WNL SERIES TRUST
5555 SAN FELIPE, SUITE 900
HOUSTON, TEXAS 77056
WNL Series Trust (the "Trust") is an open-end, diversified series management
investment company which currently offers shares of beneficial interest of
eight series (the "Portfolios"), each of which has a different investment
objective and represents the entire interest in a separate portfolio of
investments. The Portfolios are: Van Kampen American Capital Emerging Growth
Portfolio (formerly American Capital Emerging Growth Portfolio), BEA Growth
and Income Portfolio, Credit Suisse International Equity Portfolio, BlackRock
Managed Bond Portfolio, EliteValue Asset Allocation Portfolio (formerly Quest
for Value Asset Allocation Portfolio), Salomon Brothers U.S. Government
Securities Portfolio, Global Advisors Growth Equity Portfolio and Global
Advisors Money Market Portfolio. These Portfolios are currently available to
the public only through variable annuity contracts ("VA Contracts") issued by
Western National Life Insurance Company ("Life Company").
This Prospectus sets forth concisely the information about the Trust that a
prospective investor should know before investing. Please read it carefully
and retain it for future reference. A Statement of Additional Information
("SAI") dated May 1, 1996, is available without charge upon request and may be
obtained by calling the Life Company at (800) 910-4455 or by writing to the
Life Company, Attention: Variable Annuity Service Center, P.O. Box 361, 95
Bridge Street, Haddam, Connecticut 06438-0361. Some of the discussions
contained in this Prospectus refer to the more detailed descriptions contained
in the SAI, which is incorporated by reference into this Prospectus and has
been filed with the Securities and Exchange Commission.
INVESTMENTS IN THE TRUST ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. SHARES OF THE TRUST ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENTAL AGENCY. AN INVESTMENT IN THE TRUST IS SUBJECT TO RISK THAT MAY
CAUSE THE VALUE OF THE INVESTMENT TO FLUCTUATE, AND WHEN THE INVESTMENT IS
REDEEMED, THE VALUE MAY BE HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY INVESTED
BY THE INVESTOR.
PURCHASERS SHOULD BE AWARE THAT AN INVESTMENT IN THE GLOBAL ADVISORS MONEY
MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
THERE CAN BE NO ASSURANCE THAT THE GLOBAL ADVISORS MONEY MARKET PORTFOLIO WILL
BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Prospectus Dated May 1, 1996
TABLE OF CONTENTS
PAGE
SUMMARY
The Trust
Investment Adviser and Sub-Advisers
The Portfolios
Van Kampen American Capital Emerging Growth Portfolio
BEA Growth and Income Portfolio
Credit Suisse International Equity Portfolio
BlackRock Managed Bond Portfolio
EliteValue Asset Allocation Portfolio
Salomon Brothers U.S. Government Securities Portfolio
Global Advisors Growth Equity Portfolio
Global Advisors Money Market Portfolio
Investment Risks
Sales and Redemptions
FINANCIAL HIGHLIGHTS
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
Van Kampen American Capital Emerging Growth Portfolio
BEA Growth and Income Portfolio
Credit Suisse International Equity Portfolio
BlackRock Managed Bond Portfolio
EliteValue Asset Allocation Portfolio
Salomon Brothers U.S. Government Securities Portfolio
Global Advisors Growth Equity Portfolio
Global Advisors Money Market Portfolio
MANAGEMENT OF THE TRUST
Investment Adviser
Advisory Fee Waiver and Expense Cap
Expenses of the Trust
Sub-Advisers
Sub-Advisory Fees
Sub-Advisory Fee Waiver
SALES AND REDEMPTIONS
NET ASSET VALUE
PERFORMANCE INFORMATION
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
ADDITIONAL INFORMATION
APPENDIX
Securities And Investment Practices
American Depository Receipts and European Depository Receipts
Asset-Backed Securities
Bank Obligations
Borrowing
Common Stock and Other Equity Securities
Convertible Securities
Currency Management
Dollar Roll Transactions
Equity and Debt Securities Issued or Guaranteed by Supranational Organizations
Exchange Rate-Related Securities
Fixed-Income Securities
Foreign Currency Exchange Transactions
Foreign Investments
Futures and Options on Futures
Geographical and Industry Concentration
Government Stripped Mortgage-Backed Securities
Interest Rate Transactions
Illiquid Securities
Investment Companies
Lease Obligation Bonds
Lending of Securities
Lower-Rated Securities
Mortgage-Backed Securities
Collateralized Mortgage Obligations and Multiclass Pass-Through Securities
New Issuers
Options on Securities
Options on Foreign Currencies
Options on Indexes
Over the Counter Options
Repurchase Agreements
Reverse Repurchase Agreements
Small Companies
Strategic Transactions
U.S. Government Securities
When-Issued Securities and Delayed-Delivery Transactions
SUMMARY
THE TRUST
The Trust is an open-end diversified management investment company established
as a Massachusetts business trust under a Declaration of Trust dated December
12, 1994, as amended April 19, 1995. Each Portfolio issues a separate class of
shares. The Declaration of Trust permits the Trustees to issue an unlimited
number of full or fractional shares of each class of stock.
