require
payments of a specified amount of principal on each payment date. The Fund may
invest up to 15% of its assets in illiquid securities. These investments and
techniques and their attendant risks are described in "Investment Methods and
Risks." The Fund will be diversified as defined by the 1940 Act.
HIGH YIELD BOND FUND
The High Yield Bond Fund seeks a high level of current income. The Fund will
seek to achieve its objective by investing primarily in corporate obligations
with emphasis on higher-yielding, higher risk, lower-rated or unrated
securities. Under normal conditions, Massachusetts Financial Services Company
("MFS"), the sub-adviser, expects that the Fund's assets will primarily consist
of a diversified portfolio of high-yielding bonds, convertible securities and
preferred stock of both domestic and foreign issuers. The Fund may purchase
securities on a when-issued basis and on a forward commitment basis.
The debt securities in which the High Yield Bond Fund may invest include
bonds, debentures, notes, equipment lease certificates, equipment trust
certificates (including interests in trusts or other entities representing such
obligations), conditional sales contracts, commercial paper and U.S. Government
Securities, mortgage-backed securities including CMOs, stripped mortgage
securities, asset-backed bonds, collateralized bond or loan obligations, bonds
on which interest is payable in kind, deferred interest bonds and zero coupon
bonds. The Fund may also invest in parallel pay CMOs and PAC Bonds. The High
Yield Bond Fund also may invest in common stocks, warrants, loan participation,
assignments, securities sold through private placements and ADRs. The
sub-adviser believes that these investments will increase the Fund's
diversification and enhance return, but also involve certain risks, described
below. These investments and techniques and their attendant risks are described
in "Investment Methods and Risks."
The High Yield Bond Fund may also invest in other instruments or utilize
investment techniques that involve special risks. These include: emerging market
securities, brady bonds, interest rate swaps, currency swaps, other types of
available swap agreements, mortgage dollar roll transactions, options on
securities and securities indices, forward foreign currency exchange contracts,
options on foreign currency, futures contracts and options thereon, repurchase
agreements, borrowing from a bank and lending portfolio securities. The Fund may
invest up to 15% of its assets in illiquid securities. The Fund may also invest
up to 50% (and MFS expects generally to invest between 0% and 20%) of its total
assets in foreign securities (not including ADRs). The Fund may hold foreign
currency received in connection with investments in foreign securities
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when, in the judgment of the sub-adviser, it would be beneficial to convert such
currency into U.S. dollars at a later date, based on anticipated changes in the
relevant exchange rate. The Fund may also hold foreign currency in anticipation
of purchasing foreign securities.
The Fund may invest in futures contracts for hedging purposes only. The Fund
has adopted the additional restriction that it will not enter into a futures
contract if, immediately thereafter, the value of securities and other
obligations underlying all such futures contracts would exceed 50% of the value
of the Fund's total assets.
The High Yield Bond Fund may sell a security short as a hedge against
portfolio holdings whose credit is deteriorating. The Fund's short sales are
limited to situations where the Fund owns a debt security of a company and sells
short a different type of security issued by the same company such as common or
preferred stock or a senior or junior debt security. The total market value of
all securities sold short may not exceed 2% of the Fund's net assets.
During periods of unusual market conditions when the sub-adviser believes
that investing for temporary defensive purposes is appropriate, part or all of
the assets of the Fund may be invested in cash (including foreign currency) or
short-term money market instruments.
When and if available, fixed income securities may be purchased at a
discount from face value. However, the Fund does not intend to hold such
securities to maturity for the purpose of achieving potential capital gains,
unless current yields on these securities remain attractive. From time to time
the Fund may purchase securities not paying interest at the time acquired if, in
the opinion of the sub-adviser, such securities have the potential for future
income or capital appreciation.
Securities offering the high current income sought by the High Yield Bond
Fund are ordinarily in the lower rating categories of recognized rating agencies
(that is, ratings of Baa or lower by Moody's or BBB by Standard & Poor's) or are
unrated and generally involve greater volatility of price and risk of principal
and income than securities in the higher rating categories. The Fund may invest
in securities rated Baa by Moody's or BBB by Standard & Poor's as well as
securities rated Ba or lower by Moody's or BB or lower by Standard & Poor's. No
minimum rating standard is required by the Fund. A detailed discussion of the
risks associated with lower rated corporate debt obligations is found in
"Investment Methods and Risks" under "Lower Rated Corporate Debt Obligations"
and in the SAI. See Appendix A to the SAI for a description of corporate bond
ratings assigned by Standard & Poor's and Moody's.
While the sub-adviser may refer to ratings issued by established credit
rating agencies, it is not the Fund's policy to rely exclusively on ratings
issued by these rating agencies, but rather to supplement such ratings with
MFS's own independent ongoing review of the credit quality. The Fund's
achievement of its investment objective may be more dependent on the
sub-adviser's own credit analysis than in the case of an investment company
primarily investing in higher quality fixed income securities. Since shares of
the Fund represent an investment in securities with fluctuating market prices,
the value of shares of the Fund will vary as the aggregate value of the
portfolio securities of the Fund increases or decreases. However, changes in the
value of securities subsequent to their acquisition will not affect cash income
or yield to maturity to the Fund.
The Fund seeks to maximize the return on its portfolio by taking advantage
of market developments, yield disparities and variations in the creditworthiness
of issuers. This may result in increases or decreases in the holding by the Fund
of debt securities which sell at moderate to substantial premiums or discounts
from face value. Moreover, if the sub-adviser's expectations of changes in
interest rates or its evaluation of the normal yield relationship between two
securities proves to be incorrect, the income, net asset value and potential
capital gain of the Fund may be decreased or its potential capital loss may be
increased. The Fund will be diversified as defined under the 1940 Act.
BALANCED FUND
The Balanced Fund's investment objective is to provide a high total return
from a diversified portfolio of equity and fixed income securities. Total return
will consist of income plus realized and unrealized capital gains and losses.
The Fund seeks to provide a total return that approaches that of the universe of
equity
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securities of large and medium sized U.S. companies and that exceeds the return
typical of a portfolio of fixed income securities. The Fund attempts to achieve
this return by investing in equity and fixed income instruments, as described
below.
The Balanced Fund is designed primarily for investors who wish to invest for
long term objectives such as retirement. It is appropriate for investors who
seek to attain real appreciation in the market value of their investments over
the long term, but with somewhat less price fluctuation than a portfolio
consisting only of equity securities. The Fund may be an attractive option for
investors who want a professional investment adviser to decide how their
investments should be allocated between equity and fixed income securities.
Under normal circumstances, the Fund will be invested approximately 65% in
equity and 35% in fixed income securities. However, J.P. Morgan Investment
Management, Inc. ("Morgan"), the sub-adviser, may allocate the Fund's
investments between these asset classes in a manner consistent with the Fund's
investment objective and current market conditions. Using a variety of
analytical tools, the sub-adviser assesses the relative attractiveness of each
asset class and determines an optimal allocation between them. The sub-adviser
then selects securities within each asset class based on fundamental research
and quantitative analysis.
Morgan intends to manage the Balanced Fund actively in pursuit of its
investment objective. Since the Fund has a long-term investment perspective, it
does not intend to respond to short-term market fluctuations or to acquire
securities for the purpose of short-term trading; however, it may take advantage
of short-term trading opportunities that are consistent with its objective. To
the extent the Fund engages in short-term trading, it may incur increased
transaction costs.
With regard to the equity component of the Balanced Fund, Morgan seeks to
achieve a high total return through fundamental analysis, systematic stock
valuation and disciplined portfolio construction. Based on internal fundamental
research, the sub-adviser uses a dividend discount model to value equity
securities and rank a universe of large and medium capitalization companies
within economic sectors according to their relative value. The sub-adviser then
buys and sells securities within each economic sector based on this valuation
process to seek to enhance the Fund's return. In addition, Morgan uses this
disciplined portfolio construction process to seek to reduce the volatility of
the equity portion of the Fund relative to that of the Standard & Poor's 500
Index.
The Fund's equity investments will be primarily the common stock of large
and medium sized U.S. companies with market capitalizations above $1.5 billion,
including common stock of any class or series or any similar equity interest,
such as trust or limited partnership interests. The Fund's equity investments
may also include ADRs, preferred stock, warrants, rights and convertible
securities. The Fund's equity securities may or may not pay dividends and may or
may not carry voting rights.
For the fixed income component of the Balanced Fund, Morgan seeks to provide
a high total return by actively managing the duration of the Fund's fixed income
securities, the allocation of securities across market sectors, and the
selection of securities within sectors. Based on fundamental, economic and
capital markets research, the sub-adviser adjusts the duration of the Fund's
fixed income investments in light of market conditions. The sub-adviser also
actively allocates the Fund's fixed income investments among the broad sectors
of the fixed income market. Securities which the sub-adviser believes are
undervalued are selected for purchase from the sectors using advanced
quantitative tools, analysis of credit risk, the expertise of a dedicated
trading desk, and the judgment of fixed income portfolio managers and analysts.
The Fund may invest in a broad range of debt securities of domestic issuers.
These include corporate bonds, debentures, notes, mortgage-related securities,
asset-backed securities, parallel pay CMOs, PAC Bonds and private placements.
The Fund may invest in U.S. Government and agency securities, including Treasury
securities, GNMA Certificates, the Farmers Home Administration and the Export
Import Bank. The Fund may also invest in municipal obligations which may be
general obligations of the issuer or payable only from specific revenue sources.
However, the Fund will invest only in municipal obligations that have been
issued on a taxable basis or have an attractive yield excluding tax
considerations. In addition, the Fund may invest in debt securities of foreign
issuers.
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Under normal circumstances at least 65% of the Fund's assets invested in
fixed income securities will consist of securities that are rated at least A by
Moody's or Standard & Poor's or that are unrated and in Morgan's opinion are of
comparable quality. In the case of 30% of the Fund's fixed income investments,
the Fund may purchase debt securities that are rated Baa or better by Moody's or
BBB or better by Standard & Poor's or are unrated and in Morgan's opinion are of
comparable quality. The remaining 5% of the Fund's fixed income investments may
be debt securities rated Ba by Moody's or BB by Standard & Poor's or unrated and
in Morgan's opinion are of comparable quality. These standards must be satisfied
at the time an investment is made. If the quality of the investment later
declines, the Fund may continue to hold the investment. A detailed discussion of
the risks associated with lower rated corporate debt obligations is found in
"Investment Methods and Risks" under "Lower Rated Corporate Debt Obligations"
and in the SAI. See Appendix A to the SAI for a description of the corporate
bond ratings assigned by Standard & Poor's and Moody's.
In addition, the Balanced Fund may invest in securities on a when-issued or
forward commitment basis, invest in securities issued by supranational entities
and foreign companies, purchase ADRs and foreign currency, enter into repurchase
and reverse repurchase agreements, enter into dollar roll transactions, loan its
portfolio securities, purchase money market instruments and enter into forward
contracts on foreign currencies. The Fund may use options on securities and
indexes of securities, futures contracts and options on futures contracts for
hedging and risk management purposes. The Fund may also invest up to 15% of its
assets in illiquid securities. The Fund may borrow from banks. These securities
and techniques and their attendant risks are described in "Investment Methods
and Risks."
The Balanced Fund may invest in the types of money market instruments the
Investment Grade Bond Fund may invest. Under normal circumstances, the Fund will
purchase these securities to invest temporary cash balances or to maintain
liquidity to meet withdrawals. However, the Fund may invest in money market
instruments as a temporary defensive measure taken during, or in anticipation
of, adverse market conditions. The Fund may also hold cash during such times.
The Fund will be diversified as defined under the 1940 Act.
GROWTH & INCOME FUND
The Growth & Income Fund's investment objectives are to provide growth of
capital and income. The Fund will pursue its objectives by investing primarily
in equity securities and various income producing securities, including but not
limited to, dividend paying equity securities, fixed income securities and money
market instruments. The Fund may purchase securities on a when-issued or forward
commitment basis.
The portion of the Fund invested at any given time in each of these asset
classes will vary depending on market conditions, and there may be extended
periods when the Fund is primarily invested in one of them. In addition, the
amount of income derived from the Fund will fluctuate depending on the
composition of the Fund's holdings and will tend to be lower when a higher
portion of the Fund is invested in equity securities.
Under normal market conditions, Warburg, Pincus Counsellors, Inc.
("Counsellors"), the Fund's sub-adviser, will invest substantially all of the
Fund's assets in equity securities, including common stocks, securities which
are convertible into common stocks and readily marketable securities, such as
rights and warrants, which derive their value from common stock. Investments in
common stock in general are subject to market risks that may cause their prices
to fluctuate over time. Therefore, an investment in the Growth & Income Fund may
be more suitable for long-term investors who can bear the risk of these
fluctuations. The Fund may invest up to 20% of its total assets in securities of
foreign issuers and may invest without limit in ADRs and small capitalization
companies. The Fund may also invest up to 15% of its assets in illiquid
securities. The Growth & Income Fund may from time to time hold various foreign
currencies pending their investment in foreign securities or their conversion
into U.S. dollars.
The Fund may also use certain investment techniques that entail special
risks. These include: reverse repurchase agreements, dollar roll transactions,
listed and unlisted options on securities and securities indices, futures
contracts and options thereon, holding and trading foreign currency, forward
foreign currency contracts, futures contracts on foreign currency and option
contracts on foreign currencies. The Growth & Income Fund will invest in futures
contracts and options on futures contracts for hedging
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purposes or to increase total return so long as aggregate initial margins and
premiums required for non-hedging positions do not exceed 5% of the Fund's net
assets, after taking into account any unrealized profits and losses on any such
contracts. The Fund may also purchase mortgage-backed securities, asset-backed
securities and foreign government securities, borrow from banks, lend portfolio
securities and engage in short sales against the box. These securities and
techniques and their attendant risks are described in "Investment Methods and
Risks."
When in the judgment of Counsellors market conditions warrant, the Growth &
Income Fund may, for temporary defensive purposes, hold part or all of its
assets in cash and money market instruments of the type in which the Investment
Grade Bond Fund may invest as well as foreign currencies. The Fund will be
diversified as defined in the 1940 Act.
GROWTH FUND
The Growth Fund seeks capital growth. The Fund invests primarily in equity
securities that Strong Capital Management, Inc. ("Strong"), the Growth Fund's
sub-adviser, believes have above-average growth prospects. Under normal market
conditions, the Fund will invest at least 65% of its total assets in equity
securities, including common stocks, preferred stocks and securities convertible
into common or preferred stocks, such as warrants and convertible bonds. While
the emphasis of the Growth Fund is clearly on equity securities, the Growth Fund
may also invest in debt obligations when the Fund's sub-adviser perceives that
they are more attractive than stocks on a long-term basis. When the sub-adviser
determines that market conditions warrant a temporary defensive position, the
Growth Fund may invest without limitation in cash and short-term fixed income
securities.
Strong will generally invest Fund assets in companies whose earnings are
believed to reflect relatively strong growth trends, and, to a lesser extent, in
companies whose market value is thought to be undervalued. In identifying
companies with favorable growth prospects, the sub-adviser ordinarily looks to
certain other characteristics, such as the following: (1) prospects for
above-average sales and earnings growth; (2) high return on invested capital;
(3) overall financial strength, including sound financial and accounting
policies and a strong balance sheet; (4) competitive advantages, including
innovative products and service; (5) effective research, product development,
and marketing; and (6) stable, capable management.
The Growth Fund may invest up to 35% of its total assets in debt obligations
that are considered investment grade or, if not rated, of equivalent investment
quality as determined by Strong, including intermediate to long-term corporate,
U.S. Government or agency debt securities, bank obligations or commercial paper.
The Fund may also invest up to 5% of its total assets in non-investment grade
debt securities (debt securities rated Ba or lower by Moody's or BB or lower by
Standard & Poor's). A detailed discussion of the risks associated with lower
rated debt obligations is found in "Investment Methods and Risks" under "Lower
Rated Corporate Debt Obligations" and in the SAI. See Appendix A to the SAI for
a description of the bond ratings assigned by Standard & Poor's and Moody's.
The Growth Fund may invest up to 15% of its total assets directly in the
securities of foreign issuers. It may also invest without limitation in foreign
securities in domestic markets through ADRs and EDRs. However, as a matter of
policy, Strong intends to limit total exposure to foreign issuers, including
both direct investments and ADRs and EDRs, to no more than 25% of the Fund's
total assets.
While the Growth Fund will generally invest in securities for the purpose of
seeking long-term capital gains, it may engage in short-term trading to maximize
capital appreciation. Changes in the investment portfolio will be made whenever
Strong believes they are advisable, either as a result of a security having
reached its price objective, or for reasons not foreseen at the time of the
investment without regard to the length of time the security has been held by
the Fund. As a result, short-term trading may cause portfolio turnover to be
higher than that of other funds with less aggressive trading strategies, which
may, in turn, increase the Fund's transaction costs.
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The Fund may purchase obligations on a when-issued or forward commitment
basis, enter into repurchase, reverse repurchase and mortgage dollar roll
agreements, swap agreements, foreign currency transactions, loan its portfolio
securities, purchase restricted securities, forward foreign currency contracts,
options and futures contracts and borrow from banks. The Fund may purchase zero
coupon bonds, mortgage and other asset backed securities, bonds with interest
payable in kind, foreign government securities and the securities of unsecured
issuers. The Fund may also purchase the securities of other investment companies
and small capitalization companies. The Growth Fund may make short sales
"against the box," and invest up to 15% of its assets in illiquid securities.
These investments and techniques and their attendant risks are described in
"Investment Methods and Risks." The Fund will be a diversified investment
company.
EMERGING GROWTH FUND
The Emerging Growth Fund's investment objective is capital appreciation. The
Fund will pursue its objective by investing in a diversified portfolio of equity
securities selected on the basis of their potential for growth. The Fund does
not seek current income. The Fund invests in the equity securities of companies
which are listed on domestic and foreign securities exchanges or are traded in
the over-the-counter markets. The securities acquired by the Emerging Growth
Fund are primarily issues of companies which the Fund's sub-adviser,
Massachusetts Financial Services Company ("MFS"), believes possess above-average
potential for appreciation. Under normal market conditions, at least 80% of the
Fund's net assets will be invested in the securities of such issuers.
Securities in which the Fund invests may be speculative and may involve
substantial risk. A risk of investing in small, emerging companies is that they
often have limited product lines, markets or financial resources, and their
securities may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or market averages in general.
In addition, there may be less research available on many promising small and
medium-sized emerging growth companies, making it more difficult to find and
analyze these companies. The Fund, therefore, may be subject to greater
fluctuation in value than a conservative equity fund or growth fund which
invests entirely in proven growth stocks.
While the Emerging Growth Fund will invest primarily in common stocks, the
Fund may, to a limited extent, seek appreciation in other types of securities
such as foreign or convertible securities and warrants when relative values make
such purchases appear attractive either as individual issues or as types of
securities in certain economic environments. The Fund may also enter into
forward foreign currency exchange contracts for the purchase or sale of foreign
currency for hedging purposes and non-hedging purposes, including transactions
entered into for the purpose of profiting from anticipated changes in foreign
currency exchange rates, as well as options on foreign currencies. The Fund may
also hold foreign currency. The Fund may invest up to 25% (and expects generally
to invest between 0% to 10%) of its total assets in foreign securities not
including ADRs. The Fund may hold cash equivalents or other forms of debt
securities as a reserve for future purchases of common stock or to meet
liquidity needs.
The Fund may invest in mortgage-backed and corporate asset-backed
securities. The Fund may write covered call and put options and purchase call
and put options on securities and stock indices. The Fund may also purchase and
sell stock index futures contracts and may write and purchase options thereon
for hedging purposes and for non-hedging purposes, subject to applicable law. In
addition, the Fund may purchase portfolio securities on a when-issued or on a
forward commitment basis. The Fund may also invest a portion of its assets in
loan participations or other direct indebtedness.
While it is not generally the Fund's policy to invest or trade for
short-term profits, the Fund may dispose of a portfolio security whenever the
sub-adviser is of the opinion that such security no longer has an appropriate
appreciation potential or when another security appears to offer relatively
greater appreciation potential. Subject to tax requirements, portfolio changes
are made without regard to the length of time a security has been held, or
whether a sale would result in a profit or loss.
The Emerging Growth Fund may invest up to 20% of its net assets in debt
securities considered investment grade or, if not rated, of equivalent
investment quality, however, this restriction does not apply to convertible
securities. The Fund may also invest up to 5% of its net assets in
non-investment grade debt
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securities. See Appendix A to the SAI for a description of the corporate bond
ratings assigned by Standard & Poor's and Moody's. No minimum rating standard is
required by the Fund. To the extent the Emerging Growth Fund invests in these
lower rated fixed income securities, the achievement of its investment objective
may be more dependent on MFS's own credit analysis than in the case of a Fund
investing in higher quality bonds. While the sub-adviser may refer to ratings
issued by established credit rating agencies, it is not a policy of the Fund to
rely exclusively on ratings issued by these agencies, but rather to supplement
such ratings with MFS's own independent and ongoing review of credit quality.
The Fund may invest in forward commitments, floating or variable rate
instruments, reverse repurchase agreements, and when-issued securities. The Fund
may invest up to 15% of its assets in illiquid securities. The Fund may also
lend portfolio securities and invest in ADRs. When adverse market conditions
warrant, the Fund may assume a temporary defensive position by investing a large
portion or all of its assets in cash or cash equivalents including, but not
limited to, obligations of banks with assets of $1 billion or more (including
certificates of deposit, bankers' acceptances and repurchase agreements),
commercial paper, short-term notes, U.S. Government Securities and related
repurchase agreements. A detailed discussion of the risks associated with lower
rated corporate debt obligations is found in "Investment Methods and Risks"
under "Lower Rated Corporate Debt Obligations" and in the SAI.
The Fund will be a diversified investment company.
INTERNATIONAL EQUITY FUND
The International Equity Fund's investment objective is long-term capital
appreciation. The Fund will seek to achieve its objective by investing
substantially all, and at least 65%, of its total assets in equity and
equity-related securities of companies from at least three different countries
including the United States. The Fund will be "non-diversified" as defined in
the 1940 Act. See "Non-Diversified Status." The International Equity Fund is
intended for investors who can accept the risks involved in investments in
equity and equity-related securities of non-U.S. issuers, as well as in foreign
currencies and in the active management techniques that the Fund generally
employs.
Under normal circumstances, the International Equity Fund will invest in the
securities of issuers traded on markets of at least three of the world's five
largest countries by market capitalization (Japan, United Kingdom, Germany,
France and Canada). The Fund may also invest in the securities of issuers traded
on quoted markets of other countries. This may include the securities of issuers
traded on the quoted markets of Switzerland, Italy, Netherlands, Australia,
Sweden and Spain.
The equity and equity-related securities in which the International Equity
Fund will primarily invest are common stock, preferred stock, convertible debt
obligations, convertible preferred stock and warrants or other rights to acquire
stock that Lombard Odier International Portfolio Management Limited ("Lombard
Odier"), the sub-adviser, believes offer the potential for long-term capital
appreciation. Issuers of such securities may include smaller, emerging
companies. The Fund also may invest in securities of foreign issuers in the form
of sponsored and unsponsored ADRs, EDRs or other similar instruments
representing securities of foreign issuers. The Fund may purchase securities on
a when-issued basis. See "Investment Methods and Risks."
While the investment policy of the Fund is to be broadly diversified as to
both countries and individual issuers, Lombard Odier selects individual
countries and securities on the basis of several factors. Investments are
allocated among issuers in countries selected based on a comparison of values
between the equity markets in those countries. This comparison is based upon
criteria such as return on equity, book value, earnings, dividends, and interest
rates in each market. After evaluating these factors and others for each country
and comparing opportunities among countries, the sub-adviser selects those
countries which, in its opinion, have the most attractive equity markets. This
evaluation is influential in deciding the amount of investment in each equity
market. Individual equity securities are selected within each market. The
International Equity Fund will invest in individual equity securities based on
factors such as book value, earnings per share and other financial data. The
sub-adviser will also endeavor to identify industry, political, and
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geographical trends which may affect equity values within individual countries
or among a group of countries. The Fund may also invest cash temporarily in
short-term debt instruments to maintain liquidity or pending other investment.
The International Equity Fund may purchase and sell foreign currency on a
spot basis in connection with the settlement of transactions in securities
traded in such foreign currency. The Fund will not purchase and sell foreign
currencies for speculative purposes. The Fund may enter into forward foreign
currency contracts and foreign currency futures contracts for hedging purposes
only. This includes entering into forward foreign currency contracts and foreign
currency futures contracts as an anticipatory hedge.
The International Equity Fund may invest cash, held to meet redemption
requests and expenses, in obligations of the United States and of foreign
governments (including their political subdivisions), commercial paper, bankers'
acceptances, certificates of deposit and other short-term evidences of
indebtedness. The Fund will only purchase commercial paper if it is rated
Prime-1 or Prime-2 by Moody's or A-1 or A-2 by Standard & Poor's. The Fund also
may invest cash held for such purposes in short-term, high grade foreign debt
securities. The Fund may lend portfolio securities to unaffiliated brokers,
dealers and financial institutions provided that (a) immediately after any such
loan, the value of the securities loaned does not exceed 15% of the total value
of the Fund's assets, and (b) any securities loan is collateralized in
accordance with applicable regulatory requirements.
The International Equity Fund may invest up to 15% of its assets in illiquid
securities. The Fund also may make short sales and short sales "against the
box". The Fund may not make short sales or maintain a short position if to do so
would cause more than 25% of its total assets, taken at market value, to be held
as collateral for such sales.
The International Equity Fund's investments may include U.S. Government
Securities, restricted securities, mortgage-backed obligations, repurchase
agreements, debt obligations of corporate and asset-backed issuers, debt
obligations of foreign governments and their respective agencies,
instrumentalities, political subdivisions and authorities and debt obligations
issued or guaranteed by international or supranational entities that, in the
opinion of Lombard Odier, offer the potential to enhance total return. The
timing of purchase and sale transactions in debt obligations may result in
capital appreciation or depreciation because the value of debt obligations
varies inversely with prevailing interest rates. Under normal circumstances, the
Fund will not invest more than 35% of its total assets in such debt obligations.
The debt obligations in which the Fund may invest will be rated BBB or higher by
S&P or Baa or higher by Moody's, or if unrated, determined by the sub-adviser to
be of comparable credit quality. The Fund will limit its investment in corporate
debt obligations to less than 35% of its total assets. A detailed discussion of
the risks associated with lower rated corporate debt obligations is found in
"Investment Methods and Risks" under "Lower Rated Corporate Debt Obligations"
and in the SAI. See Appendix A to the SAI for a description of the corporate
bond ratings assigned by Standard & Poor's and Moody's.
Notwithstanding the International Equity Fund's investment objective of
long-term capital appreciation through investment in equity and equity-related
securities of non-U.S. issuers or of companies whose securities are principally
traded outside the United States, the Fund may on occasion, for temporary
defensive purposes to preserve capital, hold part or all of its assets in cash,
money market instruments, non-convertible preferred stocks, or, subject to
certain tax restrictions, foreign currencies. The Fund may assume a temporary
defensive posture only when political and economic factors affect foreign equity
markets to such an extent that the sub-adviser believes there to be
extraordinary risks in being substantially invested in such markets.
INVESTMENT METHODS AND RISKS
CONVERTIBLE SECURITIES
All Funds may invest in convertible securities. Convertible securities may
include corporate notes or preferred stock but are ordinarily a long-term debt
obligation of the issuer convertible at a stated price or at a stated exchange
rate into common stock of the issuer. As with all debt securities, the market
value of
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convertible securities tends to decline as interest rates increase and,
conversely, to increase as interest rates decline. Convertible securities
generally offer lower interest or dividend yields than non-convertible
securities of similar quality. However, when the market price of the common
stock underlying a convertible security exceeds the conversion price, the price
of the convertible security tends to reflect the value of the underlying common
stock. As the market price of the underlying common stock declines, the
convertible security tends to trade increasingly on a yield basis, and thus may
not depreciate to the same extent as the underlying common stock. Convertible
securities generally rank senior to common stocks in an issuer's capital
structure and are consequently of higher quality and entail less risk of
declines in market value than the issuer's common stock. However, the extent to
which such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed-income security. The
convertible debt securities in which a Fund may invest are subject to the same
rating criteria as that Fund's investment in non-convertible debt securities.
FIXED-INCOME SECURITIES
All Funds may invest in fixed-income securities. Fixed-income securities in
which the Funds may invest will tend to decrease in value when prevailing
interest rates rise and increase in value when prevailing interest rates fall.
Because the value of a Fund's investments in fixed-income securities is interest
rate sensitive, its performance may be affected by the sub-adviser's ability to
anticipate and respond to fluctuations in market interest rates. Fixed-income
securities that the various Funds may invest in include U.S. Government
Securities, debt obligations of states or municipalities or state or municipal
government agencies or instrumentalities, corporate debt obligations, preferred
stock, zero coupon bonds and deferred interest bonds.
U.S. GOVERNMENT SECURITIES. All of the Funds may purchase U.S. Government
Securities. U.S. Government Securities are obligations issued or guaranteed by
the U.S. Government, its agencies, authorities or instrumentalities. Some U.S.
Government Securities, such as Treasury bills, notes and bonds, which differ
only in their interest rates, maturities and times of issuance, are supported by
the full faith and credit of the United States. Others, such as obligations
issued or guaranteed by U.S. Government agencies, authorities or
instrumentalities are supported either by (a) the full faith and credit of the
U.S. Government (such as securities of the Small Business Administration), (b)
the right of the issuer to borrow from the Treasury (such as securities of the
Federal Home Loan Banks), (c) the discretionary authority of the U.S. Government
to purchase the agency's obligations (such as securities of the Federal National
Mortgage Association), or (d) only the credit of the issuer. No assurance can be
given that the U.S. Government will provide financial support to U.S. Government
agencies, authorities or instrumentalities in the future. U.S. Government
Securities may also include zero coupon bonds.
Securities guaranteed as to principal and interest by the U.S. Government,
its agencies, authorities or instrumentalities are considered to include (a)
securities for which the payment of principal and interest is backed by a
guarantee of or an irrevocable letter of credit issued by the U.S. Government,
its agencies, authorities or instrumentalities and (b) participation in loans
made to foreign governments or their agencies that are so guaranteed. The
secondary market for certain of these participations is limited. Such
participation may therefore be regarded as illiquid.
CORPORATE DEBT OBLIGATIONS. All of the Funds may purchase corporate debt
obligations. Corporate debt securities are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations (credit
risk) and may also be subject to price volatility due to such factors as
interest rate sensitivity, market perception of the creditworthiness of the
issuer and general market liquidity (market risk). Lower rated or unrated
securities are more likely to react to developments affecting market and credit
risk than are more highly rated securities, which react primarily to movements
in the general level of interest rates. A sub-adviser considers both credit risk
and market risk in making investment decisions as to corporate debt obligations
for a Fund.
LOWER RATED CORPORATE DEBT OBLIGATIONS. The corporate debt obligations in
which the Investment Grade Bond Fund, the High Yield Bond Fund, the Balanced
Fund, the Growth Fund and the Emerging Growth Fund may invest may be rated in
the lower rating categories by Standard & Poor's or by Moody's
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(I.E., bonds rated BBB or below by Standard & Poor's or Baa or below by Moody's)
or be unrated. The Investment Grade Bond Fund, the Growth Fund and the Emerging
Growth Fund will limit their investment in lower rated corporate debt
obligations to 5% of their total assets. The Balanced Fund will limit its
investment in lower rated corporate debt obligations to approximately 2% of its
total net assets. The High Yield Bond Fund may invest 100% of its net assets in
lower rated corporate debt obligations. Bonds rated BB or below by Standard &
Poor's or Ba or below by Moody's (or comparable unrated securities), commonly
known as "high yield, high risk," are considered, on balance, speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation and will generally involve more credit risk than
securities in the higher rating categories. As a result, investment in such
bonds will entail greater speculative risks than those associated with
investment in investment-grade bonds (I.E., bonds rated BBB or higher by
Standard & Poor's or Baa or higher by Moody's). The Securities and Exchange
Commission takes the position that bonds rated BB or below by Standard & Poor's
or Ba or below by Moody's (or comparable unrated securities) may be classified
as "junk bonds." No minimum rating standard is required for a purchase of bonds
by the High Yield Bond Fund, the Growth Fund and the Emerging Growth Fund. See
Appendix A to the SAI for a description of the ratings issued by investment
rating services.
An economic downturn could severely affect the ability of highly leveraged
issuers to service their debt obligations or to repay their obligations upon
maturity. Factors having an adverse impact on the market value of lower rated
securities will have an adverse effect on a Fund's net asset value to the extent
it invests in such securities. In addition, a Fund may incur additional expenses
to the extent it is required to seek recovery upon a default in payment of
principal or interest on its portfolio holdings.
The secondary market for high yield, high risk bond securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities, a factor which may have an
adverse effect on a Fund's ability to dispose of a particular security when
necessary to meet its liquidity needs. Under adverse market or economic
conditions, the secondary market for high yield, high risk bond securities could
contract further, independent of any specific adverse changes in the condition
of a particular issuer. As a result, a Fund could find it more difficult to sell
these securities or may be able to sell the securities only at prices lower than
if such securities were widely traded. Prices realized upon the sale of such
lower rated or unrated securities, under these circumstances, may be less than
the prices used in calculating a Fund's net asset value.
Since investors generally perceive that there are greater risks associated
with lower-rated debt securities, the yields and prices of such securities may
tend to fluctuate more than those for higher-rated securities. In the lower
quality segments of the fixed-income securities market, changes in perceptions
of issuers' creditworthiness tend to occur more frequently and in a more
pronounced manner than do changes in higher quality segments of the fixed-income
securities market resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In addition,
the prices of fixed-income securities fluctuate in response to the general level
of interest rates. Fluctuations in the prices of portfolio securities subsequent
to their acquisition will not affect cash income from such securities but will
be reflected in a Fund's net asset value.
Lower-rated (and comparable non-rated) securities tend to offer higher
yields than higher-rated securities with the same maturities because the
historical financial condition of the issuers of such securities may not have
been as strong as that of other issuers. In addition to the risk of default,
there are the related costs of recovery on defaulted issues. The sub-advisers
will attempt to reduce these risks through diversification of these Funds'
portfolios and by analysis of each issuer and its ability to make timely
payments of income and principal, as well as broad economic trends in corporate
developments.
ZERO COUPON BONDS. The Investment Grade Bond Fund, the High Yield Bond
Fund, the Balanced Fund, and the Growth Fund may invest in zero coupon bonds.
Zero coupon bonds are debt obligations which are issued at a significant
discount from face value. The original discount approximates the total amount of
interest the bonds will accrue and compound over the period until maturity or
the first interest accrual date at a rate of interest reflecting the market rate
of the security at the time of issuance. A zero coupon security
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pays no interest to its holder during its life and its value (above its cost to
a Fund) consists of the difference between its face value at maturity and its
cost. Such investments experience greater volatility in market value due to
changes in interest rates than debt obligations which provide for regular
payments of interest.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. All of the Funds may invest in
mortgage-backed securities, which represent direct or indirect participation in,
or are collateralized by and payable from, mortgage loans secured by real
property. The Funds may also invest in asset-backed securities, which represent
participation in, or are secured by and payable from, assets such as motor
vehicle installment sale contracts, installment loan contracts, leases of
various types of real and personal property, receivables from revolving credit
(credit card) agreements and other categories of receivables. Such securities
are generally issued by trusts and special purpose corporations.
Mortgage-backed and asset-backed securities are often subject to more rapid
repayment than their stated maturity dates would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During periods
of declining interest rates, prepayment of loans underlying mortgage-backed and
asset-backed securities can be expected to accelerate, and thus impair the
ability to reinvest the returns of principal at comparable yields. Accordingly,
the market values of such securities will vary with changes in market interest
rates generally and in yield differentials among various kinds of U.S.
Government Securities and other mortgage-backed and asset-backed securities.
Asset-backed securities present certain additional risks that are not presented
by mortgage-backed securities because asset-backed securities generally do not
have the benefit of a security interest in collateral that is comparable to
mortgage assets. There is the possibility that, in some cases, recoveries on
repossessed collateral may not be available to support payments on these
securities.
The Investment Grade Bond Fund, the High Yield Bond Fund and the Balanced
Fund may also invest in parallel pay Collateralized Mortgage Obligations
("CMOs") and Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs
are structured to provide payments of principal on each payment date to more
than one class. These simultaneous payments are taken into account in
calculating the stated maturity date or final distribution date of each class,
which, as with other CMO structures, must be retired by its stated maturity date
or final distribution date, but may be retired earlier. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes.
STRIPPED MORTGAGE-BACKED SECURITIES. The High Yield Bond Fund and the
Growth Fund may invest a portion of their assets in stripped mortgage-backed
securities which are derivative multi-class mortgage securities issued by
agencies or instrumentalities of the United States government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks and investment banks. Stripped
mortgage-backed securities are usually structured with two classes that receive
different proportions of the interest and principal distributions from a pool of
mortgage assets. A common type of stripped mortgage-backed securities will have
one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" Class) while the other class will
receive all of the principal (the principal only or "PO" Class). The yield to
maturity on an IO is extremely sensitive to the rate of principal payments
(including prepayments on the related underlying mortgage assets) and a rapid
rate of principal payments may have a material adverse effect on such security's
yield to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Funds may fail to fully recoup their
initial investment in these securities. The market value of the class consisting
primarily or entirely of principal payments generally is unusually volatile in
response to changes in interest rates. Because stripped mortgage-backed
securities were only recently introduced, established trading markets for these
securities have not yet developed, although the securities are traded among
institutional investors and investment banking firms.
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REPURCHASE AGREEMENTS
All of the Funds may enter into repurchase agreements with "primary dealers"
in U.S. Government Securities and member banks of the Federal Reserve System
which furnish collateral at least equal in value or market price to the amount
of their repurchase obligation. The collateral must consist of U.S. Government
securities or instruments that are rated in the highest rating category by the
requisite NRSROs. In a repurchase agreement, an investor (E.G., a Fund)
purchases a debt security from a seller which undertakes to repurchase the
security at a specified repurchase price on an agreed future date (ordinarily a
week or less). The repurchase price generally exceeds the purchase price by an
amount which reflects an agreed-upon market interest rate for the term of the
repurchase agreement. The primary risk is that, if the seller defaults, a Fund
might suffer a loss to the extent that the proceeds from the sale of the
underlying securities and other collateral held by that Fund in connection with
the related repurchase agreement are less than the repurchase price. In
addition, in the event of bankruptcy of the seller or failure of the seller to
repurchase the securities as agreed, that Fund could suffer losses, including
loss of interest on or principal of the security and costs associated with delay
and enforcement of the repurchase agreement. In evaluating whether to enter into
a repurchase agreement, the applicable sub-adviser will carefully consider the
creditworthiness of the seller.
REVERSE REPURCHASE AGREEMENTS
The Investment Grade Bond Fund, the Balanced Fund, the Growth & Income Fund,
the Growth Fund and the Emerging Growth Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, a Fund sells a security and
agrees to repurchase the same security at a mutually agreed upon date and price.
It may also be viewed as the borrowing of money by the Fund. The Funds will
invest the proceeds of borrowings under reverse repurchase agreements. In
addition, the Funds will enter into a reverse repurchase agreement only when the
interest income to be earned from the investment of the proceeds is greater than
the interest expense of the transaction. The Funds will not invest the proceeds
of a reverse repurchase agreement for a period which exceeds the duration of the
reverse repurchase agreement. A Fund may not enter into reverse repurchase
agreements exceeding in the aggregate one-third of the market value of its total
assets, less liabilities other than the obligations created by reverse
repurchase agreements. Each Fund will establish and maintain with the custodian
a separate account with a segregated portfolio of securities in an amount at
least equal to its purchase obligations under its reverse repurchase agreements.
SWAP TRANSACTIONS
The High Yield Bond Fund and the Growth Fund may, to the extent permitted by
the SEC, enter into privately negotiated "swap" transactions with other
financial institutions in order to take advantage of investment opportunities
generally not available in public markets. In general, these transactions
involve "swapping" a return based on certain securities, instruments, or
financial indexes with another party, such as a commercial bank in exchange for
a return based on different securities, instruments, or financial indexes.
By entering into swap transactions, a Fund may be able to protect the value
of a portion of its securities against declines in market values. A Fund may
also enter into swap transactions to facilitate implementation of allocation
strategies between different market segments or to take advantage of market
opportunities which may arise from time to time. A Fund may be able to enhance
its overall performance if the return offered by the other party to the swap
transaction exceeds the return swapped by the Fund. However, there can be no
assurance that the return a Fund receives from the counterparty to the swap
transaction will exceed the return it swaps to that party.
While a Fund will only enter into swap transactions with counterparties it
considers creditworthy (and will monitor the creditworthiness of parties with
which it enters into swap transactions), a risk inherent in swap transactions is
that the other party to the transaction may default on its obligations under the
swap agreement. If the other party to the swap transaction defaults on its
obligations, a Fund would be limited to contractual remedies under the swap
agreement. There can be no assurance that a Fund will succeed when pursuing its
contractual remedies. To minimize a Fund's exposure in the event of default, the
Funds will usually enter into swap transactions on a net basis (I.E., the
parties to the transaction will net the payments payable to each other before
such payments are made). When a Fund enters into swap transactions on a net
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basis, the net amount of the excess, if any, of the Fund's obligations over its
entitlements with respect to each such swap agreement will be accrued on a daily
basis and an amount of liquid assets having an aggregate market value at least
equal to the accrued excess will be segregated by the Fund's custodian. To the
extent a Fund enters into swap transactions other than on a net basis, the
amount segregated will be the full amount of the Fund's obligations, if any,
with respect to each such swap agreement, accrued on a daily basis.
Swap agreements are considered to be illiquid by the SEC staff and will be
subject to the limitations on illiquid investments. A detailed discussion of the
limitations on illiquid investments is found in "Restricted and Illiquid
Securities" and in the SAI.
INTEREST RATE SWAPS. The High Yield Bond Fund and the Growth Fund may enter
into interest rate swaps for hedging purposes and non-hedging purposes. Since
swaps are entered into for good faith hedging purposes or are offset by a
segregated account, the sub-advisers believe that swaps do not constitute senior
securities as defined in the 1940 Act and, accordingly, will not treat them as
being subject to each Fund's borrowing restrictions. The net amount of the
excess, if any, of a Fund's obligations over its "entitlement" with respect to
each interest rate swap will be accrued on a daily basis and an amount of cash
or liquid high grade debt securities (I.E. securities rated in one of the top
three ratings categories by Moody's or Standard & Poor's, or, if unrated, deemed
by the sub-adviser to be of comparable credit quality) having an aggregate net
asset value at least equal to such accrued excess will be maintained in a
segregated account by the custodian. A Fund will not enter into any interest
rate swap unless the credit quality of the unsecured senior debt or the
claims-paying ability of the other party thereto is considered to be investment
grade by the sub-adviser. If there is a default by the other party to such a
transaction, a Fund will have contractual remedies pursuant to the agreement.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid in comparison with the markets for other similar
instruments which are traded in the interbank market.
The SEC, however, considers interest rate swaps to be illiquid and therefore
subject to the limitations on illiquid investments. A detailed discussion of the
limitations on illiquid investments is found in "Restricted and Illiquid
Securities" and in the SAI.
INDEXED SECURITIES
The High Yield Bond Fund and the Emerging Growth Fund may invest in indexed
securities whose value is linked to foreign currencies, interest rates,
commodities, indices or other financial indicators. Most indexed securities are
short to intermediate term fixed-income securities whose values at maturity
and/or interest rates rise or fall according to the change in one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (I.E., their value may increase or decrease if the underlying
instrument appreciates), and may have return characteristics similar to direct
investments in the underlying instrument or to one or more options on the
underlying instrument. Indexed securities may be more volatile than the
underlying instrument itself.
DOLLAR ROLL TRANSACTIONS
All funds except the Emerging Growth Fund and the International Equity Fund
may enter into mortgage "dollar roll" transactions, with selected banks and
broker-dealers pursuant to which a Fund sells mortgage-backed securities for
delivery in the future (generally within 30 days) and simultaneously contracts
to repurchase substantially similar (same type, coupon and maturity) securities
on a specified future date. A Fund will only enter into covered rolls. A
"covered roll" is a specific type of dollar roll for which there is an
offsetting cash position or a cash equivalent security position which matures on
or before the forward settlement date of the dollar roll transaction. In the
event that the party with whom the Fund contracts to replace substantially
similar securities on a future date fails to deliver such securities, the Fund
may not be able to obtain such securities at the price specified in such
contract and thus may not benefit from the price differential between the
current sales price and the repurchase price.
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WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
All Funds may purchase when-issued securities. When-issued transactions
arise when securities are purchased by a Fund with payment and delivery taking
place in the future in order to secure what is considered to be an advantageous
price and yield to the Fund at the time of entering into the transaction. The
Investment Grade Bond Fund, the Balanced Fund, the Growth & Income Fund, the
Growth Fund and the Emerging Growth Fund may also purchase securities on a
forward commitment basis; that is, make contracts to purchase securities for a
fixed price at a future date beyond customary settlement time. A Fund is
required to hold and maintain in a segregated account with its custodian until
the settlement date cash, U.S. Government Securities or high grade liquid debt
obligations in an amount sufficient to meet the purchase price. Alternatively,
the Fund may enter into offsetting contracts for the forward sale of other
securities that it owns. Purchase of securities on a when-issued or forward
commitment basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date. Although a Fund would generally
purchase securities on a when-issued or forward commitment basis with the
intention of acquiring securities for its portfolio, the Fund may dispose of a
when-issued security or forward commitment prior to settlement if the
sub-adviser deems it advantageous to do so.
LENDING OF PORTFOLIO SECURITIES
All Funds may seek to increase their income by lending portfolio securities.
Under present regulatory policies, such loans may be made to institutions, such
as certain broker-dealers, and are required to be secured continuously by
collateral in cash, cash equivalents, or U.S. Government Securities maintained
on a current basis at an amount at least equal to the market value of the
securities loaned. A Fund may experience a loss or delay in the recovery of its
securities if the institution with which it has engaged in a portfolio security
loan transaction breaches its agreement with the Fund. If the sub-adviser
determines to make securities loans, the value of the securities loaned will not
exceed one-third of the value of the total assets of a Fund except for the
International Equity Fund, which will not loan portfolio securities in excess of
15% of the value of total assets.
RESTRICTED AND ILLIQUID SECURITIES
All Funds may invest in illiquid securities. However, no Fund will invest
more than 15% of its net assets in illiquid investments, which include most
repurchase agreements maturing in more than seven days, currency and interest
rate swaps, time deposits with a notice or demand period of more than seven
days, certain over-the-counter option contracts, participation interests in
loans, securities that are not readily marketable and restricted securities.
Such restriction shall not apply to restricted securities offered and sold to
"qualified institutional buyers" under Rule 144A under the Securities Act of
1933 (the "1933 Act"), to foreign securities which are offered or sold outside
the United States, or with respect to the Growth Fund, to certain Section 4(2)
commercial paper.
The Board of Trustees of the Trust has adopted guidelines and delegated to
the sub-advisers the daily function of determining and monitoring the liquidity
of restricted securities. The Board, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Board will carefully
monitor each Fund's investments in these securities, focusing on such important
factors, among others, as valuation, liquidity and availability of information.
To the extent that qualified institutional buyers become for a time uninterested
in purchasing these restricted securities, this investment practice could have
the effect of decreasing the level of liquidity in a Fund.
The purchase price and subsequent valuation of restricted securities
normally reflect a discount from the price at which such securities would trade
if they were not restricted, since the restriction makes them less liquid. The
amount of the discount from the prevailing market prices is expected to vary
depending upon the type of security, the character of the issuer, the party who
will bear the expenses of registering the restricted securities and prevailing
supply and demand conditions.
BORROWING
The Investment Grade Bond Fund, the High Yield Bond Fund, the Emerging
Growth Fund, the Growth & Income Fund, the Growth Fund and the Balanced Fund may
borrow money but only from banks
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and only borrow money for temporary or short-term purposes. The Funds will not
borrow for leveraging purposes and will maintain continuous asset coverage of at
least 300% (as defined in the 1940 Act) with respect to all of its borrowings.
Should the value of a Fund's assets decline to below 300% of borrowings, the
Fund may be required to sell portfolio securities within three days to reduce
the Fund's debt and restore 300% asset coverage. Borrowing involves interest
costs.
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING COVERED OPTIONS. All of the Funds except the International Equity
Fund may write (sell) covered call and put options on any securities in which
they may invest. All call options written by the Funds are covered, which means
that Fund will own the securities subject to the option so long as the option is
outstanding. All put options written by the Funds are covered, which means that
a Fund would have deposited with its custodian cash, U.S. Government Securities
or other high grade liquid debt securities with a value at least equal to the
exercise price of the put option. Call and put options written by a Fund will
also be considered to be covered to the extent that the Fund's liabilities under
such options are wholly or partially offset by its rights under call and put
options purchased by the Fund or otherwise covered by portfolio positions or by
other means consistent with applicable regulatory policies. The Funds may also
write call and put options on any securities index composed of securities in
which they may invest.
PURCHASING OPTIONS. All of the Funds except the International Equity Fund
may purchase put and call options on any securities in which they may invest or
options on any securities index based on securities in which they may invest.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If a Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
dispose of assets held in a segregated account until the options expire or are
exercised. Similarly, if a Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of the underlying securities. In a closing purchase or sale
transaction, a Fund acquires a position that offsets and cancels an option
position then held by the Fund.
The Funds (other than the International Equity Fund) may purchase and sell
both options that are traded on United States and foreign exchanges and options
traded over-the-counter with broker-dealers who make markets in these options.
The ability to terminate over-the-counter options is more limited than with
exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Until
such time as the staff of the SEC changes its position, the Funds will treat
purchased over-the-counter options and all assets used to cover written
over-the-counter options as illiquid securities. However, for options written
with primary dealers in U.S. Government Securities pursuant to an agreement
requiring a closing purchase transaction at a formula price, the amount of
illiquid securities may be calculated with reference to a formula approved by
the SEC staff.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. For example, the successful use of
puts for hedging purposes depends in part on the ability of the sub-adviser to
predict future price fluctuations and the degree of correlation between the
options and securities markets. If the sub-adviser is incorrect in its
determination of the direction or the extent of the movement of the yield
differential, the investment performance of a Fund will be less favorable than
it would have been in the absence of such option transactions. The Funds pay
brokerage commissions or spreads in connection with their options transactions.
The writing of options could significantly increase a Fund's portfolio turnover
rate.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
To hedge against changes in interest rates, securities prices or currency
exchange rates or to increase total return, the Funds may purchase and sell
various kinds of futures contracts, and purchase and sell call
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and put options on any futures contract that it may purchase or sell. The
futures contracts may be based on various securities (such as U.S. Government
Securities), securities indices, foreign currencies and other financial
instruments and indices. The Funds may also enter into closing purchase and sale
transactions with respect to any futures contract and options that each may
purchase or sell. No Fund will engage in futures and related options
transactions except for bona fide hedging purposes as defined in regulations of
the Commodity Futures Trading Commission ("CFTC") or to increase total return to
the extent permitted by such regulations.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, may require a Fund to
segregate high grade liquid debt securities with a value equal to the amount of
the Fund's obligations unless the obligations are otherwise covered by portfolio
positions or by other means consistent with applicable regulatory policies.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates, securities prices or currency exchange
rates may result in a poorer overall performance for the Fund than if it had not
entered into any futures contracts or options transactions. The loss incurred by
a Fund in writing options on futures is potentially unlimited and may exceed the
amount of the premium received.
In the event of an imperfect correlation between a futures position and a
portfolio position which is intended to be protected, the desired protection may
not be obtained and a Fund may be exposed to risk of loss. The risk of imperfect
correlation may be minimized by investing in contracts whose price behavior is
expected to resemble that of a Fund's underlying securities. The risk that a
Fund will be unable to close out a futures position will be minimized to the
extent that a Fund enters into such transactions on a national exchange with an
active and liquid secondary market. Nonetheless, it is not, for example,
possible to hedge fully or perfectly against currency fluctuations affecting the
value of securities denominated in foreign currencies because the value of such
securities is also likely to fluctuate as a result of independent factors not
related to currency fluctuations. Therefore, perfect correlation between a
Fund's futures positions and portfolio positions will be impossible to achieve.
A Fund's transactions in futures contracts and options thereon may be
limited by the requirements of the Internal Revenue Code of 1986, as amended
(the "Code"), for qualification as a regulated investment company.
FOREIGN TRANSACTIONS
FOREIGN INVESTMENTS. Investments in the securities of companies organized
outside the United States or of companies whose securities are principally
traded outside the United States ("foreign issuers") may offer potential
benefits not available from investments solely in securities of domestic issuers
or dollar denominated securities. Such benefits may include the opportunity to
invest in foreign issuers that appear, in the opinion of the sub-adviser, to
offer better opportunity for long-term capital appreciation or current earnings
than investments in domestic issuers, the opportunity to invest in foreign
countries with economic policies or business cycles different from those of the
United States and the opportunity to reduce fluctuations in portfolio value by
taking advantage of foreign securities markets that do not necessarily move in a
manner parallel to U.S. markets.
Investing in the securities of foreign issuers, including the governments of
foreign nations, involves significant risks that are not typically associated
with investing in U.S. dollar denominated securities or in securities of
domestic issuers. Such investments may be affected by changes in currency rates,
changes in foreign or U.S. laws or restrictions applicable to such investments
and in exchange control regulations (E.G., currency blockage). For example, a
decline in the exchange rate would reduce the value of certain portfolio
investments. In addition, if the exchange rate for the currency in which a Fund
receives interest payments declines against the U.S. dollar before such interest
is paid as dividends to shareholders, the Fund may have to sell portfolio
securities to obtain sufficient cash to pay such dividends. As discussed below,
a
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Fund may employ certain investment techniques to hedge its foreign currency
exposure; however, such techniques also entail certain risks. Some foreign stock
markets may have substantially less volume than, for example, the New York Stock
Exchange and securities of some foreign issuers may be less liquid than
securities of comparable domestic issuers. Commissions and dealer mark-ups on
transactions in foreign investments may be higher than for similar transactions
in the United States. In addition, clearance and settlement procedures may be
different in foreign countries and, in certain markets, on certain occasions,
such procedures have been unable to keep pace with the volume of securities
transactions, thus making it difficult to conduct such transactions. For
example, delays in settlement could result in temporary periods when a portion
of the assets of a Fund are uninvested and no return is earned thereon. The
inability of a Fund to make intended investments due to settlement problems
could cause it to miss attractive investment opportunities. Inability to dispose
of portfolio securities or other investments due to settlement problems could
result either in losses to a Fund due to subsequent declines in value of the
portfolio investment or, if the Fund has entered into a contract to sell the
investment, could result in possible liability to the Fund.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to domestic
companies. There may be less publicly available information about a foreign
issuer than about a domestic issuer. In addition, there is generally less
government regulation of stock exchanges, brokers, and listed and unlisted
issuers in foreign countries than in the United States. Furthermore, with
respect to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, imposition of withholding taxes on dividend or interest
payments, limitations on the removal of funds or other assets of the Fund, or
political or social instability or diplomatic developments which could affect
investments in those countries. Individual foreign economies also may differ
favorably or unfavorably from the United States economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position.
INVESTMENTS IN ADRS AND EDRS. Many securities of foreign issuers are
represented by American Depository Receipts ("ADRs") and European Depository
Receipts ("EDRs"). All Funds may invest in ADRs; the Investment Grade Bond Fund,
the Growth Fund and the International Equity Fund may invest in EDRs as well.
ADRs represent the right to receive securities of foreign issuers deposited in a
domestic bank or a foreign correspondent bank. Prices of ADRs are quoted in U.S.
dollars, and ADRs are traded in the United States on exchanges or
over-the-counter and are sponsored and issued by domestic banks. ADRs do not
eliminate all the risk inherent in investing in the securities of foreign
issuers. To the extent that a Fund acquires ADRs through banks which do not have
a contractual relationship with the foreign issuer of the security underlying
the ADR to issue and service such ADRs, there may be an increased possibility
that the Fund would not become aware of and be able to respond to corporate
actions such as stock splits or rights offerings involving the foreign issuer in
a timely manner. In addition, the lack of information may result in
inefficiencies in the valuation of such instruments. However, by investing in
ADRs rather than directly in the stock of foreign issuers, a Fund will avoid
currency risks during the settlement period for either purchases or sales. In
general, there is a large, liquid market in the United States for ADRs quoted on
a national securities exchange or the NASD's national market system. The
information available for ADRs is subject to the accounting, auditing and
financial reporting standards of the domestic market or exchange on which they
are traded, which standards are more uniform and more exacting than those to
which many foreign issuers may be subject.
Certain of the Funds may also invest in EDRs, which are receipts evidencing
an arrangement with a European bank similar to that for ADRs and are designed
for use in the European securities markets. EDRs are not necessarily quoted in
the same currency as the underlying security.
FOREIGN CURRENCY TRANSACTIONS. Because investment in foreign issuers will
usually involve currencies of foreign countries, and because the Funds may be
exposed to currency exposure independent of their securities positions, the
value of the assets of the Funds invested in foreign issuers as measured in U.S.
dollars will be affected by changes in foreign currency exchange rates. To the
extent that a Fund's assets consist of investments denominated in a particular
currency, the Fund's exposure to adverse developments affecting the value of
such currency will increase.
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An issuer of securities purchased by a Fund may be domiciled in a country
other than the country in whose currency the instrument is denominated or
quoted. Currency exchange rates may fluctuate significantly over short periods
of time causing, along with other factors, a Fund's net asset value to fluctuate
as well. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates also
can be affected unpredictably by intervention by U.S. or foreign governments or
central banks, or the failure to intervene, or by currency controls or political
developments in the U.S. or abroad. The market in forward foreign currency
exchange contracts, currency swaps and other privately negotiated currency
instruments offers less protection against defaults by the other party to such
instruments than is available for currency instruments traded on an exchange. To
the extent that a substantial portion of a Fund's total assets, adjusted to
reflect the Fund's net position after giving effect to currency transactions, is
denominated in the currencies of foreign countries, the Fund will be more
susceptible to the risk of adverse economic and political developments within
those countries. The Funds may enter into forward foreign currency exchange
contracts for hedging purposes in order to protect against anticipated changes
in future foreign currency exchange rates or to increase total return.
The Funds may enter into contracts to purchase foreign currencies to protect
against an anticipated rise in the U.S. dollar price of securities it intends to
purchase. They may enter into contracts to sell foreign currencies to protect
against a decline in value of their foreign currency denominated or quoted
portfolio securities, or a decline in the value of anticipated dividends from
such securities, due to a decline in the value of foreign currencies against the
U.S. dollar. Contracts to sell foreign currency could limit any potential gain
which might be realized by a Fund if the value of the hedged currency increased.
If a Fund enters into a forward foreign currency exchange contract to sell
foreign currency to increase total return or to buy foreign currency for any
purpose, the Fund will be required to place cash, U.S. Government Securities or
high grade liquid debt securities in a SEGREGATED ACCOUNT of the Fund in an
amount equal to the value of the Fund's total assets committed to the
consummation of the forward contract unless the obligations are otherwise
covered by portfolio positions or by other means consistent with applicable
regulatory policies. If the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in a segregated
account so that the value of the account will equal the amount of the Fund's
commitment with respect to the contract.
Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive a Fund of unrealized profits, transaction costs or
expected benefits of a currency hedge or force the Fund to cover its purchase or
sale commitments, if any, at the current market price. A Fund will not enter
into such transactions unless the credit quality of the unsecured senior debt or
the claims-paying ability of the counterparty is considered to be investment
grade by the sub-adviser.
OPTIONS ON CURRENCIES. The High Yield Bond Fund, the Growth & Income Fund,
the Growth Fund and the International Equity Fund may purchase and sell (write)
put and call options on foreign currencies for hedging purposes only to protect
against declines in the U.S. dollar value of foreign portfolio securities and
anticipated dividends on such securities and against increases in the U.S.
dollar cost of foreign securities to be acquired. As with other kinds of option
transactions, however, the writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received. A
Fund could be required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on foreign
currency may constitute an effective hedge against exchange rate fluctuations;
however, in the event of exchange rate movements adverse to a Fund's position,
the Fund may forfeit the entire amount of the premium plus related transaction
costs. Options on foreign currencies to be written or purchased by these Funds
will be traded on U.S. and foreign exchanges or over-the-counter. See "Options
on Securities and Securities Indices" above for a discussion of the liquidity
risks associated with options transactions.
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BRADY BONDS
The High Yield Bond Fund may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public and
private entities in certain emerging markets for new bonds in connection with
debt restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in [Argentina, Brazil, Bulgaria,
Costa Rica, Dominican Republic. Ecuador, Jordan, Mexico, Nigeria, Panama, the
Philippines, Poland, Uruguay and Venezuela]. Brady Bonds have been issued only
recently, and for that reason do not have a long payment history. Brady Bonds
may be collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed-rate bonds or floating-rate bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
EMERGING MARKET SECURITIES
The High Yield Bond Fund and Emerging Growth Fund may invest in securities
of issuers whose principal activities are located in emerging market countries.
Emerging market countries include any country determined by the sub-adviser to
have an emerging market economy, taking into account a number of factors,
including whether the country has a low- to middle-income economy according to
the International Bank for Reconstruction and Development, the country's foreign
currency debt rating, its political and economic stability and the development
of its financial and capital markets. The sub-adviser determines whether an
issuer's principal activities are located in an emerging market country by
considering such factors as its country of organization, the principal trading
market for its securities and the source of its revenues and assets. The
issuer's principal activities generally are deemed to be located in a particular
country if: (a) the security is issued or guaranteed by the government of that
country or any of its agencies, authorities or instrumentalities; (b) the issuer
is organized under the laws of, and maintains a principal office in, that
country; (c) the issuer has its principal securities trading market in that
country; (d) the issuer derives 50% or more of its total revenues from goods
sold or services performed in that country; or (e) the issuer has 50% or more of
its assets in that country.
OTHER INVESTMENT COMPANIES
The Growth & Income Fund and the Growth Fund may invest up to 10% of their
total assets, calculated at the time of purchase, in the securities of other
investment companies, including business development companies, and small
business investment companies. The Funds may not invest more than 5% of their
total assets in the securities of any one investment company or in more than 3%
of the voting securities of any other investment company. The Funds may
indirectly bear their proportionate share of any advisory fees paid by
investment companies in which they invest in addition to the management fee paid
by the Funds.
NON-DIVERSIFIED STATUS
Since the International Equity Fund is not "diversified" as defined by the
1940 Act, it may invest a greater percentage of its assets in any single issuer
than otherwise permissible for diversified investment companies and it will be
more susceptible to adverse developments affecting any single issuer.
Nonetheless, this "non-diversified" Fund is still subject to the diversification
requirements that arise under federal tax law. See "Taxes."
RISKS OF INVESTING IN EMERGING COMPANIES
Investing in securities of smaller, lesser-known companies involves greater
risks than investing in larger, more mature, better known issuers, including an
increased possibility of portfolio price volatility. Historically, small
capitalization stocks and stocks of recently organized companies, in which the
High Yield Bond Fund, the Growth & Income Fund, the Emerging Growth Fund and the
International Equity Fund may also
22
<PAGE>
invest, have been more volatile in price than the larger capitalization stocks
included in the Standard & Poor's 500. Among the reasons for the greater price
volatility of these small company stocks are the less certain growth prospects
of smaller firms, the lower degree of liquidity in the markets for such stocks
and the greater sensitivity of small companies to changing economic conditions.
For example, these companies are associated with higher investment risk than
that normally associated with larger, more mature, better known firms due to the
greater business risks of small size and limited product lines, markets,
distribution channels and financial and managerial resources.
The values of small company stocks may fluctuate independently of larger
company stock prices. Small company stocks may decline in price as large company
stock prices rise, or rise in price as large company stock prices decline. In
addition, in many instances the securities of smaller companies are traded only
over-the-counter or on a regional securities exchange, and the frequency and
volume of their trading is substantially less than is typical of larger
companies. Investors should therefore expect that to the extent a Fund invests
in stock of small capitalization companies, the net asset value of that Fund's
shares may be more volatile than, and may fluctuate independently of broad stock
market indices such as the Standard & Poor's 500. Furthermore, the securities of
companies with small stock market capitalizations may trade less frequently and
in limited volume.
WARRANTS AND RIGHTS
All Funds except the Investment Grade Bond Fund may invest up to 5% of their
net assets (calculated at the time of purchase) in certain warrants or rights
that entitle the holder to buy equity securities at a specific price for a
specific period of time.
SHORT SALES "AGAINST THE BOX"
The Growth & Income Fund, the Growth Fund and International Equity Fund may
make short sales "against the box." In a short sale, a Fund sells a borrowed
security and has a corresponding obligation to the lender to return the
identical security. Each Fund may engage in short sales if at the time of the
short sale the Fund owns or has the right to obtain without additional costs an
equal amount of the security being sold short. This investment technique is
known as a short sale "against the box."
In a short sale, the seller does not immediately deliver the securities sold
and is said to have a short position in those securities until delivery occurs.
If a Fund engages in a short sale, the collateral for the short position will be
maintained by the Trust's custodian or qualified sub-custodian. While the short
sale is open, the Fund will maintain in a segregated account an amount of
securities equal in kind and amount to the securities sold short or securities
convertible into or exchangeable for such equivalent securities. These
securities constitute the Fund's long position.
The Funds do not intend to engage in short sales "against the box" for
investment purposes. A Fund may, however, make a short sale as a hedge, when it
believes that the price of a security may decline, causing a decline in the
value of a security owned by the Fund (or a security convertible or exchangeable
for such security), or when the Fund wants to sell the security at an attractive
current price, but also wishes to defer recognition of gain or loss for U.S.
federal income tax purposes and for purposes of satisfying certain tests
applicable to regulated investment companies under the Code. In such case, any
future losses in the Fund's long position should be offset by a gain in the
short position and, conversely, any gain in the long position should be reduced
by a loss in the short position. The extent to which such gains or losses are
reduced will depend upon the amount of the security sold short relative to the
amount the Fund owns. There will be certain additional transaction costs
associated with short sales "against the box", but the Funds will endeavor to
offset these costs with the income from the investment of the cash proceeds of
short sales.
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<PAGE>
INVESTMENT RESTRICTIONS
Each of the Funds is also subject to certain investment restrictions which
have been adopted by the Trust for each Fund as fundamental policies that cannot
be changed without the approval of a majority of the outstanding votes
attributable to shares of the Fund. Among other restrictions, as diversified
funds, the Investment Grade Bond Fund, the High Yield Bond Fund, the Balanced
Fund, the Growth & Income Fund and the Growth Fund each may not, with respect to
75% of its total assets, purchase the securities of any one issuer (except U.S.
Government Securities) if more than 5% of the value of the Fund's assets would
be invested in such issuer. Similarly, none of the Funds except the High Yield
Bond Fund may invest more than 25% of its total assets in securities of issuers
in any one industry, except that this limitation does not apply to U.S.
Government Securities or foreign currency investments. For a more complete
description of the investment restrictions to which each Fund is subject, see
the SAI.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of the
dollar amount of sales or purchases of portfolio securities by the average
monthly value of the Fund's portfolio securities, excluding securities having a
maturity at the date of purchase of one year or less. The Trust anticipates the
annual portfolio turnover rates for the Funds will not exceed the following:
<TABLE>
<CAPTION>
FUND PORTFOLIO TURNOVER RATE
- --------------------------------------------------------------------------------- -------------------------
<S> <C>
Investment Grade Bond Fund....................................................... 300%
High Yield Bond Fund............................................................. 150%
Balanced Fund.................................................................... 200%
Growth & Income Fund............................................................. 200%
Growth Fund...................................................................... 150%
Emerging Growth Fund............................................................. 95%
International Equity Fund........................................................ 100%
</TABLE>
High rates of portfolio turnover involve correspondingly greater expenses
which must be borne by a Fund and its shareholders and may under certain
circumstances make it more difficult for a Fund to qualify as a regulated
investment company under the Code.
24
<PAGE>
MANAGEMENT
TRUSTEES AND OFFICERS
The Trust's Board of Trustees is responsible for deciding matters of general
policy and reviewing the actions of the Adviser and the sub-advisers, the
custodian, accounting and administrative services provider and other providers
of services to the Trust. The officers of the Trust supervise its daily business
operations. The SAI contains information as to the identity of, and other
information about, the directors and officers of the Trust.
INVESTMENT ADVISER
Alexander Hamilton Capital Management, Inc. (the "Adviser"), 33045 Hamilton
Court, Farmington Hills, Michigan 48334-3358, is the investment adviser of the
Trust and its Funds. Adviser is a wholly-owned subsidiary of the Alexander
Hamilton Life Insurance Company of America ("Alexander Hamilton Life"), a
Michigan stock life insurance company. Alexander Hamilton Life was incorporated
under the laws of Michigan on October 31, 1963. It is principally engaged in the
sale of life insurance and annuities, and is licensed in Canada, the District of
Columbia, and all states except New York. As of December 31, 1994, Alexander
Hamilton Life had assets of over $7 billion. Alexander Hamilton Life is
wholly-owned by Jefferson-Pilot Corporation, a $16 billion asset company based
in Greensboro, North Carolina. Jefferson-Pilot is in the insurance business
through Jefferson-Pilot Life Insurance Company, and in the communications
business through television and radio stations.
The Adviser has little previous experience in providing advisory services.
The Adviser has entered into an investment management agreement, dated
October 9, 1995, with the Trust under which the Adviser assumes overall
responsibility, subject to the supervision of the Trust's Board of Trustees, for
administering all operations of the Trust and for monitoring and evaluating the
management of the assets of each of the Funds by the sub-advisers on an ongoing
basis. The Adviser provides or arranges for the provision of the overall
business management and administrative services necessary for the Trust's
operations and furnishes or procures any other services and information
necessary for the proper conduct of the Trust's business. The Adviser also acts
as liaison among, and supervisor of, the various service providers to the Trust,
including the custodian, transfer agent, and accounting services agent and to
its own administration agent that performs services for the Trust on its behalf.
The Adviser is also responsible for overseeing the Trust's compliance with the
requirements of applicable law and with each Fund's investment objective(s),
policies and restrictions, including oversight of the sub-advisers.
For its services to the Trust, the Adviser receives a monthly management
fee. The fee is deducted daily from the assets of each of the Funds and paid to
the Adviser monthly. The fee for each Fund is based on the average daily net
assets of the Fund at the following annual rates:
<TABLE>
<CAPTION>
FUND ADVISORY FEE
- ------------------------------------------------------------------------------------------ ---------------
<S> <C>
Investment Grade Bond Fund................................................................ 0.60%
High Yield Bond Fund...................................................................... 0.75%
Balanced Fund............................................................................. 0.80%
Growth & Income Fund...................................................................... 0.70%
Growth Fund............................................................................... 0.75%
Emerging Growth Fund...................................................................... 0.80%
International Equity Fund................................................................. 1.00%
</TABLE>
INVESTMENT SUB-ADVISERS
J.P. Morgan Investment Management, Inc. ("Morgan") is the sub-adviser to the
Investment Grade Bond Fund and the Balanced Fund. Morgan, with principal offices
at 522 Fifth Avenue, New York, NY 10036, is a wholly-owned subsidiary of J.P.
Morgan & Co. Incorporated, a bank holding company organized under the laws of
Delaware. Morgan offers a wide range of investment management services and acts
as investment adviser to corporate and institutional clients. As of June 30,
1995, Morgan had assets under management of over $130 billion. Subject to the
supervision of the Trustees and the Adviser, Morgan makes the day-to-day
investment decisions, arranges for the execution of portfolio transactions and
generally manages the investments of the Investment Grade Bond and Balanced
Funds.
25
<PAGE>
Morgan uses a sophisticated, disciplined, collaborative process for managing
all asset classes. The following persons are primarily responsible for the
day-to-day management and implementation of Morgan's process for the Investment
Grade Bond Fund (his or her business experience for the past 5 years is
indicated parenthetically): Harriet T. Huber, Vice President (employed by Morgan
since 1989) and Mark E. Smith, Vice President (employed by Morgan since 1994,
previously fixed income portfolio manager with Allied Signal, Inc.). The
following persons are primarily responsible for the day-to-day management and
implementation of Morgan's process for the Balanced Fund: Michael J. Kelly, Vice
President (employed by Morgan since 1985) and Harriet T. Huber, Vice President
(employed by Morgan since 1989).
Massachusetts Financial Services Company ("MFS") is the sub-adviser to the
High Yield Bond Fund and the Emerging Growth Fund. MFS serves as investment
adviser to a variety of individual and institutional investors, including mutual
funds. MFS was established in 1924 and is a wholly owned subsidiary of SunLife
Assurance Company of Canada (U.S.). As of December 31, 1995, the firm managed
approximately $42.2 billion of assets and 1.8 million investor accounts.
Robert J. Manning, Senior Vice President, is primarily responsible for the
day-to-day management of the High Yield Bond Fund's portfolio. Mr. Manning has
been with MFS since 1984.
John W. Ballen, Senior Vice President & Director of Equity Portfolio
Management, and Mark E. Stoeckle, Vice President, are together primarily
responsible for the management of the Emerging Growth Fund. Mr. Ballen joined
MFS in 1984. Mr. Stoeckle joined MFS in 1993 after eight years of investment
banking experience with Bear Stearns. Mr. Stoeckle has actively managed equity
portfolios on behalf of MFS institutional clients since 1993.
Warburg, Pincus Counsellors, Inc. ("Counsellors"), serves as the sub-adviser
to the Growth & Income Fund. Counsellors is a wholly-owned subsidiary of
Warburg, Pincus Counsellors, G.P. ("Counsellors G.P."), a New York general
partnership. E.M. Warburg, Pincus & Co., Inc. ("EMW") controls Counsellors
through its ownership of a class of voting preferred stock of Counsellors.
Counsellors, organized in 1970, is a professional investment counselling firm
which provides investment services to investment companies, employee benefit
plans, endowment funds, foundations and other institutions and individuals. As
of June 30, 1995, Counsellors managed over $10.8 billion in assets, including
approximately $4.9 billion of assets of nineteen investment companies or
portfolios. Counsellors' offices are located at 466 Lexington Avenue, New York,
New York 10017-3147. As sub-adviser to the Growth & Income Fund, Counsellors is
responsible for the investment of the Fund's assets.
Anthony G. Orphanos, a Managing Director of EMW has been with Counsellors
for over seventeen years and is the chief investment officer and responsible for
the day-to-day management of the Growth & Income Fund's investments. Mr.
Orphanos manages other investment portfolios with investment objectives and
policies similar to those of the Growth & Income Fund. Mr. Orphanos has over
twenty-three years of investment experience.
Strong Capital Management, Inc. ("Strong"), the sub-adviser to the Growth
Fund, was organized in 1974. Since then, Strong's principal business has been
providing continuous investment supervision for individuals and institutional
accounts, such as pension funds and profit-sharing plans. The sub-adviser also
acts as investment adviser for its own propriety mutual funds. As of June 30,
1995, the sub-adviser managed over $14 billion in assets. Strong's principal
mailing address is P.O. Box 2936, Milwaukee, Wisconsin 53201. Richard S. Strong
is the controlling shareholder of the sub-adviser.
Subject to the supervision of the Trust's Trustees and the Adviser, Strong
manages the Growth Fund's portfolio in accordance with its stated investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities on behalf of the Fund, and administers the
affairs of the Fund. The portfolio manager for the Growth Fund is Mr. Ronald C.
Ognar. Mr. Ognar, a Chartered Financial Analyst with more than twenty-five years
of investment experience, joined the Adviser in April 1993 after two years as a
principal and portfolio manager with RCM Capital Management. For approximately
three years prior to that, he was a portfolio manager at Kemper Financial
Services in Chicago. Mr. Ognar began his investment career in 1968 at LaSalle
National Bank in Chicago after serving two years in the U.S. Army. He received
his bachelor's degree in accounting from the University of Illinois in 1968. In
addition to his duties as portfolio manager of the Fund, he also co-manages the
Strong Total Return Fund.
26
<PAGE>
Lombard Odier, the sub-adviser to the International Equity Fund, provides
investment advisory services with respect to the Fund's investments in foreign
securities, including recommending optimal geographic and equity allocation.
Lombard Odier is wholly-owned by Lombard, Odier & Cie ("LOC"), one of the
largest and oldest private banks in Switzerland, established in 1798. Mr. Jean
Bonna, a Managing Partner of LOC, is Chairman of Lombard Odier. Mr. Robert van
Maasdijk is the Managing Director of Lombard Odier. Lombard Odier presently
serves as investment sub-adviser to one open-end investment company and one
closed-end investment company.
The Trust retains Lombard Odier to manage the investment of the
International Equity Fund's assets and to place orders for the purchase and sale
of portfolio securities. Lombard Odier will be primarily responsible for
recommending the allocation of investments among various international markets
and currencies, recommendation and selection of particular securities in the
international markets, and placement of portfolio transactions in the foreign
equity markets. Although overall strategy is set by the Lombard Odier Strategy
Committee, Mr. Ronald Armist (14 years of investment experience) and Mr. Omid
Kamshad (19 years of investment experience) will primarily be responsible for
the day-to-day management of the International Equity Fund.
INVESTMENT ADVISORY AGREEMENTS. Each sub-adviser has entered into an
investment advisory agreement with the Adviser under which the sub-adviser,
subject to the general supervision of the Adviser and the Trust's Board of
Trustees, manages the investment portfolio of the Fund(s) of which it is the
sub-adviser. Under the investment advisory agreements, the sub-advisers are
responsible for making investment decisions for the Funds and for placing the
purchase and sale orders for the portfolio securities of each Fund. The
sub-advisers may place orders for portfolio transactions with any broker
including, to the extent and in the manner permitted by applicable law,
affiliated brokers.
As compensation for its services, the sub-advisers receive a monthly fee
from the Adviser based on the average daily net assets of each Fund at the
following annual rates:
<TABLE>
<CAPTION>
SUB-ADVISER SUB-ADVISORY FEE
- -------------------------------------------------------------------------------------- -------------------
<S> <C>
J.P. Morgan (Investment Grade Bond Fund).............................................. 0.30%
J.P. Morgan (Balanced Fund)*.......................................................... 0.45%
MFS (High Yield Bond Fund)**.......................................................... 0.40%
MFS (Emerging Growth)**............................................................... 0.40%
Warburg Pincus Counsellors (Growth & Income Fund)..................................... 0.50%
Strong (Growth Fund)*................................................................. 0.60%
Lombard Odier (International Equity Fund)............................................. 0.50%
</TABLE>
- ------------------------
* At certain specified net asset levels, the sub-advisory fee for the Balanced
Fund and the Growth Fund will each decrease as a percentage of net assets.
Specifically, the sub-advisory fee for the Balanced Fund equals 0.45% of the
Fund's net assets up to $100 million, 0.40% of net assets between $100
million and $200 million, 0.35% of net assets between $200 million and $400
million and 0.30% of net assets above $400 million. The sub-advisory fee for
the Growth Fund equals 0.60% of the Fund's net assets up to $25 million,
0.50% of net assets between $25 million and $50 million, 0.40% of net assets
between $50 million and $100 million and 0.30% of net assets above $100
million.
** MFS has voluntarily agreed to waive its sub-advisory fee for the period
2/8/96 to 8/8/96 and 2/8/96 to 11/8/96 for the High Yield Bond and Emerging
Growth Funds respectively.
See the SAI for more detailed information about the investment advisory
agreements.
PERFORMANCE INFORMATION
From time to time the Trust may publish average annual total return figures
for one or more of the Funds in advertisements, and communications to
shareholders or sales literature. Average annual total return is determined by
computing the annual percentage change in value of $1,000 invested for specified
27
<PAGE>
periods ending with the most recent calendar quarter, assuming reinvestment of
all dividends and distributions at net asset value. The average annual total
return calculation assumes a complete redemption of the investment at the end of
the relevant period.
The Trust also may from time to time publish year-by-year total return,
cumulative total return and yield information for the Funds in advertisements,
communications to shareholders or sales literature. These may be provided for
various specified periods by means of quotations, charts, graphs or schedules.
Year-by-year total return and cumulative total return for a specified period are
each derived by calculating the percentage rate required to make a $1,000
investment in a Fund (assuming all distributions are reinvested) at the
beginning of such period equal to the actual total value of such investment at
the end of such period.
Certain Funds also may advertise their yield. Yield is computed by dividing
net investment income earned during a recent 30 day period by the product of the
average daily number shares outstanding and entitled to receive dividends during
the period and the price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semi-annual) basis and then
annualized. Net investment income per share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from the
net investment income determined for accounting purposes.
In addition, the Trust may from time to time publish performance of its
Funds relative to certain performance rankings and indices.
The investment results of the Funds will fluctuate over time and any
presentation of investment results for any prior period should not be considered
a representation of what an investment may earn or what a Fund's performance may
be in any future period. In addition to information provided in shareholder
reports, the Trust may, in it's discretion, from time to time make a list of the
Fund's holdings available to investors upon request.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is normally determined once daily
as of the close of regular trading on the New York Stock Exchange, currently
4:00 p.m. New York time, on each day when the New York Stock Exchange is open,
except as noted below. The New York Stock Exchange is scheduled to be open
Monday through Friday throughout the year, except for certain federal and other
holidays. The net asset value of each Fund's shares will not be calculated on
the Friday following Thanksgiving, the Friday following Christmas if Christmas
falls on a Thursday and the Monday before Christmas if Christmas falls on a
Tuesday. The net asset value of each Fund is determined by dividing the value of
the Fund's securities, cash, and other assets (including accrued but uncollected
interest and dividends), less all liabilities (including accrued expenses but
excluding capital and surplus) by the number of shares of the Fund outstanding.
The value of each Fund's securities and assets, except those of certain
short-term debt securities held by the Funds, is determined on the basis of
their market values. All short-term debt securities having remaining maturities
of sixty days or less held by the Funds are valued by the amortized cost method,
which is intended to approximate market value. Investments for which market
quotations are not readily available are valued at their fair value as
determined in good faith by, or under authority delegated by, the Trust's Board
of Trustees. See "Determination of Net Asset Value" in the SAI.
OFFERING, PURCHASE AND REDEMPTION OF SHARES
Shares of the Funds are sold in a continuous offering and are authorized to
be offered to the Alexander Hamilton Variable Annuity Separate Account (the
"Account") to support variable annuity contracts. Net purchase payments under
the Contracts are placed in one or more subaccounts of the Account and the
assets of each such subaccount are invested in the shares of the Fund
corresponding to that subaccount. The Account purchases and redeems shares of
the Funds for its subaccounts at net asset value without sales or redemption
charges.
28
<PAGE>
For each day on which a Fund's net asset value is calculated, the Account
transmits to the Trust any orders to purchase or redeem shares of the Fund(s)
based on the purchase payments, redemption (surrender) requests, and transfer
requests from Contract owners, annuitants and beneficiaries that have been
processed on that day. The Account purchases and redeems shares of each Fund at
the Fund's net asset value per share calculated as of that same day although
such purchases and redemptions may be executed the next morning. Money received
by the Trust from the Account for the purchase of shares of the International
Equity Fund may not be invested by those Funds until the day following the
execution of such purchases.
Please refer to the separate prospectus for the Contract and the Account for
a more detailed description of the procedures whereby a Contract owner,
annuitant, or beneficiary may allocate his or her interest in the Account to a
subaccount using the shares of one of the Funds as an underlying investment
medium.
In the future, the Trust may offer shares of one or more of the Funds
(including new funds that might be added to the Trust) to other registered or
unregistered separate accounts of Alexander Hamilton Life to support variable
annuity contracts (other than the Contracts) or variable life insurance
contracts. Likewise, the Trust may also, in the future, offer shares of one or
more of the Funds directly to qualified pension and retirement plans.
In the event that shares of any Fund are offered to a separate account
supporting variable life insurance or to qualified pension and retirement plans,
a potential for certain conflicts may exist between the interests of variable
annuity contract owners, variable life insurance contract owners and plan
participants. The Trust currently does not foresee any disadvantage to owners of
the Contracts arising from the fact that shares of any Fund might be held by
such entities. In such an event, the Trust's Board of Trustees, however, will
monitor the Funds in order to identify any material irreconcilable conflicts of
interest which may possibly arise, and to determine what action, if any, should
be taken in response to such conflicts.
INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Funds intend to distribute substantially all of their net investment
income annually. Each Fund also intends to annually distribute substantially all
of its net realized capital gains. All income dividends and capital gain
distributions made by a Fund will be reinvested in shares of that Fund at the
Fund's net asset value.
TAXES
TAX STATUS. The Trust believes that each Fund will qualify as a regulated
investment company under Subchapter M, Chapter 1, Subtitle A of the Code and
each Fund intends to distribute substantially all of its net income and net
investment capital gain to its shareholders. As a result, under the provisions
of subchapter M, there should be little or no income or gains taxable to the
Funds. In addition, each Fund intends to comply with certain other distribution
rules specified in the Code so that it will not incur a 4% nondeductible federal
excise tax that otherwise would apply. Under current law, the net income of the
Funds, including net capital gain, is not taxed to Alexander Hamilton Life to
the extent that it is applied to increase the reserves held by Alexander
Hamilton Life in respect of the annuity contracts.
SOURCES OF GROSS INCOME. To qualify for treatment as a regulated investment
company, a Fund must, among other things, derive its income from certain
sources. Specifically, in each taxable year, a Fund must generally derive at
least 90% of its gross income from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of securities or
foreign currencies, or other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of
investing in securities, or currencies. A Fund must also generally derive less
than 30% of its gross income from the sale or other disposition of any of the
following which was held for less than three months: (1) stock or securities,
(2) options, futures, or forward contracts (other than options, futures, or
forward contracts on foreign currencies), or (3) foreign currencies (or options,
futures, or forward contracts on foreign currencies) but only if such currencies
(or options, futures, or forward contracts) are not directly related to the
Fund's principal business of investing in stock or securities (or options and
futures with respect to stock or securities). For purposes of these tests, gross
income generally is determined without regard to losses from the sale or other
disposition of stock or securities or other Fund assets.
29
<PAGE>
DIVERSIFICATION OF ASSETS. To qualify for treatment as a regulated
investment company, a Fund must also satisfy certain requirements with respect
to the diversification of its assets. A Fund must have, at the close of each
quarter of the taxable year, at least 50% of the value of its total assets
represented by cash, cash items, United States Government securities, securities
of other regulated investment companies, and other securities which, in respect
of any one issuer, do not represent more than 5% of the value of the assets of
the Fund nor more than 10% of the voting securities of that issuer. In addition,
at those times not more than 25% of the value of the Fund's assets may be
invested in securities (other than United States Government securities or the
securities of other regulated investment companies) of any one issuer, or of two
or more issuers which the Fund controls and which are engaged in the same or
similar trades or businesses or related trades or businesses. For purposes of
the Fund's requirements to maintain diversification for tax purposes, the issuer
of a loan participation will be the underlying borrower. In cases where the Fund
does not have recourse directly against the borrower, both the borrower and each
agent bank and co-lender interposed between the Fund and the borrower will be
deemed issuers of the loan participation for tax diversification purposes. The
Fund's investments in U.S. Government Securities are not subject to these
limitations. The foregoing diversification requirements are in addition to those
imposed by the Investment Company Act of 1940.
Because the Trust is established as an investment medium for variable
annuity contracts, Section 817(h) of the Code imposes additional diversification
requirements on each Fund. These requirements generally are that no more than
55% of the value of the assets of a Fund may be represented by any one
investment; no more than 70% by any two investments; no more than 80% by any
three investments; and no more than 90% by any four investments. For these
purposes, all securities of the same issuer are treated as a single investment
and each United States government agency or instrumentality is treated as a
separate issuer.
FOREIGN INVESTMENTS. Funds investing in foreign securities or currencies
may be required to pay withholding or other taxes to foreign governments.
Foreign tax withholding from dividends and interest, if any, is generally at a
rate between 10% and 35%. The investment yield of the Funds that invest in
foreign securities or currencies will be reduced by these foreign taxes.
Shareholders will bear the cost of any foreign tax withholding, but may not be
able to claim a foreign tax credit or deduction for these foreign taxes. Funds
investing in securities of passive foreign investment companies may be subject
to U.S. Federal income taxes and interest charges, and the investment yield of
the Funds making such investments will be reduced by these taxes and interest
charges. Shareholders will bear the cost of these taxes and interest charges,
but will not be able to claim a deduction for these amounts.
ADDITIONAL TAX CONSIDERATIONS. If a Fund failed to qualify as a regulated
investment company, owners of Contracts based on the Fund (1) might be taxed
currently on the investment earnings under their Contracts and thereby lose the
benefit of tax deferral, and (2) the Fund might incur additional taxes. In
addition, if a Fund failed to comply with the diversification requirements of
Section 817(h) of the Code, owners of Contracts based on the Fund would be taxed
on the investment earnings under their Contracts and thereby lose the benefit of
tax deferral. Accordingly, compliance with the above rules is carefully
monitored by the sub-advisers and it is intended that the Funds will comply with
these rules as they exist or as they may be modified from time to time.
Compliance with the tax requirements described above may result in a reduction
in the return under a Fund, since, to comply with the above rules, the
investments utilized (and the time at which such investments are entered into
and closed out) may be different from that the sub-adviser might otherwise
believe to be desirable.
The shareholders of the Funds are currently limited to the Account and the
Company. For more information regarding the tax implications for the purchaser
of a Contract who allocates investments to the Funds, please refer to the
prospectus for the Contract.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations currently in effect. It is not
intended to be a complete explanation or a substitute for consultation with
individual tax advisors. For the complete provisions, reference should be made
to the pertinent Code sections and the Treasury Regulations promulgated
thereunder. The Code and Regulations are subject to change.
30
<PAGE>
OTHER INFORMATION
REPORTS
Annual Reports containing audited financial statements of the Trust and
Semi-Annual Reports containing unaudited financial statements, as well as proxy
materials, are sent to Contract owners, annuitants or beneficiaries, as
appropriate. Inquiries may be directed to the Trust at the telephone number or
address set forth on the cover page of this prospectus.
VOTING AND OTHER RIGHTS
Each share outstanding is entitled to one vote on all matters submitted to a
vote of shareholders (of a Fund or the Trust) and is entitled to a pro rata
share of any distributions made by a Fund and, in the event of liquidation, of
its net assets remaining after satisfaction of outstanding liabilities. Each
share (of each Fund), when issued, is nonassessable and has no preemptive or
conversion rights. The shares have noncumulative voting rights. Alexander
Hamilton Life will vote shares of a Fund held by the Account which are
attributable to Contracts in accordance with instructions received from Contract
owners, annuitants and beneficiaries as provided in the prospectus for the
Contracts. Fund shares held by the Account as to which no instructions have been
received will be voted for or against any proposition, or in abstention, in the
same proportion as the shares of the Account as to which instructions have been
received. Fund shares held by any registered separate account of Alexander
Hamilton Life or its affiliates that are not attributable to Contracts will also
be voted for or against any proposition in the same proportion as the shares for
which voting instructions are received by that separate account. However, if the
Trust determines that it is permitted to vote any such shares of a Fund in its
own right, it may elect to do so, subject to the then current interpretation of
the 1940 Act and the rules thereunder.
As a Massachusetts business trust, the Trust is not required to hold regular
annual shareholder meetings. The Trust is, however, required to hold shareholder
meetings for the following purposes: (i) approving certain agreements as
required by the 1940 Act; (ii) changing fundamental investment objectives,
policies and restrictions of any Fund; and (iii) filling vacancies on the board
of trustees in the event that less than a majority of the Trustees were elected
by shareholders. Trustees may also be removed by shareholders by a vote of
two-thirds of the outstanding votes attributable to shares of all Funds at a
meeting called at the request of holders of 10% or more of such votes. The Trust
has the obligation to assist in shareholder communications.
The Jefferson-Pilot Employees' Retirement Benefit Plan and Alexander
Hamilton Life own more than 25% of the outstanding shares of each Fund which may
result in it being deemed a controlling person of each of these Funds, as that
term is defined in the 1940 Act.
CUSTODY OF ASSETS
Pursuant to a custody agreement with the Trust, Bank of New York serves as
the custodian of the Funds' assets.
ACCOUNTING AND ADMINISTRATIVE SERVICES
Pursuant to the Fund Accounting and Administrative Service agreements, Bank
of New York also performs certain accounting services for the Trust. These
services include maintaining and keeping current the Trust's books, accounts,
records, journals and other records of original entry related to the Trust's
business, performing certain daily functions related thereto, including
calculating each Fund's daily net asset value. Bank of New York is responsible
for providing certain administrative services to the Trust such as calculating
each Fund's standardized performance information, preparing annual and
semi-annual reports to shareholders and the SEC, preparing each Fund's tax
returns, monitoring compliance and performing other administrative duties.
TRANSFER AGENT
Pursuant to a service agreement with the Trust, Bank of New York also acts
as a transfer, redemption and dividend disbursing agent for the Trust.
31
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PART B
-----------------------------------
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
ALEXANDER HAMILTON VARIABLE INSURANCE TRUST
INVESTMENT GRADE BOND FUND
HIGH YIELD BOND FUND
BALANCED FUND
GROWTH & INCOME FUND
GROWTH FUND
EMERGING GROWTH FUND
INTERNATIONAL EQUITY FUND
November 1, 1995
This Statement of Additional Information is not a prospectus. Much of the
information contained in this Statement expands upon information discussed in
the prospectus for Alexander Hamilton Variable Insurance Trust (the "Trust") and
should, therefore, be read in conjunction with the prospectus for the Trust. To
obtain a copy of the prospectus with the same date as this Statement of
Additional Information write to the Trust at its Administrative Service Center,
P.O. Box 19497, Newark, New Jersey 07195-0497 or call 1-(800)-289-1776.
<PAGE>
TABLE OF CONTENTS
Page
----
INTRODUCTION................................................. 3
ADDITIONAL INVESTMENT POLICY INFORMATION .................... 5
Investment Grade Bond Fund ............................. 5
High Yield Bond Fund.................................... 7
Balanced Fund .......................................... 12
Growth & Income Fund ................................... 13
Growth Fund ............................................ 14
Emerging Growth Fund ................................... 15
International Equity Fund .............................. 17
SPECIAL INVESTMENT METHODS AND RISKS ........................ 20
Restricted and Illiquid Securities ..................... 20
Options on Securities and Securities Indices ........... 21
Futures Contracts and Options on Futures Contracts ..... 28
Foreign Investments .................................... 36
Fixed-Income Securities ................................ 45
Warrants and Rights .................................... 55
Swap and Related Transactions .......................... 55
Short Sales "Against the Box" .......................... 57
Dollar Roll Transactions ............................... 59
Emerging Market Securities.............................. 60
INVESTMENT RESTRICTIONS ..................................... 62
Fundamental Restrictions ............................... 62
Non-fundamental Restrictions ........................... 69
Interpretive Rules ..................................... 74
INVESTMENT ADVISER .......................................... 75
Investment Management Agreement ........................ 76
Expenses of the Trust .................................. 80
<PAGE>
Page
-----
PORTFOLIO TRANSACTIONS AND BROKERAGE ........................ 81
DETERMINATION OF NET ASSET VALUE ............................ 83
PERFORMANCE INFORMATION ..................................... 87
SHARES OF STOCK ............................................. 92
CUSTODY OF ASSETS ........................................... 95
TRUSTEES AND OFFICERS ....................................... 98
OTHER INFORMATION ........................................... 103
Financial Statements ................................... 103
Legal Counsel .......................................... 103
Other Information ...................................... 103
APPENDIX A .................................................. 105
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INTRODUCTION
The Alexander Hamilton Variable Insurance Trust (the "Trust") is an open-
end management investment company established as a Massachusetts business trust
under a Declaration of Trust dated September 16, 1994. The Trust consists of
seven separate investment portfolios or funds (the "Funds" or a "Fund"), each of
which is, in effect, a separate mutual fund. The Trust issues a separate class
of shares for each Fund representing fractional undivided interests in that
Fund. An investor, by investing in a Fund, becomes entitled to a pro-rata share
of all dividends and distributions arising from the net income and capital gains
on the investments of that Fund. Likewise, an investor shares pro-rata in any
losses of that Fund.
Pursuant to an investment management agreement and subject to the authority
of the Trust's Board of Trustees, Alexander Hamilton Capital Management, Inc.
(the "Adviser") serves as the Trust's investment adviser and conducts the
business and affairs of the Trust. The Adviser has engaged the following
advisers to act as sub-adviser to provide the day-to-day portfolio management
for the respective Fund(s).
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- --------------------------------------------------------------------------------
FUND SUB-ADVISER
- --------------------------------------------------------------------------------
Investment Grade Bond Fund J. P. Morgan Investment
Management, Inc.
- --------------------------------------------------------------------------------
High Yield Bond Fund Massachusetts Financial
Services Company
- --------------------------------------------------------------------------------
Balanced Fund J. P. Morgan Investment
Management, Inc.
- --------------------------------------------------------------------------------
Growth & Income Fund Warburg, Pincus Counsellors,
Inc.
- --------------------------------------------------------------------------------
Growth Fund Strong Capital Management, Inc.
- --------------------------------------------------------------------------------
Emerging Growth Fund Massachusetts Financial
Services Company
- --------------------------------------------------------------------------------
International Equity Fund Lombard Odier International
Portfolio Management Limited
- --------------------------------------------------------------------------------
The Trust currently offers each class of its shares only to the Alexander
Hamilton Variable Annuity Separate Account (a separate account of the Alexander
Hamilton Life Insurance Company of America) as the underlying funding vehicle
for certain variable annuity contracts (the "Contracts"). The Trust does not
offer its shares directly to the general public. The Alexander Hamilton
Variable Annuity Separate Account, like the Trust, is registered as an
investment company with the Securities and Exchange Commission ("SEC") and a
separate prospectus, which accompanies the prospectus for the Trust (the
"Prospectus"), describes the Separate Account and the Contracts. The prospectus
for the Separate Account and the Contracts also has a statement
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<PAGE>
of additional information similar to this Statement of Additional Information.
The Trust may, in the future, offer its stock to other registered and
unregistered separate accounts of the Alexander Hamilton Life Insurance Company
and its affiliates supporting other variable annuity contracts or variable life
insurance contracts and to qualified pension and retirement plans.
Terms appearing in this Statement of Additional Information that are
defined in the Prospectus have the same meaning herein as in the Prospectus.
ADDITIONAL INVESTMENT POLICY INFORMATION
INVESTMENT GRADE BOND FUND
The Investment Grade Bond Fund seeks high total return consistent with
moderate risk of capital and maintenance of liquidity. Subject to this
investment objective, the sub-adviser will consider the total rate of return on
portfolio securities in managing the Fund. Under normal market or economic
conditions, the Fund will invest a majority of its assets in investment grade
debt obligations and money market instruments.
The Investment Grade Bond Fund may or may not be suitable or appropriate
for all investors. The Fund is not a money market fund and is not an
appropriate investment for those whose primary objective is stability of
principal. The value of the portfolio
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<PAGE>
securities of the Fund will fluctuate based upon market, economic, and to some
degree, foreign exchange conditions. Although the Fund seeks to reduce risk by
investing in a diversified portfolio, such diversification does not eliminate
all risk. There is no assurance, however, that the Fund will achieve this
result.
Yields on short, intermediate, and long-term securities are dependent on a
variety of factors, including the general conditions of the money, bond and
foreign exchange markets, the size of a particular offering, the maturity of the
obligation, and the rating of the issue. Debt securities with longer maturities
tend to produce higher yields and are generally subject to potentially greater
capital appreciation and depreciation than obligations with shorter maturities
and lower yields. The market prices of debt securities usually vary, depending
upon available yields (known as market risk). An increase in interest rates
will generally reduce the value of portfolio investments, and a decline in
interest rates will generally increase the value of portfolio investments. The
ability of the Investment Grade Bond Fund to achieve its investment objective is
also dependent on the continuing ability of the issuers of the debt securities
to meet their obligations for the payment of interest and principal when due
(known as credit risk).
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<PAGE>
HIGH YIELD BOND FUND
The High Yield Bond Fund seeks a high level of current income. The Fund
will seek to achieve its objective by investing primarily in corporate debt
obligations(1/) with emphasis on higher-yielding, higher risk, lower-rated or
unrated securities. Under normal conditions, the sub-adviser expects that the
Fund's assets will primarily consist of a diversified portfolio of high-
yielding bonds, convertible securities and preferred stock.
The High Yield Bond Fund intends to invest a substantial portion of its
assets in fixed-income securities offering high current income. Such high
yielding fixed-income securities are ordinarily in the lower rating categories
of Moody's or Standard & Poor's or will be unrated securities of comparable
quality. Such securities are commonly known as "junk bonds." These lower-rated
fixed-income securities are considered, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation and will generally involve more credit risk than
securities in the higher rating categories. The market values of such
securities tend to reflect individual corporate developments to a greater extent
than do higher-rated securities, which react primarily to fluctuations in the
general level of interest rates.
- --------------------
1/ The maturities of these securities is expected to range from 8 to 12 years.
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<PAGE>
Such lower-rated securities also tend to be more sensitive to economic
conditions than are higher-rated securities. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, regarding lower-rated
bonds may depress prices and liquidity for such securities. Factors adversely
affecting the market value of high yielding securities will adversely affect the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent it were required to seek recovery upon a default in the payment of
principal or interest on its portfolio holdings. Although some risk is inherent
in all securities ownership, holders of fixed-income securities have a claim on
the assets of the issuer prior to the holders of common stock. Therefore, an
investment in fixed-income securities generally entails less credit risk than an
investment in common stock of the same issuer.
The sub-adviser's judgment as to the "reasonableness" of the risk involved
in any particular investment will be a function of its experience in managing
fixed-income investments and its evaluation of general economic and financial
conditions of a specific issuer.
In some circumstances, defensive strategies may be implemented to preserve
or enhance capital even at the sacrifice of current yield. Defensive
strategies, which may be used singly or in any combination, may include, but are
not limited to,
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<PAGE>
investments in zero coupon bonds or investments in money market instruments.
High yielding securities may be issued by corporations in the growth stage
of their development. They may also be issued in connection with a corporate
reorganization or as part of a corporate takeover. Companies that issue such
high yielding securities are often highly leveraged and may not have available
to them more traditional methods of financing. Therefore, the risk associated
with acquiring the securities of such issuers generally is greater than is the
case with higher-rated securities. For example, during an economic downturn or
a sustained period of rising interest, highly leveraged issuers of high yielding
securities may experience financial stress. During such periods, such issuers
may not have sufficient revenues to meet their interest payment obligations.
The issuer's ability to service its debt obligations may also be adversely
affected by specific corporate developments, or the issuer's inability to meet
specific projected business forecasts, or the unavailability of additional
financing. The risk of loss due to default by the issuer is significantly
greater for the holders of high yielding securities because such securities are
generally unsecured and are often subordinated to other creditors of the issuer.
High yielding securities frequently have call or buy-back features that
would permit an issuer to call or repurchase the
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<PAGE>
security from the Fund. If a call were exercised by the issuer during a period
of declining interest rates, the Fund would likely have to replace such called
security with a lower yielding security, thus decreasing the net investment
income to the Fund. The premature disposition of a high yielding security
because of a call or buy-back feature, the deterioration of the issuer's
creditworthiness or a default may also make it more difficult for the Fund to
time its receipt of income, which may have tax implications.
The Fund may have difficulty disposing of certain high yielding securities
for which there is a thin trading market. Because not all dealers maintain
markets in all high yielding securities, there is no established retail
secondary market for many of these securities, and the Fund anticipates that
they could be sold only to a limited number of dealers or institutional
investors. To the extent there is a secondary trading market for high yielding
securities, it is generally not so liquid as that for higher-rated securities.
The lack of a liquid secondary market may have an adverse impact on market price
and the Fund's ability to dispose of particular issues when necessary to meet
the Fund's liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities may also make it more difficult for the
Fund to obtain accurate market quotations
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<PAGE>
for purposes of valuing the Fund's assets. Market quotations are generally
available on many high yield issues only from a limited number of dealers and
may not necessarily represent firm bids of such dealers or prices for actual
sales.
It is likely that a major economic recession could severely affect the
market for and the values of high yielding securities, as well as the ability of
the issuers of such securities to repay principal and pay interest thereon.
The High Yield Bond Fund may acquire high yielding securities that are sold
without registration under the federal securities laws and therefore carry
restrictions on resale. Many recent high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration; however, if a Fund is required to sell such restricted securities
before the securities have been registered, then the Fund may be deemed an
underwriter of such securities as defined in the Securities Act of 1933 (the
"1933 Act"), which entails special responsibilities and liabilities. The Fund
may incur special costs in disposing of such securities, but will generally
incur no costs when the issuer is responsible for registering the securities.
The High Yield Bond Fund may acquire high yielding securities during an
initial underwriting. Such securities involve special risks because they are
new issues. The Fund has no arrangement with any person concerning the
acquisition of such securities and
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<PAGE>
the sub-adviser will carefully review the credit and other characteristics
pertinent to such new issues.
From time to time in the past, there were proposals for legislation
designed to limit the use of certain high yielding securities in connection with
leveraged buy-outs, mergers and acquisitions, or to limit the deductibility of
interest payments on such securities. Such proposals if enacted into law could
reduce the market for such securities generally, could negatively affect the
financial condition of issuers of high yield securities by removing or reducing
a source of future financing, and could negatively affect the value of specific
high yield issues. However, such legislation is not currently proposed.
BALANCED FUND
The Balanced Fund seeks high total return. The Fund will pursue its
investment objective by investing in a diversified portfolio of equity and fixed
income securities. The equity component of the Fund will consist primarily of
the common stock of large and medium sized U.S. companies within various
economic sectors according to their relative value. The sub-adviser buys and
sells securities within each economic sector based on this valuation process to
enhance total return.
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<PAGE>
The sub-adviser believes that diversification of the Fund's investments among
economic sectors will better enable the Fund to achieve its investment objective
of high total return and may result in a reduction in investment risk and lower
volatility. The Balanced Fund's equity investments also include ADRs, preferred
stock, warrants, rights and convertible securities.
The fixed income component of the Balanced Fund will invest in fixed income
securities allocated across the broad sectors of the fixed income markets.
Under normal market conditions, the substantial majority of fixed income
securities will be rated in the highest rating categories by Standard & Poor's
and Moody's. The Fund may invest up to 5% of its assets dedicated to fixed
income investments in securities rated Ba by Moody's or BB by Standard & Poor's.
GROWTH & INCOME FUND
The Growth & Income Fund's investment objectives are to provide growth of
capital and income. The Fund will pursue its objectives by investing primarily
in equity securities and in various income producing securities including, but
not limited to, dividend paying equity securities, fixed income securities and
money market instruments.
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<PAGE>
The portion of the Fund invested at any given time in each of these asset
classes will vary depending on market conditions, and there may be extended
periods when the Fund is primarily invested in one of them. In addition, the
amount of income derived from the Fund will fluctuate depending on the
composition of the Fund's holdings and will tend to be lower when a higher
portion of the Fund is invested in equity securities. Under normal market
conditions, Counsellors will invest substantially all of the Fund's assets in
equity securities, including common stocks, securities which are convertible
into common stocks and readily marketable securities, such as rights and
warrants, which derive their value from common stocks.
GROWTH FUND
The investment objective of the Growth Fund is to seek capital growth. In
pursuing these investment objectives, the sub-adviser reviews a wide range of
companies, looking for businesses that are undervalued in relation to the
company's assets, earnings or marketing position or companies that have strong
growth potential in their business markets.
The Fund invests primarily in growth-oriented common stock of domestic
corporations and, to a limited extent, foreign corporations. The Fund may
invest in any market sector.
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<PAGE>
In determining whether to invest Fund assets in a particular company, the
Growth Fund's sub-adviser ordinarily looks to the following characteristics:
(1) prospects for above-average sales and earnings growth; (2) high return on
invested capital; (3) overall financial strength, including sound financial and
accounting policies and a strong balance sheet; (4) competitive advantages,
including innovative products and service; (5) effective research, product
development and marketing; and (6) stable, capable management.
EMERGING GROWTH FUND
The Emerging Growth Fund's investment objective is capital appreciation.
The Fund will pursue its objective by investing primarily in common stocks and
other equity type securities issued by companies with strong growth potential.
The sub-adviser's investment philosophy is to identify investment values
available in the market at attractive prices. Investment value arises from the
ability to generate earnings or from the ownership of assets or resources.
Underlying earnings potential and asset values are frequently demonstrable but
not recognized in the market prices of the securities representing their
ownership. Important investment opportunities often occur where companies
develop solutions to large, complex, fundamental problems, such as declining
industrial productivity; rising costs and declining sources of energy; the
economic imbalances and
- 15 -
<PAGE>
value erosion caused by years of high inflation and interest rates; the soaring
costs and competing priorities of providing health care; and the accelerating
interdependence and "shrinking size" of the world.
Solutions or parts of solutions to large problems may be generated by
established companies or comparatively new companies of all sizes through the
development of new products, technologies or services, or through new
applications of older ones.
Investment in such companies represents a very wide range of investment
potential, current income return rates, and exposure to market risks. Income
generated by investments in these companies would be expected to be moderate,
characterized by lesser rates than those of a fund whose sole objective is
current income, and somewhat higher rates than those of a higher-risk growth
fund.
The stock market frequently values the aggregate ownership of a company at
a substantially lower figure than its component assets would be worth if they
were sold off separately over time. Such assets may include intangible assets
such as product and market franchises, operating know-how, or distribution
systems, as well as such tangible properties as oil reserves, timber, real
estate, or production facilities. Investment opportunities in
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<PAGE>
these companies are determined by the magnitude of difference between economic
worth and current market price.
Market undervaluations are very often corrected by purchase and sale,
restructuring of the company, or market appreciation to recognize the actual
worth. The recognition process may well occur over time, however, creating a
form of time-exposure risk. Success from investing in these companies is often
great, but may well be achieved only after a waiting period of inactivity.
Investment by the Emerging Growth Fund in smaller sized companies may
involve a significantly greater degree of risk and the reduction of current
income to a negligible level. Such investments will not be limited to new,
small companies engaged only in frontier technology; rather, the sub-adviser
will seek opportunities for maximum appreciation through the full spectrum of
business operations, products, services, and asset values. Such companies are
usually more flexible in trying new approaches to problem-solving and in making
new or different employment of assets. Because of the high risk level involved,
the ratio of success among such companies is lower than the average, but for
those companies which succeed, the magnitude of investment reward is potentially
higher.
INTERNATIONAL EQUITY FUND
Although widespread interest in foreign equity investments has only
recently developed among U.S. investors, foreign
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<PAGE>
equities have since 1970 produced higher returns in dollars than the Standard &
Poor's 500 Index. Research coverage outside the U.S. is often fragmented and
relatively unsophisticated; for this reason many foreign companies that are
well-positioned to grow and prosper have not come to the attention of investors.
The sub-adviser for the International Equity Fund believes that the high
historical returns and less efficient pricing of foreign markets create
favorable conditions for the Fund's highly focused investment approach.
Using fundamental company and industry research, the sub-adviser seeks to
identify companies that have a high probability of achieving superior long-term
returns. Companies of this type tend to operate within industries which are
less economically sensitive, relatively free of regulation and which favor
strong franchises.
To identify these long-term investment opportunities, the sub-adviser will
look for those companies which enjoy a stable competitive advantage and are able
to benefit from the favorable dynamics of the industry in which they operate.
This stage includes analyzing the current and expected financial performance of
the company; contacting suppliers, customers and competitors; and meeting with
management. In particular, the sub-adviser looks for companies whose managers
have a strong commitment to both maintaining the high returns of the existing
business and
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<PAGE>
reinvesting the capital generated at high rates of return. The International
Equity Fund looks for companies whose management always acts in the interests of
the owners and seek to maximize returns to all stockholders.
The sub-adviser measures a company's business value by its ability to
generate substantial free cash flow after all working and fixed capital
expenditures. In the judgment of the sub-adviser, free cash flow is the best
measure of the underlying economics of a company, is less subject to
manipulation than reported earnings, and is more meaningful when valuing
companies across different tax and accounting regimes. Having identified
companies with superior free cash flow characteristics, the sub-adviser then
considers that free cash flow relative to the current stock price and the
prospects for long-term growth. These two components are used to determine an
expected total return at the stock's prevailing market price.
After buying a stock, the sub-adviser for the International Equity Fund
monitors developments within the company and its industry and maintains regular
contact with management. The Fund is a long-term holder of stocks and because
of this, the sub-adviser adjusts the Fund's portfolio only when expected returns
fall below acceptable levels or when the sub-adviser identifies substantially
more attractive investments.
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<PAGE>
SPECIAL INVESTMENT METHODS AND RISKS
RESTRICTED AND ILLIQUID SECURITIES
The Investment Grade Bond Fund, the High Yield Bond Fund, the Balanced
Fund, the Growth & Income Fund, the Emerging Growth Fund, the Growth Fund and
the International Equity Fund may purchase certain restricted securities (those
that are not registered under the Securities Act of 1933 (the "1933 Act") but
can be offered and sold to "qualified institutional buyers" under Rule 144A of
that Act) and limited amounts of illiquid investments, including illiquid
restricted securities. Limitations on illiquid securities and other illiquid
investments for each Fund are described in non-fundamental investment
restriction #3 below.
Illiquid investments include many restricted securities, repurchase
agreements that mature in more than seven days, currency and interest rate
swaps, time deposits that mature in more than seven days or that have a notice
or demand period more than seven days, certain over-the-counter option
contracts, participation interests in loans, securities not readily marketable
and certain restricted securities.
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<PAGE>
Certain repurchase agreements which provide for settlement in more than
seven days, however, can be liquidated before the nominal fixed term on seven
days or less notice. The Trust will consider such repurchase agreements as
liquid. Likewise, restricted securities (including commercial paper issued
pursuant to Section 4(2) of the 1933 Act) that the Board of Trustees of the
Trust or the sub-advisers have determined to be liquid will be treated as such.
The SEC staff has taken the position that fixed time deposits maturing in
more than seven days that cannot be traded on a secondary market and
participation interests in loans are illiquid and not readily marketable. Until
such time (if any) as this position changes, the Trust will include such
investments in the percentage limitation on illiquid investments applicable to
each Fund.
OPTIONS ON SECURITIES AND SECURITIES INDICES
All of the Funds except the International Equity Fund may write (sell)
covered call and put options on any securities in which they may invest. A call
option written by a Fund obligates such Fund to sell specified securities to the
holder of the option at a specified price if the option is exercised at any time
before the expiration date.
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<PAGE>
All call options written by a Fund are covered, which means that such Fund will
own the securities subject to the option so long as the option is outstanding.
A Fund's purpose in writing covered call options is to realize greater income
than would be realized on portfolio securities transactions alone. However, a
Fund may forgo the opportunity to profit from an increase in the market price of
the underlying security.
A put option written by a Fund would obligate such Fund to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. All put options written by
a Fund would be covered, which means that such Fund would have deposited with
its custodian cash or liquid high grade debt securities with a value at least
equal to the exercise price of the put option. The purpose of writing such
options is to generate additional income for the Fund. However, in return for
the option premium, a Fund accepts the risk that it will be required to purchase
the underlying securities at a price in excess of the securities' market value
at the time of purchase.
In addition, a written call option or put option may be covered by
maintaining cash or liquid high grade debt securities (either of which may be
denominated in any currency) in a segregated account with its custodian or by
purchasing an offsetting option or any other option which, by virtue of its
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<PAGE>
exercise price or otherwise, reduces a Fund's net exposure on its written option
position.
The Funds other than the International Equity Fund may also write (sell)
covered call and put options on any securities index composed of securities in
which it may invest. Options on securities indices are similar to options on
securities, except that the exercise of securities index options requires cash
payments and normally does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security.
A Fund may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index,
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities in its portfolio. A Fund may cover call and put options on a
securities index by maintaining cash or liquid high grade debt securities with a
value equal to the exercise price in a segregated account with its custodian.
A Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to
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<PAGE>
the one it has written. Obligations under over-the-counter options may be
terminated only by entering into an offsetting transaction with the counterparty
to such option. Such purchases are referred to as "closing purchase"
transactions.
Each Fund may purchase put and call options on any securities in which it
may invest or options on any securities index based on securities in which it
may invest. A Fund would also be able to enter into closing sale transactions
in order to realize gains or minimize losses on options it had purchased.
A Fund would normally purchase call options in anticipation of an increase
in the market value of securities of the type in which it may invest. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified securities at a specified price during the option period.
A Fund would ordinarily realize a gain if, during the option period, the value
of such securities exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise such a Fund would realize a loss on the purchase of
the call option.
A Fund would normally purchase put options in anticipation of a decline in
the market value of securities in its portfolio ("protective puts") or in
securities in which it may invest. The purchase of a put option would entitle a
Fund, in exchange for the premium paid, to sell specified securities at a
specified price during the option period. The purchase of protective puts
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is designed to offset or hedge against a decline in the market value of a Fund's
securities. Put options may also be purchased by a Fund for the purpose of
affirmatively benefiting from a decline in the price of securities which it does
not own. A Fund would ordinarily realize a gain if, during the option period,
the value of the underlying securities decreased below the exercise price
sufficiently to cover the premium and transaction costs; otherwise such a Fund
would realize a loss on the purchase of the put option. Gains and losses on the
purchase of protective put options would tend to be offset by countervailing
changes in the value of the underlying portfolio securities.
The Fund would purchase put and call options on securities indices for the
same purposes as it would purchase options on individual securities.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
liquid secondary market on an options exchange will exist for any particular
exchange-traded option or at any particular time. If a Fund is unable to effect
a closing purchase transaction with respect to covered options it has written,
the Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it would have to exercise the options
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in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist, although outstanding options on that exchange that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
The Funds other the International Equity Fund may purchase and sell both
options that are traded on United States and foreign exchanges and options
traded over-the-counter with broker-dealers who make markets in these options.
The ability to
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terminate over-the-counter options is more limited than with exchange-traded
options and may involve the risk that broker-dealers participating in such
transactions will not fulfill their obligations. Until such time as the staff
of the SEC changes its position, each Fund will treat purchased over-the-counter
options and all assets used to cover written over-the-counter options as
illiquid securities, except that with respect to options written with primary
dealers in U.S. Government securities pursuant to an agreement requiring a
closing purchase transaction at a formula price, the amount of illiquid
securities may be calculated with reference to the formula.
Transactions by a Fund in options on securities and stock indices will be
subject to limitations established by each of the exchanges, boards of trade or
other trading facilities governing the maximum number of options in each class
which may be written or purchased by a single investor or group of investors
acting in concert. Thus, the number of options which a Fund may write or
purchase may be affected by options written or purchased by other investment
advisory clients of the sub-advisers. An exchange, board of trade or other
trading facility may order the liquidations of positions found to be in excess
of these limits, and it may impose certain other sanctions.
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The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of protective
puts for hedging purposes depends in part on the sub-adviser's ability to
predict future price fluctuations and the degree of correlation between the
options and securities markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Funds may purchase and sell futures contracts and purchase and write
options on futures contracts. The Funds may purchase and sell futures contracts
based on various securities (such as U.S. Government Securities), securities
indices, foreign currencies and other financial instruments and indices. A Fund
will engage in futures, or related options transactions, only for bona fide
hedging purposes, as defined below, or to increase total returns to the extent
permitted by regulations of the Commodity Futures Trading Commission ("CFTC").
All futures contracts entered into by a Fund are traded on U.S. exchanges or
boards of trade that are licensed and regulated by the CFTC or on foreign
exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
for an agreed upon price during a designated month (or to deliver the final cash
settlement
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price, in the case of a contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, a Fund can
seek through the sale of futures contracts to offset a decline in the value of
its current portfolio securities. When rates are falling or prices are rising,
a Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market when it effects
anticipated purchases. Similarly, the Growth & Income Fund, the Growth Fund and
the International Equity Fund can sell futures contracts on a specified currency
to attempt to protect against a decline in the value of such currency and its
portfolio securities which are denominated in such currency. These Funds can
purchase futures contracts on foreign currency to fix the price in U.S. dollars
of a security denominated in such currency that such Fund has acquired or
expects to acquire.
Positions taken normally in the futures markets are not normally held to
maturity, but are instead liquidated through offsetting transactions which may
result in a profit or a loss. While a Fund's futures contracts on securities or
currency will usually be liquidated in this manner, it may instead make or take
delivery of the underlying securities or currency whenever, if
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possible, it appears economically advantageous for the Fund to do so. A
clearing corporation associated with the exchange on which futures on securities
or currency are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
HEDGING STRATEGIES. Hedging by use of futures contracts seeks to establish
with more certainty than would otherwise be possible (1) the effective price,
(2) rate of return or (3) currency exchange rate on portfolio securities or
securities that a Fund owns or proposes to acquire. A Fund may, for example,
take a "short" position in the futures market by selling futures contracts in
order to attempt to hedge against an anticipated rise in interest rates or a
decline in market prices or foreign currency rates that would adversely affect
the U.S. dollar value of the Fund's portfolio securities. Such futures
contracts may include contracts for the future delivery of securities held by
the Fund or securities with characteristics similar to those of a Fund's
portfolio securities. Similarly, the Growth & Income Fund, the Growth Fund and
the International Equity Fund may sell futures contracts on a currency in which
its portfolio securities are denominated or in one currency to hedge against
fluctuations in the value of securities denominated in a different currency if,
for example, there is an established historical pattern of correlation between
the two currencies.
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If, in the opinion of its sub-adviser, there is a sufficient degree of
correlation between price trends for a Fund's portfolio securities and futures
contracts based on other financial instruments, securities indices or other
indices, the Fund may also enter into such futures contracts as part of its
hedging strategy. Although under some circumstances prices of securities in a
Fund's portfolio may be more or less volatile than prices of such futures
contracts, the sub-adviser will attempt to estimate the extent of this
difference in volatility based on historical patterns and to compensate for it
by having the Fund enter into a greater or lesser number of futures contracts or
by attempting to achieve only a partial hedge against price changes affecting
the Fund's securities portfolio. When hedging of this character is successful,
any depreciation in the value of portfolio securities will substantially be
offset by appreciation in the value of the futures position. On the other hand,
it is possible that any unanticipated appreciation in the value of the Fund's
portfolio securities would be substantially offset by a decline in the value of
the futures position.
On other occasions, a Fund may take a "long" position by purchasing such
futures contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the
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applicable market to be less favorable than prices or rates that are currently
available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
futures contracts will give a Fund the right (but not the obligation), for a
specified price, to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By
writing a call option, a Fund becomes obligated, in exchange for the premium, to
sell a futures contract, which may have a value higher than the exercise price.
Conversely, the writing of a put option on a futures contract generates a
premium, which may partially offset an increase in the price of securities that
the Fund intends to purchase. However, a Fund becomes obligated to purchase a
futures contract, which may have a value lower than the exercise price. Thus,
the loss incurred by the Fund in writing options on futures is potentially
unlimited and may exceed the amount of the premium
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received. A Fund will incur increased transaction costs in connection with the
writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same series.
There is no guarantee that such closing transactions can be effected. A Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. Where permitted, a Fund will engage in futures
transactions and in related options transactions only for bona fide hedging or
to increase total return to the extent permitted by CFTC regulations. A Fund
will determine that the price fluctuations in the futures contracts and options
on futures used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or which it expects to purchase.
Except as stated below, each Fund's futures transactions will be entered into
for traditional hedging purposes -- I.E., futures contracts will be sold to
protect against a decline in the price of securities (or the currency in which
they are denominated) that the Fund owns, or futures contracts will be purchased
to protect the Fund against an increase in the price of securities (or the
currency in which they are denominated) it intends to purchase. However, in
particular cases, when it is economically advantageous for a Fund
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to do so, a long futures position may be terminated or an option may expire
without the corresponding purchase of securities or other assets.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC regulation permits a Fund to elect to comply with a different
test, under which the aggregate initial margin and premiums required to
establish positions in futures contracts and options on futures for the purpose
of increasing total return, will not exceed 5 percent of the net asset value of
the Fund's portfolio, after taking into account unrealized profits and losses on
any such positions and excluding the amount by which such options were in-
the-money at the time of purchase. As permitted, each Fund will engage in
transactions in futures contracts and in related options transactions only to
the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), for maintaining its
qualification as a regulated investment company for federal income tax purposes
(see "Taxation").
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, may require the Fund to
segregate with its custodian liquid high grade debt securities in an amount
equal to the underlying value of such contracts and options.
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While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
unanticipated changes in interest rates, securities prices or currency exchange
rates may result in a poorer overall performance for a Fund than if it had not
entered into any futures contracts or options transactions. In the event of an
imperfect correlation between a futures position and portfolio position which is
intended to be protected, the desired protection may not be obtained and a Fund
may be exposed to risk of loss.
Perfect correlation between a Fund's futures positions and portfolio
positions may be difficult to achieve because no futures contracts based on
individual equity securities are currently available. The only futures
contracts available to hedge a Fund's portfolio are various futures on U.S.
Government securities, securities indices and foreign currencies. In addition,
it is not possible for a Fund to hedge fully or perfectly against currency
fluctuations affecting the value of securities denominated in foreign currencies
because the value of such securities is likely to fluctuate as a result of
independent factors not related to currency fluctuations.
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FOREIGN INVESTMENTS
Investing in the securities of companies organized outside the United
States or of companies whose securities are principally traded outside the
United States ("foreign issuers") or investments in securities denominated or
quoted in foreign currency ("non-dollar securities") involves certain special
considerations, including those set forth below, which are not typically
associated with investing in securities of domestic issuers or U.S. dollar
denominated securities. Since investments in foreign issuers may involve
currencies of foreign countries and since a Fund may temporarily hold funds in
bank deposits in foreign currencies during completion of investment programs and
since a Fund may be subject to currency exposure independent of its securities
positions, the Fund may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations and may incur costs in
connection with conversions between various currencies.
Since foreign issuers are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. issuers, there may be less publicly available information
about a foreign issuer than about a domestic issuer. Volume and liquidity in
most foreign securities markets are less than in the United
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<PAGE>
States and securities of many foreign issuers are less liquid and more volatile
than securities of comparable domestic issuers. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges. There is generally less government supervision and regulation of
securities exchanges, brokers, dealers and listed and unlisted issuers than in
the United States. Mail service and other communications between the United
States and foreign countries may be slower or less reliable than within the
United States, thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities.
Foreign investment markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of a Fund are uninvested and no return is
earned on such assets. The inability of a Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio investments due to
settlement problems could result either in losses to a Fund due to subsequent
declines in value of the portfolio securities or, if the Fund has entered into a
contract to sell the
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<PAGE>
securities, could result in possible liability to the purchaser. In addition,
with respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect a Fund's investments in those
countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Funds may enter into
forward foreign currency exchange contracts. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
These contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
generally charged at any stage for trades.
At the maturity of a forward contract the Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing purchase transaction involving the purchase or sale of an
offsetting
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<PAGE>
contract. Closing purchase transactions with respect to forward contracts are
usually effected with the currency trader who is a party to the original forward
contract.
The Funds may enter into forward foreign currency exchange contracts in
several circumstances. First, when a Fund enters into a contract for the
purchase or sale of a security denominated or noted in a foreign currency, or
when the Fund anticipates the receipt in a foreign currency of dividend or
interest payments on such a security which it holds, the Fund may desire to
"lock in" the U.S. dollar price of the security or the U.S. dollar equivalent of
such dividend or interest payment, as the case may be. By entering into a
forward contract for the purchase or sale, for a fixed amount of dollars, of the
amount of foreign currency involved in the underlying transactions, the Fund
will attempt to protect itself against an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when the sub-adviser of a Fund believes that the currency of
a particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the
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<PAGE>
amount of foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. The precise matching
of the forward contract amounts and the value of the securities involved will
not generally be possible because the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date on which the contract is entered into and the
date it matures. Using forward contracts to protect the value of a Fund's
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which a Fund can achieve at some future point in
time. The precise projection of short-term currency market movements is not
possible, and short-term hedging provides a means of fixing the dollar value of
only a portion of a Fund's foreign assets.
The Funds may engage in cross-hedging by using forward contracts in one
currency to hedge against fluctuations in the value of securities denominated in
a different currency if the sub-adviser determines that there is a pattern of
correlation between the two currencies. These Funds may also purchase and sell
forward contracts for non-hedging purposes when the sub-adviser anticipates that
the foreign currency will appreciate or depreciate in value, but securities
denominated in that currency
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<PAGE>
do not present attractive investment opportunities and are not held in the
Fund's portfolio.
A Fund's custodian will place cash or high grade liquid debt securities
(I.E., securities rated in one of the top three ratings categories by Standard &
Poor's or by Moody's or, if unrated, deemed by the sub-adviser to be of
comparable credit quality) into a segregated account of the Fund in an amount
equal to the value of the Fund's total assets committed to the consummation of
forward foreign currency exchange contracts requiring the Fund to purchase
foreign currencies or forward contracts entered into for non-hedging purposes.
If the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will equal the amount of the Fund's commitments
with respect to such contracts. The segregated account will be marked-to-market
on a daily basis. Although the contracts are not presently regulated by the
CFTC, the CFTC may in the future assert authority to regulate these contracts.
In such event, the Fund's ability to utilize forward foreign currency exchange
contracts may be restricted.
While a Fund will enter into forward contracts to reduce currency exchange
rate risks, transactions in such contracts involve certain other risks. Thus,
while a Fund may benefit from such transactions, unanticipated changes in
currency prices may
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<PAGE>
result in a poorer overall performance for the Fund than if it had not engaged
in any such transactions. Moreover, there may be imperfect correlation between
a Fund's portfolio holdings of securities denominated in a particular currency
and forward contracts entered into by the Fund. Such imperfect correlation may
cause the Fund to sustain losses which will prevent the Fund from achieving a
complete hedge or expose the Fund to risk of foreign exchange loss.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. The High Yield Bond
Fund, the Growth & Income Fund, the Growth Fund and the International Equity
Fund may write covered put and call options and purchase put and call options on
foreign currencies for the purpose of protecting against declines in the U.S.
dollar value of portfolio securities and against increases in the dollar cost of
securities to be acquired.
A call option written by a Fund obligates the Fund to sell specified
currency to the holder of the option at a specified price at any time before the
expiration date. A put option written by a Fund would obligate the Fund to
purchase specified currency from the option holder at a specified price at any
time before the expiration date. The writing of currency options involves a
risk that a Fund will, upon exercise of the option, be required to sell currency
subject to a call at a price that is less than the currency's market value or be
required to purchase
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<PAGE>
currency subject to a put at a price that exceeds the currency's market value.
A Fund may terminate its obligations under a call or put option by
purchasing an option identical to the one it has written. Such purchases are
referred to as "closing purchase transactions." A Fund could also enter into
closing sale transactions in order to attempt to realize gains or minimize
losses on options purchased by it.
A Fund would normally purchase call options in anticipation of an increase
in the U.S. dollar value of currency in which securities to be acquired by the
Fund are denominated. The purchase of a call option would entitle a Fund, in
return for the premium paid, to purchase specified currency at a specified price
during the option period. The Fund would ordinarily realize a gain if, during
the option period, the value of such currency exceeded the sum of the exercise
price, the premium paid and transaction costs; otherwise the Fund would realize
either no gain or a loss on the purchase of the call option.
A Fund would normally purchase put options in anticipation of a decline in
the dollar value of currency in which securities in its portfolio are
denominated ("protective puts"). The purchase of a put option would entitle the
Fund, in exchange for the premium paid, to sell specified currency at a
specified price during the option period. The purchase of protective puts is
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designed merely to offset or hedge against a decline in the dollar value of the
Fund's portfolio securities due to currency exchange rate fluctuations. A Fund
would ordinarily realize a gain if, during the option period, the value of the
underlying currency decreased below the exercise price sufficiently to more than
cover the premium and transaction costs; otherwise the Fund would realize either
no gain or a loss on the purchase of the put option. Gains and losses on the
purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying currency.
SPECIAL RISKS ASSOCIATED WITH OPTIONS ON CURRENCY. An exchange traded
options position may be closed out only on an options exchange which provides a
secondary market for an option of the same series. Although a Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option, or at any particular time.
For some options no secondary market on an exchange may exist. In such event,
it might not be possible to effect closing transactions in particular options,
with the result that a Fund would have to exercise its options in order to
realize any profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options. If a Fund as a covered call
option writer is unable to
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effect a closing purchase transaction in a secondary market, it will not be able
to sell the underlying currency (or security denominated in that currency) until
the option expires or it delivers the underlying currency upon exercise.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders.
A Fund may purchase and write over-the-counter options to the extent
consistent with its limitation on investments in restricted securities. See
"Investment Restrictions" in the Prospectus. Trading in over-the-counter
options is subject to the risk that the other party will be unable or unwilling
to close-out options purchased or written by the Fund.
The amount of the premiums which a Fund may pay or receive may be adversely
affected as new or existing institutions, including other investment companies,
engage in or increase their option purchasing and writing activities.
FIXED-INCOME SECURITIES
SHORT-TERM BANK AND CORPORATE OBLIGATIONS. Commercial paper represents
short-term unsecured promissory notes issued in bearer form by banks or bank
holding companies, corporations, and
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finance companies. The commercial paper purchased by the Funds consists of
direct U.S. dollar-denominated obligations of domestic issuers. Bank
obligations in which the Funds may invest include certificates of deposit,
bankers' acceptances, fixed time deposits and bank notes. Certificates of
deposit are certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally
drawn by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect, that the bank unconditionally agrees
to pay the face value of the instrument on maturity. Fixed time deposits are
bank obligations payable at a stated maturity date and bearing interest at a
fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but
may be subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. Certain fixed time deposits maturing in more than seven days may be
deemed to be illiquid securities. Bank notes rank junior to deposit liabilities
of the bank and PARI PASSU with other senior, unsecured obligations of the bank.
Bank notes are classified as "other borrowings" on a bank's balance
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sheet, while deposit notes and certificates of deposit are classified as
deposits. Bank notes are not insured by the Federal Deposit Insurance
Corporation or any other insurer. Deposit notes are insured by the Federal
Deposit Insurance Corporation only to the extent of $100,000 per depositor per
bank.
VARIABLE AMOUNT MASTER DEMAND NOTES. The Funds may purchase variable
amount master demand notes. These obligations permit the investment of
fluctuating amounts at varying rates of interest pursuant to direct arrangements
between the lender and borrower and are not generally transferable nor are they
ordinarily rated. A Fund may invest in them only if the sub-adviser believes
that the notes are of comparable quality to the other obligations in which the
Fund may invest.
VARIABLE RATE AND FLOATING RATE DEMAND INSTRUMENTS. The Emerging Growth
Fund may purchase variable and floating rate demand instruments that are debt
securities that possess a floating or variable interest rate adjustment formula.
These instruments also permit the Fund to demand payment of the principal
balance plus unpaid accrued interest upon a specified number of days' notice to
the issuer or its agent. The demand feature may be backed by a bank letter of
credit or guarantee issued with respect to such instrument.
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The terms of the variable or floating rate demand instruments that the Fund
may purchase provide that interest rates are adjustable at intervals ranging
from daily to up to six months, and the adjustments are based upon current
market levels, the prime rate of a bank or another appropriate interest rate
adjustment index as provided in the respective instruments. Some of these
instruments are payable on demand on a daily basis or on not more than seven
days' notice. Others, such as instruments with quarterly or semi-annual
interest rate adjustments, may be put back to the issuer on designated days on
not more than thirty days's notice. Still others are automatically called by
the issuer unless the Fund instructs otherwise. The Emerging Growth Fund
intends to exercise the demand only (1) upon a default under the terms of the
debt security, (2) as needed to provide liquidity to the Fund, (3) to maintain
the respective quality standards of a Fund's investment portfolio, or (4) to
attain a more optimal portfolio structure.
The maturity of the variable or floating rate demand instruments held by
the Fund will ordinarily be deemed to be the longer of (1) the notice period
required before the Fund is entitled to receive payment of the principal amount
of the instrument or (2) the period remaining until the instrument's next
interest rate adjustment.
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LOAN PARTICIPATION INTERESTS. The High Yield Bond Fund, the Growth &
Income Fund, the Growth Fund and the Emerging Growth Fund may purchase loan
participation interests with remaining maturities of thirteen months or less in
loans of any maturity. Such loans must be to issuers in whose obligations the
Funds may otherwise invest. Any participation purchased by the Funds must be
issued by a bank in the United States with assets exceeding $1 billion. Because
the issuing bank does not guarantee the participation in any way, the
participations are subject to the credit risks generally associated with the
underlying corporate borrower. In addition, because it may be necessary under
the terms of the loan participation for the Funds to assert through the issuing
bank such rights as may exist against the underlying corporate borrower, in the
event the underlying corporate borrower fails to pay principal and interest when
due, the Funds may be subject to delays, expenses and risks that are greater
than those that would have been involved if the Funds had purchased a direct
obligation (such as commercial paper) of such borrower. Moreover, under the
terms of the loan participation the High Yield Bond Fund, the Growth & Income
Fund, the Growth Fund or the Emerging Growth Fund may be regarded as a creditor
of the issuing bank (rather than of the underlying corporate borrower), so that
the Fund may also be subject to the risk that the issuing bank may become
insolvent. Further, in the event of
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the bankruptcy or insolvency of the corporate borrower, the loan participation
may be subject to certain defenses that can be asserted by such borrower as a
result of improper conduct by the issuing bank. The secondary market, if any,
for these loan participations is limited and any such participation purchased by
the Fund may be regarded as illiquid.
The Funds do not believe that price quotations currently obtainable from
banks, dealers or pricing services consistently represent the market values of
participation interests. Therefore, the Trust's accounting servicing agent
will, following guidelines established by the Board of Trustees, value the
participation interests held by the Funds at fair value, which approximates
market value. In valuing a participation interest, the agent will consider the
following factors: (i) the characteristics of the participation interest,
including the cost, size, interest rate, period until next interest rate reset,
maturity and base lending rate of the participation interest, the terms and
conditions of the loan and any related agreements and the position of the loan
in the borrower's debt structure; (ii) the nature, adequacy and value of the
collateral, including the Fund's rights, remedies and interests with respect to
the collateral; (iii) the creditworthiness of the borrower, based on an
evaluation of its financial condition, financial statements and information
about the borrower's business, cash flows,
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capital structure and future prospects; (iv) the market for the participation
interest, including price quotations for and trading in the participation
interest and similar participation interest or instruments and the market
environment and investor attitudes towards the participation interest or
participation interests generally; (v) the quality and creditworthiness of any
intermediate participants; and (vi) general economic or market conditions.
ZERO COUPON BONDS. The Investment Grade Bond Fund, the High Yield Bond
Fund, the Balanced Fund, and the Growth Fund may invest in zero coupon bonds
which are debt obligations that do not entitle the holder to any periodic
payments of interest prior to maturity or provide for a specified cash payment
date when the bonds begin paying current interest. As a result, zero coupon
bonds are generally issued and traded at a significant discount from their face
value. The discount approximates the present value amount of interest the bonds
would have accrued and compounded over the period until maturity.
Zero coupon bonds benefit the issuer by mitigating its initial need for
cash to meet debt service, but generally provide a higher rate of return to
compensate investors for the deferment of cash interest or principal payments.
Such securities are often issued by companies that may not have the capacity to
pay current interest and so may be considered to have more risk than
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current interest-bearing securities. In addition, the market price of zero
coupon bonds generally is more volatile than the market prices of securities
that provide for the periodic payment of interest. The market prices of zero
coupon bonds are likely to fluctuate more in response to changes in interest
rates than those of interest-bearing securities having similar maturities and
credit quality.
Zero coupon bonds carry the additional risk that, unlike securities that
provide for the periodic payment of interest to maturity, the Funds will realize
no cash until a specified future payment date unless a portion of such
securities is sold. If the issuer of such securities defaults, the Funds may
obtain no return at all on their investment. In addition, a Fund's investment
in zero coupon bonds may require it to sell certain of its portfolio securities
to generate sufficient cash to satisfy certain income distribution requirements.
See "Taxation" below.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. All of the Funds may invest
in mortgage-backed securities, which represent direct or indirect participation
in, or are collateralized by and payable from, mortgage loans secured by real
property. The Funds may also invest in asset-backed securities, which represent
participation in, or are secured by and payable from, assets such as motor
vehicle installment sales, installment loan contracts, leases of various types
of real and personal property,
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receivables from revolving credit (I.E., credit card) agreements and other
categories of receivables. Such assets are securitized through the use of
trusts and special purpose corporations. Payments or distributions of principal
and interest may be guaranteed up to certain amounts and for a certain time
period by a letter of credit or a pool insurance policy issued by a financial
institution unaffiliated with the trust or corporation, or other credit
enhancements may be present.
Mortgage-backed and asset-backed securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. This can
occur when interest rates decline significantly. A Fund's ability to maintain
positions in such securities will be affected by reductions in the principal
amount of such securities resulting from prepayments, and its ability to
reinvest the returns of principal at comparable yields is subject to generally
prevailing interest rates at that time. To the extent that a Fund invests in
mortgage-backed and asset-backed securities, the values of its portfolio
securities will vary with changes in market interest rates generally and the
differentials in yields among various kinds of U.S. Government Securities and
other mortgage-backed and asset-backed securities.
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Asset-backed securities present certain additional risks that are not
presented by mortgage-backed securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to mortgage assets. Credit card receivables are generally unsecured
and the debtors on such receivables are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set-off certain amounts owed on the credit cards, thereby reducing the
balance due. Automobile receivables generally are secured, but by automobiles
rather than residential real property. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations.
If the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders of
the asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
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WARRANTS AND RIGHTS
All Funds except the Investment Grade Bond Fund may invest up to 5% of
their net assets, calculated at the time of purchase, in warrants or rights
(other than those acquired in units or attached to other securities) which
entitle the holder to buy equity securities at a specific price for a specific
period of time but will do so only if such equity securities are deemed
appropriate by the sub-adviser for investment by the Fund. The Funds will each
not invest more than 2% of their net assets, calculated at the time of purchase,
in warrants or rights which are not listed on the New York or American Stock
Exchanges. Warrants and rights have no voting rights, receive no dividends and
have no rights with respect to the assets of the issuer.
SWAPS AND RELATED TRANSACTIONS
The High Yield Bond Fund and the Growth Fund may enter into interest rate
swaps, currency swaps and other types of available swap agreements, such as
caps, collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease a Fund's
exposure to long or short-term interest rates (in the U.S. or abroad), foreign
currency values, mortgage securities, corporate borrowing rates, or other
factors such as securities prices or inflation
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rates. Swap agreements can take many different forms and are known by a variety
of names. A Fund is not limited to any particular form or variety of swap
agreement if the sub-adviser determines it is consistent with the Fund's
investment objective and policies.
The High Yield Bond Fund and the Growth Fund will maintain cash or
appropriate liquid assets with the custodian to cover its current obligations
under swap transactions. If a Fund enters into a swap agreement on a net basis
(I.E., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments), the Fund
will maintain cash or liquid assets with the custodian with a daily value at
least equal to the excess, if any, of the Fund's accrued obligations under the
swap agreement over the accrued amount the Fund is entitled to receive under the
agreement. If a Fund enters into a swap agreement on other than a net basis, it
will maintain cash or liquid assets with a value equal to the full amount of the
Fund's accrued obligations under the agreement. Changes in the specific
interest rate, currency or certain other factors determine the amount of
payments to be made under the swap, cap, floor or collar. If the sub-adviser is
incorrect in its forecasts of such factors, the investment performance of a Fund
would be less than what it would have been if these investment techniques had
not been used. If a swap
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agreement calls for payments by a Fund, the Fund must be prepared to make such
payments when due. In addition, if the counterparty's creditworthiness
declined, the value of the swap agreement would be likely to decline,
potentially resulting in losses.
If the counterparty defaults, a Fund's risk of loss consists of the net
amount of payments that the Fund is contractually entitled to receive. Each
Fund anticipates that it will be able to eliminate or reduce its exposure under
these arrangements by assignment or other disposition or by entering into an
offsetting agreement with the same or another counterparty.
SHORT SALES "AGAINST THE BOX"
The Growth & Income Fund, the Growth Fund and the International Equity Fund
may make short sales "against the box." In a short sale, a Fund sells a
borrowed security and has a corresponding obligation to the lender to return the
identical security. Each Fund may engage in short sales if at the time of the
short sale the Fund owns or has the right to obtain without additional cost an
equal amount of the security being sold short. This investment technique is
known as a short sale "against the box."
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. If a Fund engages in a short
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sale, the collateral for the short position will be maintained by the Trust's
custodian or qualified sub-custodian. While the short sale is open, the Fund
will maintain in a segregated account an amount of securities equal in kind and
amount to the securities sold short or securities convertible into or
exchangeable for such equivalent securities. These securities constitute the
Fund's long position.
The Funds do not intend to engage in short sales against the box for
investment purposes. A Fund may, however, make a short sale as a hedge, when it
believes that the price of a security may decline, causing a decline in the
value of a security owned by the Fund (or the security convertible or
exchangeable for such security), or when the Fund wants to sell the security at
an attractive current price, but also wishes to defer recognition of gain or
loss for U.S. federal income tax purposes and for purposes of satisfying certain
tests applicable to regulated investment companies under the Code. In such
case, any future losses in the Fund's long position should be offset by a gain
in the short position and, conversely, any gain in the long position should be
reduced by a loss in the short position. The extent to which such gains or
losses are reduced will depend upon the amount of the security sold short
relative to the amount the Fund owns. There will be certain additional
transaction costs associated with short sales against the box, but the Funds
will
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endeavor to offset these costs with the income from the investment of the cash
proceeds of short sales.
DOLLAR ROLL TRANSACTIONS
The Investment Grade Bond Fund, the Growth & Income Fund, the Growth Fund,
and the Balanced Fund may enter into mortgage "dollar rolls" in which the Funds
sell mortgage-backed securities for delivery in the current month and
simultaneously contract to repurchase substantially similar (same type, coupon,
and maturity) securities on a specified future date. Dollar roll transactions
consist of the sale by a fund of mortgage-backed securities together with a
commitment to purchase similar, but not necessarily identical, securities at a
future date. Any difference between the sale price and the purchase price is
netted against the interest income foregone on the securities to arrive at an
implied borrowing (reverse repurchase) rate. Alternatively, the sale and
purchase transactions which constitute the dollar roll can be executed at the
same price, with a fund being paid a fee as consideration for entering into the
commitment to purchase. Dollar rolls may be renewed prior to cash settlement
and initially may involve only firm commitment agreements by the Funds to buy a
security. If the broker-dealer to whom the Fund sells the security becomes
insolvent, a Fund's right to purchase or repurchase the security may be
restricted; the value of the security may change adversely over the term of
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the dollar roll; the security that the Fund is required to repurchase may be
worth less than the security that the Fund originally held and the return earned
by the Fund with the proceeds of a dollar roll may not exceed transaction costs.
The Fund will place U.S. Government or other liquid, high quality assets in a
segregated account in an amount sufficient to cover its repurchase obligation.
EMERGING MARKET SECURITIES
The risks of investing in foreign securities may be intensified in the case
of investments in emerging markets. Securities of many issuers in emerging
markets may be less liquid and more volatile than securities of comparable
domestic issuers. Emerging markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when a portion of the assets of the Fund is uninvested and no
return is earned thereon. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result in losses to the Fund due to subsequent
declines in value of the portfolio security, a decrease in the
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level of liquidity in the Fund's portfolio, or, if the Fund has entered into a
contract to sell the security, in possible liability to the purchaser. Certain
markets may require payment for securities before delivery, and in such markets
the Fund bears the risk that the securities will not be delivered and that the
Fund's payments will not be returned. Securities prices in emerging markets can
be significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign Ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be
predominantly based on only a few industries, may be highly vulnerable to
changes in local or global trade conditions, and may suffer from extreme and
volatile debt burdens or inflation rates. Local securities markets may trade a
small number of securities and may be unable to respond effectively to increases
in trading volume, potentially making prompt liquidation of substantial holdings
difficult or impossible at times. Securities of issuers located in countries
with emerging markets may have limited marketability and may be subject to more
abrupt or erratic price movements.
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Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The Fund could be
adversely affected by delays in, or a refusal to grant any required governmental
approval for repatriation of capital, as well as by the application to the Fund
of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls may
at times preclude investment in certain foreign emerging market debt obligations
and increase the expenses of the Fund.
INVESTMENT RESTRICTIONS
FUNDAMENTAL RESTRICTIONS
The following investment restrictions have been adopted by the Trust as
fundamental policies for the Fund to which each applies, as shown below.
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A fundamental policy is one that cannot be changed without the affirmative
vote of the holders of a majority (as defined in the Investment Company Act of
1940, the "1940 Act") of the outstanding votes attributable to the shares of a
Fund. The investment objective or objectives of each Fund and all other
investment policies or practices of the Fund are considered by the Trust not to
be fundamental and accordingly may be changed by the Trust's Board of Trustees
without shareholder approval. See "Investment Objective and Policies" in the
Trust's Prospectus. For purposes of the 1940 Act, "majority" means the lesser
of (a) 67% or more of the votes attributable to shares of the Fund present at a
meeting, if the holders of more than 50% of such votes are present or
represented by proxy, or (b) more than 50% of the votes attributable to shares
of the Fund.
With the exception of the Growth Fund whose investment restrictions are set
out below, none of the Funds may:
1. Pledge, mortgage or hypothecate its assets, except:
(a) to the extent necessary to secure permitted borrowings; and (b) to the
extent related to the deposit of assets in escrow in connection with (i) the
writing of covered put and call options, (ii) the purchase of securities on a
forward commitment or
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delayed-delivery basis, (iii) collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts
(including those relating to indices), options on futures contracts or indices,
and (iv) collateral with respect to forward currency exchange contracts and
dollar roll transactions.
2. Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but a Fund may make margin
deposits in connection with transactions in currencies, options, futures
contracts and options on futures contracts.
3. Underwrite securities issued by others, except to the extent that the
sale of portfolio securities by a Fund may be deemed to be underwriting.
4. Purchase, hold or deal in real estate (including real estate limited
partnerships) or oil, gas or mineral leases, although a Fund may purchase and
sell securities that are secured by real estate or interests therein, may
purchase mortgage-related securities and securities issued by real estate
investment trusts, may hold and sell real estate acquired for the Fund as a
result of the ownership of securities and may purchase or sell securities of
companies that invest in or sponsor oil, gas, or mineral exploration or
development programs.
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5. Invest in commodities except that a Fund may purchase and sell futures
contracts, including those relating to securities, currencies and indices, and
options on futures contracts, securities, currencies or indices, and purchase
and sell currencies or securities on a forward commitment or delayed-delivery
basis as described in the Prospectus.
6. Lend any money or other assets except through the purchase of all or a
portion of an issue of securities or obligations of the type in which the Fund
may invest. However, a Fund may lend its portfolio securities in an amount not
to exceed one-third of the value of its total assets and enter into repurchase
agreements.
7. Issue any senior security (as such term is defined in Section 18(f) of
the 1940 Act) except as otherwise permitted under these fundamental investment
restrictions.
8. Alone or together with any other of the Funds, make investments for
the purpose of exercising control over, or management of, any issuer.
9. Borrow money except from banks for temporary or short-term purposes
and then only if the Fund maintains asset coverage of at least 300% for such
borrowings. For purposes of this investment restriction, transactions in
currency, swaps, options, futures contracts, including those relating to
indices, forward contracts, options on futures contracts or indices and forward
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commitment transactions shall not constitute borrowing. None of the Funds will
purchase securities when such borrowings exceed 5% of its assets.
Fund-specific restrictions:
10. All Funds other than the High Yield Bond Fund may not invest more than
25% of the value of their total assets in the securities of issuers conducting
their principal business activities in the same industry. This limitation does
not apply to U.S. Government Securities.
11. The Funds, except for the High Yield Bond Fund and the International
Equity Fund, may not sell securities short and the Funds, except for the Growth
& Income Fund, the Growth Fund and the International Equity Fund, may not engage
in short sales against the box.
12. All Funds other than the International Equity Fund may not, as to 75%
of the total assets at the time of purchase, purchase the securities of any
issuer if more than 5% of the value of the Fund's total assets would be invested
in such securities.
The Growth Fund:
1. May not with respect to 75% of its total assets, purchase the
securities of any issuer (except securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities) if, as a result, (i) more than
5% of the
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Fund's total assets would be invested in the securities of that issuer, or (ii)
the Fund would hold more than 10% of the outstanding voting securities of that
issuer.
2. May (i) borrow money from banks and (ii) make other investments or
engage in other transactions permissible under the 1940 Act which may involve a
borrowing, provided that the combination of (i) and (ii) shall not exceed
33 1/3% of the value of the Fund's total assets (including the amount borrowed),
less the Fund's liabilities (other than borrowings), except that the Fund may
borrow up to an additional 5% of its total assets (not including the amount
borrowed) from a bank for temporary or emergency purposes (but not for leverage
or the purchase of investments).
3. May not issue senior securities, except as permitted under the 1940
Act.
4. May not act as an underwriter of another issuer's securities, except
to the extent that the Fund may be deemed to be an underwriter within the
meaning of the 1933 Act in connection with the purchase and sale of portfolio
securities.
5. May not purchase or sell physical commodities unless acquired as a
result of ownership of securities or other
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instruments (but this shall not prevent the Fund from purchasing or selling
options, futures contacts or other derivative instruments, or from investing in
securities or other instruments backed by physical commodities).
6. May not make loans if, as a result, more than 331/3% of the Fund's
total assets would be lent to other persons, except through (i) purchases of
debt securities or other debt instruments, or (ii) engaging in repurchase
agreements.
7. May not purchase the securities of any issuer if, as a result, more
than 25% of the Fund's total assets would be invested in the securities of
issuers, the principal business activities of which are in the same industry.
8. May not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prohibit the
Fund from purchasing or selling securities or other instruments backed by real
estate or of issuers engaged in real estate activities).
9. May, notwithstanding any other fundamental investment policy or
restriction, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental investment
objective, policies, and restrictions as the Fund.
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NON-FUNDAMENTAL RESTRICTIONS
In addition to the investment restrictions mentioned above, the Trustees of
the Trust have adopted certain non-fundamental restrictions for each Fund as
shown below. Non-fundamental restrictions represent the current intentions of
the Trust's Board of Trustees and they differ from fundamental investment
restrictions in that they may be changed or amended by the Board of Trustees
without prior notice to or approval of shareholders.
With the exception of the Growth Fund whose non-fundamental restrictions
are set out below, none of the Funds may:
1. Purchase the securities of any issuer if by such purchase the Fund
would own more than 10% of the outstanding voting securities of such issuer.
2. Write covered calls or put options with respect to more than 25% of
the value of its net assets at any time, invest more than 25% of its net assets
at any time in purchased puts, calls, spreads or straddles, or any combination
thereof other than protective put options. The aggregate value of premiums paid
on all options held by one of these Funds at any time will not exceed 20% of the
Fund's total net assets.
Fund specific restrictions:
3. The Investment Grade Bond Fund, the High Yield Bond Fund, the Balanced
Fund, the Growth & Income Fund, the Emerging Growth Fund and the International
Equity Fund will not invest in
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illiquid securities, including certain repurchase agreements or time deposits
maturing in more than seven days, if, as a result thereof, more than 15% of the
value of its net assets would be invested in assets that are either illiquid or
are not readily marketable.
4. The International Equity Fund will not invest in foreign issuers
unless, after such investment, issuers in at least the following number of
different countries are represented in the Fund's portfolio: if up to 40% of
the Fund's total assets are invested in foreign issuers, two foreign countries;
if between 40% and 60% of the Fund's total assets are invested in foreign
issuers, three foreign countries; if between 60% and 80% of the Fund's total
assets are invested in foreign issuers, four foreign countries; and if over 80%
of the Fund's total assets are invested in foreign issuers, five foreign
countries.
5. The Investment Grade Bond Fund, the Balanced Fund, the Growth & Income
Fund and the Emerging Growth Fund may not enter into reverse repurchase
agreements exceeding in the aggregate one-third of the market value of the
Fund's total assets, less liabilities other than obligations created by reverse
repurchase agreements.
The Growth Fund may not:
1. Sell securities short, unless the Fund owns or has the right to obtain
securities equivalent in kind and amount to
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the securities sold short, or unless it covers such short sale as required by
the current rules and positions of the SEC or its staff, and provided that
transactions in options, futures contracts, options on futures contracts, or
other derivative instruments are not deemed to constitute selling securities
short.
2. Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions; and
provided that margin deposits in connection with futures contracts, options on
futures contracts, or other derivative instruments shall not constitute
purchasing securities on margin.
3. Invest in illiquid securities if, as a result of such investment, more
than 15% of its net assets would be invested in illiquid securities, or such
other amounts as may be permitted under the 1940 Act.
4. Purchase securities of other investment companies except in compliance
with the 1940 Act and applicable state law.
5. Invest all of its assets in the securities of a single open-end
investment management company with substantially the same fundamental investment
objective, restrictions and policies as the Fund.
6. Purchase the securities of any issuer (other than securities issued or
guaranteed by domestic or foreign
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governments or political subdivisions thereof) if, as a result more than 5% of
its total assets would be invested in the securities of issuers that, including
predecessor or unconditional guarantors, have a record of less than three years
of continuous operation. This policy does not apply to securities of pooled
investment vehicles or mortgage or asset-backed securities.
7. Invest in direct interests in oil, gas, or other mineral exploration
programs or leases; however, the Fund may invest in the securities of issuers
that engage in these activities.
8. Engage in futures or options on futures transactions which are
impermissible pursuant to Rule 4.5 under the Commodity Exchange Act and, in
accordance with Rule 4.5, will use futures or options on futures transactions
solely for bona fide hedging transactions (within the meaning of the Commodity
Exchange Act), provided, however, that the Fund may, in addition to bona fide
hedging transactions, use futures and options on futures transactions if the
aggregate initial margin and premiums required to establish such positions, less
the amount by which any such options positions are in the money (within the
meaning of the Commodity Exchange Act), do not exceed 5% of the Fund's net
assets.
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In addition, (i) the aggregate value of securities underlying call options
on securities written by the Fund or obligations underlying put options on
securities written by the Fund determined as of the date the options are written
will not exceed 50% of the Fund's net assets; (ii) the aggregate premiums paid
on all options purchased by the Fund and which are being held will not exceed
20% of the Fund's net assets; (iii) the Fund will not purchase put or call
options, other than hedging positions, if, as a result thereof, more than 5% of
its total assets would be so invested; and (iv) the aggregate margin deposits
required on all futures and options on futures transactions being held will not
exceed 5% of the Fund's total assets.
9. Pledge, mortgage or hypothecate any assets owned by the Fund except as
may be necessary in connection with permissible borrowings or investments and
then such pledging, mortgaging, or hypothecating may not exceed 33 1/3% of the
Fund's total assets at the time of the borrowing or investment.
10. Purchase or retain the securities of any issuer if any officer or
director of the Fund or its investment adviser beneficially owns more than 1/2
of 1% of the securities of such issuer and such officers and directors together
own beneficially more then 5% of the securities of such issuer.
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11. Purchase warrants, valued at the lower of cost or market value, in
excess 5% of the Fund's net assets. Included in that amount, but not to exceed
2% of the Fund's net assets, may be warrants that are not listed on any stock
exchange. Warrants acquired by the Fund in units or attached to securities are
not subject to these restrictions.
12. Borrow money except (i) from banks or (ii) through reverse repurchase
agreements or mortgage dollar rolls, and will not purchase securities when bank
borrowings exceed 5% of its total assets.
13. Make any loans other than loans of portfolio securities, except
through (i) purchases of debt securities or other debt instruments, or (ii)
engaging in repurchase agreements.
INTERPRETIVE RULES
For purposes of the foregoing limitations, any limitation which involves a
maximum percentage will not be violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by, a Fund. In addition, with regard to
exceptions recited in a restriction, a Fund may only rely on anexception if its
investment objective(s) or policies (as disclosed in the Prospectus) otherwise
permit it to rely on the exception.
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INVESTMENT ADVISER
Alexander Hamilton Capital Management, Inc. (the "Adviser"), 33045 Hamilton
Court, Farmington Hills, Michigan 48334-3358, is the investment manager of the
Trust and its Funds. The Adviser is a wholly-owned subsidiary of the Alexander
Hamilton Life Insurance Company of America ("Alexander Hamilton Life"), a
Michigan stock life insurance company.
On August 10, 1995, the Company announced that it was being purchased by
Jefferson-Pilot Corporation, a $16.4 billion asset company based in Greensboro,
North Carolina. Jefferson-Pilot is in the insurance business through Jefferson-
Pilot Life Insurance Company, and in the communications business through
television and radio stations. The acquisition involves the individual life and
annuity business of the Company; other lines of business will be retained by
Household Group, Inc. The acquisition was completed during the fourth quarter
of 1995.
The Adviser was organized on June 16, 1993. Although the Adviser is not
primarily responsible for the daily management of the Funds, the Adviser will
oversee the management of the assets of the Funds by each of the sub-advisers.
In turn, each sub-adviser is responsible for the day-to-day management of a
specific Fund.
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<PAGE>
INVESTMENT MANAGEMENT AGREEMENT
The Adviser has entered into an investment management agreement, dated
October 9, 1995, with the Trust under which the Adviser assumes overall
responsibility, subject to the supervision of the Trust's Board of Trustees, for
administering all operations of the Trust and for monitoring and evaluating the
management of the assets of each of the Funds by the sub-advisers on an ongoing
basis. The Adviser provides or arranges for the provision of the overall
business management and administrative services necessary for the Trust's
operations and furnishes or procures any other services and information
necessary for the proper conduct of the Trust's business. The Adviser also acts
as liaison among, and supervisor of, the various service providers to the Trust,
including the sub-advisers, custodian, transfer agent, and accounting and
administration services agent that performs services for the Trust on its
behalf. The Adviser is also responsible for overseeing the Trust's compliance
with the requirements of applicable law and in conformity with each Fund's
investment objective(s), policies and restrictions, including oversight of the
sub-advisers.
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<PAGE>
For its services to the Trust, the Adviser receives a monthly management
fee. The fee is deducted daily from the assets of each of the Funds and paid to
the Adviser monthly. The fee for each Fund is based on the average daily net
assets of the Fund at the following annual rates:
- ------------------------------------------------
FUND ADVISORY FEE
- -------------------------------------------------
Investment Grade Bond Fund 0.60%
- -------------------------------------------------
High Yield Bond Fund 0.75%
- -------------------------------------------------
Balanced Fund 0.80%
- -------------------------------------------------
Growth & Income Fund 0.70%
- -------------------------------------------------
Growth Fund 0.75%
- -------------------------------------------------
Emerging Growth Fund 0.80%
- -------------------------------------------------
International Equity Fund 1.00%
- -------------------------------------------------
The investment management agreement does not place limits on the operating
expenses of the Trust or of any Fund. However, the Adviser has voluntarily
undertaken to pay any such expenses (but not including brokerage or other
portfolio transaction expenses or expenses of litigation, indemnification, taxes
or other extraordinary expenses) to the extent that such expenses and
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<PAGE>
the advisory fee, as accrued for each Fund, exceed the following percentages of
that Fund's estimated average daily net assets on an annualized basis:
- -----------------------------------------------
FUND EXPENSE CAP
- -----------------------------------------------
Investment Grade Bond Fund 0.85%
- -----------------------------------------------
High Yield Bond Fund 0.95%
- -----------------------------------------------
Balanced Fund 1.00%
- -----------------------------------------------
Growth & Income Fund 0.90%
- -----------------------------------------------
Growth Fund 1.00%
- -----------------------------------------------
Emerging Growth Fund 1.05%
- -----------------------------------------------
International Equity Fund 1.40%
- -----------------------------------------------
The investment management agreement provides that the Adviser may render
similar services to others so long as the services that it provides thereunder
are not impaired thereby. The investment management agreement also provides that
the Adviser shall not be liable for any error of judgment or mistake of law or
for any loss arising out of any investment or for any act or omission in the
management of the Trust, except for (i) willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of reckless disregard
of
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<PAGE>
its duties or obligations under the investment management agreement, and (ii) to
the extent specified in Section 36(b) of the Act concerning loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation.
The investment management agreement was approved for each Fund by the
Trustees of the Trust, including a majority of the Trustees of the Trust who are
not parties to the investment advisory agreement or "interested persons" (as
such term is defined in the Act) of any party thereto (the "non-interested
trustees"), and by the initial shareholders of the Trust. The investment
management agreement will remain in effect until October 9, 1997 and from year
to year thereafter provided such continuance is specifically approved as to each
Fund at least annually by (a) the vote of a majority of the votes attributable
to shares of the Fund or a majority of the Trustees of the Trust, and (b) the
vote of a majority of the non-interested Trustees of the Trust, cast in person
at a meeting called for the purpose of voting on such approval. The investment
management agreement will terminate automatically if assigned (as defined in the
1940 Act). The investment management agreement is also terminable as to any
Fund at any time by the Trustees of the Trust or by vote of a majority of the
votes attributable to outstanding voting securities of the applicable Fund (a)
without penalty and
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<PAGE>
(b) on 60 days' written notice to the Adviser. The agreement is also terminable
by the Adviser on six months written notice to the Trust.
EXPENSES OF THE TRUST
The Trust incurs certain operating and general administrative expenses in
addition to the Adviser's fee. These expenses, which are accrued daily, include
but are not limited to: taxes; expenses for legal and auditing services; costs
of printing; charges for custody services; transfer agent fees, if any; expenses
of redemption of shares; expense of registering shares under federal and state
securities laws; accounting costs; insurance; dues of trade associations;
interest; brokerage costs, and other expenses properly payable by the Trust.
In general, each Fund is charged for the expenses incurred in its
operations as well as for a portion of the Trust's general administrative
expenses, allocated on the basis of the asset size of the respective Funds, or
by the Board of Trustees as appropriate. Expenses other than the Adviser's fee
that are borne directly and paid individually by a Fund include, but are not
limited to, brokerage commissions, dealer markups, taxes, custody fees, and
other costs properly payable by the Fund. Expenses which are allocated among
the Funds include, but are not limited to, Trustees' fees and expenses,
independent accountant fees, transfer agent fees, expenses of redemption,
insurance
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<PAGE>
costs, legal fees, and all other costs of operation properly payable by the
Trust.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The sub-advisers are responsible for decisions to buy and sell securities
for the Funds, the selection of brokers and dealers to effect the transactions
and the negotiation of brokerage commissions, if any. Purchases and sales of
securities on a securities exchange are effected through brokers who charge a
negotiated commission for their services. Orders may be directed to any broker
including, to the extent and in the manner permitted by applicable law,
affiliates of the Adviser or sub-advisers.
In placing orders for portfolio securities of a Fund, its sub-adviser is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the sub-adviser will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. While the
sub-adviser generally seeks reasonably competitive spreads or commissions, the
Funds will not necessarily be paying the lowest spread or commission available.
Within the framework of this policy, the sub-advisers will consider research and
investment services provided by brokers or
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<PAGE>
dealers who effect or are parties to portfolio transactions of the Funds, the
sub-advisers and their affiliates, or other clients of the sub-advisers or their
affiliates. Such research and investment services include statistical and
economic data and research reports on particular companies and industries. Such
services are used by the sub-advisers in connection with all of their investment
activities, and some of such services obtained in connection with the execution
of transactions for the Funds may be used in managing other investment accounts.
Conversely, brokers furnishing such services may be selected for the execution
of transactions of such other accounts, whose aggregate assets are far larger
than those of the Funds, and the services furnished by such brokers may be used
by the sub-advisers in providing investment advisory services for the Funds.
On occasions when the sub-adviser deems the purchase or sale of a security
to be in the best interests of a Fund as well as its other advisory clients
(including any other fund or other investment company or advisory account for
which the sub-adviser or an affiliate acts as investment adviser), the sub-
adviser, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be sold or purchased for the Fund with those to be
sold or purchased for such other customers in order to obtain the best net price
and most favorable execution. In such event, allocation of the securities so
purchased or
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<PAGE>
sold, as well as the expenses incurred in the transaction, will be made by the
sub-adviser in the manner it considers to be most equitable and consistent with
its fiduciary obligations to the Fund and such other customers. In some
instances, this procedure may adversely affect the price and size of the
position obtainable for a Fund.
Commission rates are established pursuant to negotiations with the broker
based on the quality and quantity of execution services provided by the broker
in the light of generally prevailing rates. The allocation of orders among
brokers and the commission rates paid are reviewed periodically by the Board of
Trustees of the Trust.
DETERMINATION OF NET ASSET VALUE
Under the 1940 Act, the Board of Trustees of the Trust is responsible for
determining in good faith the fair value of securities of each Fund. In
accordance with procedures adopted by the Board of Trustees of the Trust, the
net asset value per share is calculated by determining the net worth of each
Fund (assets, including securities at market value or amortized cost value,
minus liabilities) divided by the number of that Fund's outstanding shares. All
securities are valued as of the close of regular trading on the New York Stock
Exchange. Each Fund will compute its net asset value once daily at the close of
such
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<PAGE>
trading (normally 4:00 p.m. New York time), on each day (as described in the
Prospectus) that the Trust is open for business.
In the event that the New York Stock Exchange or the national securities
exchange on which stock options are traded adopt different trading hours on
either a permanent or temporary basis, the Board of Trustees of the Trust will
reconsider the time at which net asset value is computed. In addition, the
Funds may compute their net asset value as of any time permitted pursuant to any
exemption, order or statement of the SEC or its staff.
Portfolio assets of the Funds are valued as follows:
(a) securities and other investments listed on any U.S. or foreign stock
exchange or the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") are valued at the last sale price on that
exchange or NASDAQ on the valuation day; if no sale occurs, securities
traded on a U.S. exchange or NASDAQ are valued at the mean between the
closing bid and closing asked prices and securities traded on a
foreign exchange will be valued at the official bid price (the last
sale price and official bid price for securities traded principally on
a foreign exchange will be determined as of the close of the London
Foreign Exchange);
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<PAGE>
(b) over-the-counter securities not quoted on NASDAQ are valued at the
last sale price on the valuation day or, if no sale occurs, at the
mean between the last bid and asked prices;
(c) debt securities with a remaining maturity of 61 days or more are
valued on the basis of dealer-supplied quotations or by a pricing
service selected by the sub-adviser and approved by the Board of
Trustees of the Trust if those prices are deemed by the sub-adviser to
be representative of market values at the close of business of the New
York Stock Exchange;
(d) options and futures contracts are valued at the last sale price on the
market where any such option or futures contracts is principally
traded;
(e) over-the-counter options are valued based upon prices provided by
market makers in such securities or dealers in such currencies;
(f) forward foreign currency exchange contracts are valued based upon
quotations supplied by dealers in such contracts;
(g) all other securities and other assets, including those for which a
pricing service supplies no quotations or quotations are not deemed by
the sub-adviser to be representative of market values, but excluding
debt
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<PAGE>
securities with remaining maturities of 60 days or less, are valued at
fair value as determined in good faith pursuant to procedures
established by the Board of Trustees of the Trust; and
(h) debt securities with a remaining maturity of 60 days or less will be
valued at their amortized cost which approximates market value.
Portfolio securities traded on more than one U.S. national securities
exchange or foreign securities exchange are valued at the last sale price on
each business day at the close of the exchange representing the principal market
for such securities. The value of all assets and liabilities expressed in
foreign currencies will be converted into U.S. dollar values at the mean between
the buying and selling rates of such currencies against U.S. dollars last quoted
by any major bank. If such quotations are not available, the rate of exchange
will be determined in good faith by or under procedures established by the Board
of Trustees of the Trust.
Trading in securities on European and Far Eastern securities exchanges and
on over-the-counter markets is normally completed well before the close of
business on each business day. In addition, European or Far Eastern securities
trading generally or in a particular country or countries may not take place on
all business days. Furthermore, trading takes place in Japanese
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<PAGE>
markets on certain Saturdays and in various foreign markets on days which are
not business days for the Trust and days on which the Funds' net asset value is
not calculated. Such calculation does not take place contemporaneously with the
determination of the prices of the majority of the portfolio securities used in
such calculation. Events affecting the values of portfolio securities that
occur between the time their prices are determined and the close of regular
trading on the New York Stock Exchange will not be reflected in a Fund's
calculation of net asset values unless the sub-adviser deems that the particular
event would materially affect net asset value, in which case an adjustment will
be made.
PERFORMANCE INFORMATION
The Trust may from time to time quote or otherwise use average annual total
return information for the Funds in advertisements, shareholder reports or sales
literature. Average annual total return values are computed pursuant to
equations specified by the SEC.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment in a Fund made at the beginning of the period, and then calculating
the annual compounded rate of return which would produce that amount, assuming a
redemption at the end of the period. This calculation assumes a complete
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<PAGE>
redemption of the investment. It also assumes that all dividends and
distributions are reinvested at net asset value on the reinvestment dates during
the period.
The Trust also may from time to time quote or otherwise use year-by-year
total return, cumulative total return and yield information for the Funds in
advertisements, shareholder reports or sales literature. Year-by-year total
return and cumulative total return for a specified period are each derived by
calculating the percentage rate required to make a $1,000 investment in a Fund
(assuming that all distributions are reinvested) at the beginning of such period
equal to the actual total value of such investment at the end of such period.
Yield is computed by dividing net investment income earned during a recent
30 day period by the product of the average daily number of shares outstanding
and entitled to receive dividends during the period and the price per share on
the last day of the relevant period. The results are compounded on a bond
equivalent (semi-annual) basis and then annualized. Net investment income per
share is equal to the dividends and interest earned during the period, reduced
by accrued expenses for the period. The calculation of net investment income
for these purposes may differ from the net investment income determined for
accounting purposes.
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<PAGE>
Any performance data quoted for a Fund will represent historical
performance and the investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than original cost. Performance data for the Funds will not reflect charges
deducted under the variable annuity contracts. If contract charges are taken
into account, such performance data would reflect lower returns. Accordingly,
any advertisement that includes performance data for the Funds will also include
performance data for the variable annuity contracts.
From time to time the Trust may publish an indication of the Funds' past
performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Weisenberger Investment Companies Service,
Donoghue's Money Fund Report, Barron's, Business Week, Changing Times, Financial
World, Forbes, Fortune, Money, Personal Investor, Sylvia Porter's Personal
Finance and The Wall Street Journal. The Trust may also advertise information
which has been provided to the NASD for publication in regional and local
newspapers. In addition, the Trust may from time to time advertise its
performance relative to certain indices and benchmark investments, including
(but not limited to): (a) the Lipper Analytical Services, Inc. Mutual Fund
Performance Analysis, Fixed-Income Analysis and Mutual Fund Indices (which
measure total return and average current yield for
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<PAGE>
the mutual fund industry and rank mutual fund performance); (b) the CDA Mutual
Fund Report published by CDA Investment Technologies, Inc. (which analyzes
price, risk and various measures of return for the mutual fund industry);
(c) the Consumer Price Index published by the U.S. Bureau of Labor Statistics
(which measures changes in the price of goods and services); (d) Stocks, Bonds,
Bills and Inflation published by Ibbotson Associates (which provides historical
performance figures for stocks, government securities and inflation); (e) the
Hambrecht & Quist Growth Stock Index; (f) the NASDAQ OTC Composite Prime Return;
(g) the Russell Midcap Index; (h) the Russell 2000 Index - Total Return; (i) the
ValueLine Composite-Price Return; (j) the Wilshire 4500 Index; (k) the Salomon
Brothers' World Bond Index (which measures the total return in U.S. dollar terms
of government bonds, Eurobonds and foreign bonds of ten countries, with all such
bonds having a minimum maturity of five years); (l) the Shearson Lehman Brothers
Aggregate Bond Index or its component indices (the Aggregate Bond Index measures
the performance of Treasury, U.S. Government agencies, mortgage and Yankee
bonds); (m) the S&P Bond indices (which measure yield and price of corporate,
municipal and U.S. Government bonds); (n) the J.P. Morgan Global Government Bond
Index; (o) Donoghue's Money Market Fund Report (which provides industry averages
of 7-day annualized and compounded yields of
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<PAGE>
taxable, tax-free and U.S. Government money market funds); (p) other taxable
investments including certificates of deposit, money market deposit accounts,
checking accounts, savings accounts, money market mutual funds and repurchase
agreements; (q) historical investment data supplied by the research departments
of Goldman Sachs, Lehman Brothers, First Boston Corporation, Morgan Stanley
(including EAFE), Salomon Brothers, Merrill Lynch, Donaldson Lufkin and Jenrette
or other providers of such data; (r) the FT-Actuaries Europe and Pacific Index;
(s) mutual fund performance indices published by Variable Annuity Research &
Data Service; (t) S&P 500 Index; and (u) mutual fund performance indices
published by Morningstar, Inc. The composition of the investments in such
indices and the characteristics of such benchmark investments are not identical
to, and in some cases are very different from, those of a Fund's portfolio.
These indices and averages are generally unmanaged and the items included in the
calculations of such indices and averages may be different from those of the
equations used by the Trust to calculate a Fund's performance figures.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the sub-advisers'
views as to markets, the rationale for a Fund's investments and discussions of
the Fund's current asset allocation.
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<PAGE>
From time to time, advertisements or information may include a discussion
of certain attributes or benefits to be derived by an investment in a particular
Fund. Such advertisements or information may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail in the communication.
Such performance data will be based on historical results and will not be
intended to indicate future performance. The total return or yield of a Fund
will vary based on market conditions, portfolio expenses, portfolio investments
and other factors. The value of a Fund's shares will fluctuate and an
investor's shares may be worth more or less than their original cost upon
redemption. The Trust may also, at its discretion, from time to time make a
list of a Fund's holdings available to investors upon request.
SHARES OF STOCK
The Trust is an open-end, management investment company established as a
Massachusetts business trust under a Declaration of Trust dated September 16,
1994. The Trust issues a separate class of shares for each Fund representing
fractional undivided interests in that Fund. The Board of Trustees of the Trust
have authority to divide or combine the shares of any Fund into greater or
lesser number without thereby changing the proportionate beneficial interests in
the Fund.
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<PAGE>
Each issued and outstanding share is entitled to participate equally in
dividends and distributions declared for the respective class and, upon
liquidation or dissolution, in net assets allocated to such class remaining
after satisfaction of outstanding liabilities. The shares of each class, when
issued, will be fully paid and non-assessable and have no preemptive or
conversion rights.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted by the provisions of the 1940 Act, applicable state law or otherwise
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class
affected by such matter. Rule 18f-2 further provides that a class shall be
deemed to be affected by a matter unless the interests of each class in the
matter are substantially identical or the matter does not affect any interest of
such class. However, Rule 18f-2 exempts the selection of independent public
accountants, the approval of principal underwriting contracts and the election
of Trustees from the separate voting requirements of Rule 18f-2.
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<PAGE>
The Jefferson-Pilot Corporation Employees' Retirement Plan and Alexander
Hamilton Life will provide capital for each of the Trust's Funds by purchasing
stock of each class in the following amounts: Investment Grade Bond Fund,
$3,000,000; High Yield Bond Fund, $2,000,000; Balanced Fund, $4,000,000; Growth
& Income Fund, $5,000,000; Growth Fund, $5,000,000; Emerging Growth Fund,
$5,000,000; and International Equity Fund, $5,000,000. Such shares were
acquired for investment and can only be disposed of by redemption.
Under normal circumstances, the Trust will redeem shares of the Funds in
cash the next business day. However, the right of a shareholder to redeem
shares and the date of payment by the Trust may be suspended for more than seven
days for any period during which the New York Stock Exchange is closed, other
than the customary weekends or holidays, or when trading on such Exchange is
restricted as determined by the SEC; or during any emergency, as determined by
the SEC, as a result of which it is not reasonably practicable for a Fund to
dispose of securities owned by it or fairly to determine the value of its net
assets; or for such other period as the SEC may by order permit for the
protection of shareholders.
Under Massachusetts law, the Trust is not required to hold annual
shareholder meetings and does not intend to do so.
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<PAGE>
CUSTODY OF ASSETS
Pursuant to a custody agreement with the Trust, Bank of New York holds the
cash and portfolio securities of the Trust as custodian.
Bank of New York is responsible for holding all securities and cash of each
Fund, receiving and paying for securities purchased, delivering against payment
securities sold, and receiving and collecting income from investments, making
all payments covering expenses of the Trust, all as directed by persons
authorized by the Trust.
Bank of New York does not exercise any supervisory function in such matters
as the purchase and sale of portfolio securities, payment of dividends, or
payment of expenses of the Funds or the Trust. Portfolio securities of the
Funds purchased domestically are maintained in the custody of Bank of New York
and may be entered into the Federal Reserve, Depository Trust Company, or
Participant's Trust Company book entry systems. Pursuant to the Custody
Agreement, portfolio securities purchased outside the United States will be
maintained in the custody of various foreign branches of Bank of New York and
such other custodians or subcustodians, including foreign banks and foreign
securities depositories, as are approved by the Board of Trustees of the Trust,
in accordance with regulations under the 1940 Act.
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Bank of New York holds securities of the Funds on which call options have
been written and certain assets of the Funds constituting margin deposits with
respect to financial futures contracts at the disposal of the futures commission
merchants ("FCMs") through which such transactions are effected. The Funds may
also be required to post margin deposits with respect to covered call and put
options written on stock indices and for this purpose certain assets of those
Funds may be held by the custodian pursuant to similar arrangements with the
brokers involved.
This arrangement regarding margin deposits essentially consists of Bank of
New York creating a separate segregated account into which it transfers (upon
the Trust's instructions) assets from a Fund's general (regular) custodial
account. The custody agreement for such arrangement provides that FCMs or
brokers will have access to the funds in the segregated accounts when and if the
FCMs or brokers represent that the Trust has defaulted on its obligation to the
FCMs or brokers and that the FCMs or brokers have met all the conditions
precedent to their right to receive such funds under the agreement between the
Trust and the FCMs or brokers. The Trust has an agreement with each FCM or
broker which provides (1) that the assets of any Fund held
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by the FCM or broker will be in the possession of Bank of New York until
released or sold or otherwise disposed of in accordance with or under the terms
of such agreement, (2) that such assets would not otherwise be pledged or
encumbered by the FCM or broker, (3) that when requested by the Trust the FCM or
broker will cause Bank of New York to release to its general custody account any
assets to which a Fund is entitled under the terms of such agreement, and
(4) that the assets in the segregated account shall otherwise be used only to
satisfy the Trust's obligations to the FCM or broker under the terms of such
agreement.
If on any day a Fund experiences net realized or unrealized gains with
respect to financial futures contracts or covered options on stock indices held
through a given FCM or broker, it is entitled immediately to receive from the
FCM or broker, and usually will receive by the next business day, the net amount
of such gains. Thereupon, such assets will be deposited in its general or
segregated account with Bank of New York, as appropriate.
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TRUSTEES AND OFFICERS
The Trustees and officers of the Trust are listed below together with their
respective positions with the Trust and a brief statement of their principal
occupations during the past five years and any positions held with affiliates of
the Trust:
Position(s) Principal
Name, Address, Held with Occupation(s)
and Age the Trust During Past 5 Years
------------- --------- -------------------
E.J. Yelton* Trustee and Executive Vice President,
(age 56) President Jefferson -Pilot Life
Insurance Company since
October 1993; prior
thereto, President, ING
Investment Centre
Dennis R. Glass* Trustee Executive Vice President
(age 46) and Chief Financial
Officer, Jefferson-Pilot
Life Insurance Company
since 1993; prior thereto,
Executive Vice President
and Chief Financial
Officer, Protective Life
Corporation (from 1991 to
1993); prior thereto,
Executive Vice President
and Chief Financial
Officer, The Portman
Companies
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<PAGE>
Position(s) Principal
Name, Address, Held with Occupation(s)
and Age the Trust During Past 5 Years
------------- --------- -------------------
Mark E. Konen* Trustee Senior Vice President and
(age 36) Corporate Actuary,
Jefferson-Pilot
Corporation since August
1994; prior thereto, Vice
President and Actuary, FMI
Inc.
Timothy Brooks Burnett Trustee President and Treasurer,
822 North Elm Street Bessemer Improvement
Greensboro, NC 27401 Company; and Chairman and
(age 55) Secretary, Burkely
Property Group since
January 1990.
Terrence E. Geremski Trustee Director, Guilford Mills,
1 Loch Ridge Court Inc. since 1993; Vice
Greensboro, NC 27408 President, Chief Financial
Officer and Treasurer,
Guilford Mills, Inc. since
July 1992; prior thereto,
Vice President,
Controller, Varity
Corporation.
Ralph K. Shelton Trustee President, Southeast
1617 Foxhollow Rd. Fuels, Inc.
Greensboro, NC 27410
(age 53)
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<PAGE>
Position(s) Principal
Name, Address, Held with Occupation(s)
and Age the Trust During Past 5 Years
------------- --------- -------------------
H. Lusby Brown* Vice President Second Vice President,
(age 37) and Treasurer Jefferson-Pilot Life
Insurance Company since
August 1991; prior
thereto, Security Analyst,
Jefferson-Pilot Life
Insurance Company.
J. Gregory Poole* Secretary Associate Counsel and
(age 31) Assistant Secretary,
Jefferson-Pilot Life
Insurance Company since
January 1994; prior
thereto, Attorney,
Jefferson-Pilot Life
Insurance Company.
Deborah L. McKenney* Assistant Associate Counsel,
(age 26) Secretary Jefferson-Pilot Life
Insurance Company since
October 1995; prior
thereto, Associate
Counsel, Alexander
Hamilton Life Insurance
Company (August 1995 to
October 1995); prior
thereto, student,
University of Michigan.
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<PAGE>
Position(s) Principal
Name, Address, Held with Occupation(s)
and Age the Trust During Past 5 Years
------------- --------- -------------------
Catherine B. Ream* Assistant Manager, Variable
(age 29) Treasurer Products, Alexander
Hamilton Life Insurance
Company since November
1992; prior thereto,
Investment Support
Officer, Connecticut
Mutual Life Insurance
Company.
There is no family relationship between any of the Trustees or officers
listed above.
* "Interested Person" of the Trust for purposes of the 1940 Act. The address
of Interested Persons is Jefferson-Pilot Life, 100 North Greene Street,
Greensboro, NC 27401.
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The Trustees of the Trust received the following compensation from the
Trust during the current fiscal year:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits Estimated from the
Aggregate Accrued as Annual Trust and
Compensation Part of the Benefits Fund Complex
from the Trust's upon Paid to
Name of Person, Position Trust Expenses Retirement Trustees
------------------------ ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C>
Dennis R. Glass $ 0 $ 0 $ 0 N.A.
Trustee
E.J. Yelton $ 0 $ 0 $ 0 N.A.
Trustee
Mark E. Konen $ 0 $ 0 $ 0 N.A.
Trustee
Timothy B. Burnett** $ 0 $ 0 $ 0 N.A.
Trustee
Terrence E. Geremski** $ 0 $ 0 $ 0 N.A.
Trustee
Ralph K. Shelton** $ 0 $ 0 $ 0 N.A.
Trustee
</TABLE>
** Each non-interested Trustee currently receives an annual retainer of $4,000
plus $750 per meeting of the Board and $250 for each committee meeting which he
or she attends.
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<PAGE>
OTHER INFORMATION
FINANCIAL STATEMENTS
This Statement of Additional Information does not contain audited or
unaudited financial statements for the Trust since as December 31, 1995, the
Trust had not commenced operations and had no assets or liabilities. It is
anticipated that Ernst & Young, LLP will serve as independent auditors for the
Trust.
LEGAL COUNSEL
Sutherland, Asbill & Brennan, 1275 Pennsylvania Avenue, N.W., Washington,
D.C. 20004-2404, is counsel to the Trust.
OTHER INFORMATION
The Prospectus and this Statement do not contain all the information
included in the registration statement filed with the SEC under the 1933 Act
with respect to the securities offered by the Prospectus. Certain portions of
the registration statement have been omitted from the Prospectus and this
Statement pursuant to the rules and regulations of the SEC. The registration
statement including the exhibits filed therewith may be examined at the office
of the SEC in Washington, D.C.
Statements contained in the Prospectus or in this Statement as to the contents
of any contract or other document referred to are not necessarily complete, and,
in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the registration statement of which the
Prospectus and
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<PAGE>
this Statement form parts, each such statement being qualified in all respects
by such reference.
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<PAGE>
APPENDIX A
DESCRIPTION OF CORPORATE BOND AND PREFERRED STOCK RATINGS
AND COMMERCIAL PAPER (1/)
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
CORPORATE BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
- --------------------
(2/) The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P") at the date of this Statement for the
securities listed. Ratings are generally given to securities at the time of
issuance. While the rating agencies may from time to time revise such ratings,
they undertake no obligations to do so, and the ratings indicated do not
necessarily represent ratings which will be given to these securities on the
date of the Fund's fiscal year end.
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<PAGE>
Baa: Bonds which are rated Baa are considered a medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or maybe characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements and
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well safe-
guarded during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A and Baa groups which Moody's believe
possess the strongest investment attributes are designated by the symbols Aa1,
A1 and Baa1.
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<PAGE>
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S
CORPORATE BOND RATINGS
AAA: Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB-B-CCC-CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from "AA" to "BBB" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
Unrated: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative obligations. The Fund is dependent on the sub-adviser's
judgment, analysis and experience in the evaluation of such bonds.
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<PAGE>
DESCRIPTION OF CERTAIN COMMERCIAL PAPER RATINGS
STANDARD & POOR'S
Commercial paper rated A by S&P has the following characteristics:
Liquidity ratios are adequate to meet cash requirements. Long-term senior debt
is rated "A" or better, although in some cases "BBB" credits may be allowed.
The issuer has access to at least two additional channels of borrowing. Basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances. Typically, the issuer's industry is well established and the
issuer has a strong position within the industry. The reliability and quality
of management are unquestioned. The rating is described by S&P as the
investment grade category, the highest rating classification. Relative strength
or weakness of the above factors determine whether the issuer's commercial paper
is rated A-1, A-2 or A-3.
MOODY'S
Among the factor considered by Moody's in assigning commercial paper
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; (8) recognitions by the management of
obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. Relative differences in
strengths and weaknesses in respect of these criteria establish a rating in one
of three classifications. The rating Prime-1 is the highest commercial paper
rating assigned by Moody's. Its other two ratings, Prime-2 and Prime-3 are
designated Higher Quality and High Quality, respectively.
FITCH INVESTORS SERVICE, INC.
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
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<PAGE>
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated "F-1+".
DUFF & PHELPS
Commercial Paper/Certificates of Deposits
Category 1: Top Grade
Duff 1 plus: Highest certainty of timely payment. Short-term liquidity
including internal operating factors and/or ready access to
alternative sources of funds, is clearly outstanding, and safety
is just below risk-free U.S. Treasury short-term obligations.
Duff 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors.
Risk factors are minor.
Notes: Bonds which are unrated may expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to
the risks of lower-rated bonds. The Fund is dependent on the sub-
adviser's judgment, analysis and experience in the evaluation of such
bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
IBCA LIMITED AND ICBA INC.
A-1: Short-term obligations rate A-1 are supported by very strong capacity
for timely repayment. A plus ("+") sign is added to those issues
determined to possess the highest capacity for timely repayment.
A-2: Short-term obligations rated A-2 are supported by a strong capacity
for timely repayment, although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
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<PAGE>
THOMPSON BANKWATCH, INC.
The TBW short-term ratings apply only to unsecured instruments that have a
maturity of one year or less and specifically assess the likelihood of an
untimely payment of principal and interest.
TBW-1: The highest category; indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis.
TBW-2: The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree
of safety is not as high as for issues rated TBW-1.
CREDIT RATINGS FOR GOVERNMENT BONDS
The following table shows the credit rating assigned by Moody's Investors
Service, Inc. and Standard & Poor's Corporation for foreign currency-denominated
debt issued by various countries.
Country Moody's S & P
------- ------- -----
USA Aaa AAA
Japan Aaa AAA
Germany Aaa AAA
Italy A1 AA
France Aaa AAA
UK Aaa AAA
Canada Aa2 AA+
Belgium Aa1 AA+
Denmark Aa1 AA+
Sweden Aa3 AA+
Switzerland Aaa AAA
Netherlands Aaa AAA
Spain Aa2 AA
Australia Aa2 AA
Certain governments listed above carry an implied rating by Moody and/or
S&P. Information is as of July 7, 1995 for Moody's and as of July 7, 1995 for
Standard & Poor's.
All of the countries (except Italy) have a AAA rating by Standard & Poor's
Corporation and a Aaa rating with Moody's Investors Service, Inc. for their
domestic currency debt. Italy's ratings are A1+ and A1 respectively.
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