Each Portfolio has distinct investment objectives and policies. (See
"Investment Objectives and Policies of the Portfolios.") Additional Portfolios
may be added to the Trust in the future.
INVESTMENT ADVISER AND SUB-ADVISERS
Subject to the authority of the Board of Trustees of the Trust, WNL Investment
Advisory Services, Inc. (the "Adviser") serves as the Trust's investment
adviser and has responsibility for the overall management of the investment
strategies and policies of the Portfolios. The Adviser has engaged
Sub-Advisers for each Portfolio to make investment decisions and place orders.
The Sub-Advisers for the Portfolios are:
<TABLE>
<CAPTION>
<S> <C>
Sub-Adviser Name of Portfolio
- ---------------------------------------------------- ----------------------------------
Van Kampen American Capital Asset Management, Inc. Van Kampen American Capital
Emerging Growth
BEA Associates BEA Growth and Income
Credit Suisse Investment Management Ltd. Credit Suisse International Equity
BlackRock Financial Management BlackRock Managed Bond
OpCap Advisors, formerly Quest for Value Advisors EliteValue Asset Allocation
Salomon Brothers Asset Management Inc Salomon Brothers U.S. Government
Securities
State Street Global Advisors Global Advisors Growth Equity
(A division of State Street Bank and Trust Company) Global Advisors Money Market
</TABLE>
For additional information concerning the Adviser and the Sub-Advisers,
including a description of advisory and sub-advisory fees, see "Management of
the Trust."
THE PORTFOLIOS
VAN KAMPEN AMERICAN CAPITAL EMERGING GROWTH PORTFOLIO
The Portfolio's investment objective is to seek to provide capital
appreciation; any ordinary income received from portfolio securities is
entirely incidental. The Portfolio will, under normal conditions, invest at
least 65% of its total assets in common stocks of small and medium-sized
companies, both domestic and foreign, in the early stages of their life cycle
that the Sub-Adviser believes have the potential to become major enterprises.
While the Portfolio will invest primarily in common stocks, to a limited
extent, it may invest in other securities such as preferred stocks,
convertible securities and warrants. The Portfolio may invest up to 20% of its
assets in securities of foreign issuers. Investing in foreign securities
generally involves risks not ordinarily associated with investing in
securities of domestic issuers. (See "Appendix - Foreign Investments" and the
SAI for a discussion of the risks involved in foreign investing.)
BEA GROWTH AND INCOME PORTFOLIO
The Portfolio's fundamental investment objective is to provide long-term
capital growth, current income and growth of income, consistent with
reasonable investment risk. The Portfolio will invest primarily in domestic
equity as well as domestic debt securities. The proportion of the Portfolio's
assets to be invested in each type of security will vary from time to time in
accordance with the Sub-Adviser's assessment of economic conditions and
investment opportunities. The asset allocation strategy is based on the
premise that, from time to time, certain asset classes are more attractive
long-term than others. The Sub-Adviser anticipates that under normal market
conditions, between 35% and 65% of the Portfolio's total assets will be
invested in equity securities, and between 35% and 65% will be invested in
debt securities.
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
The Portfolio's fundamental investment objective is long-term capital
appreciation. The Portfolio will seek to achieve its objective primarily by
investing in equity and equity-related securities of companies from at least
five different countries, excluding the United States. This Portfolio 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 Portfolio
generally employs. Under normal conditions, the Portfolio will invest at least
65% of its total assets in equity securities of issuers whose principal places
of business (as determined by location of the issuer's principal headquarters)
are located in countries other than the United States. The balance of the
Portfolio, up to 35% of its total assets, may be invested in equity or debt
securities of U.S. issuers or foreign entities. Investing in foreign
securities generally involves risks not ordinarily associated with investing
in securities of domestic issuers. (See "Appendix - Foreign Investments" and
the SAI for a discussion of the risks involved in foreign investing.)
BLACKROCK MANAGED BOND PORTFOLIO
The Portfolio's fundamental 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 Portfolio will
fluctuate, the Portfolio attempts to preserve the value of its investments to
the extent consistent with its objective. The Sub-Adviser actively manages the
Portfolio's duration, the allocation of securities across market sectors, and
the selection of specific securities within sectors. The Sub-Adviser also
actively allocates the Portfolio's assets among the broad sectors of the
fixed-income market, including, but not limited to, U.S. Government and agency
securities, corporate securities, private placements, and asset-backed and
mortgage-related securities, including residential and commercial
mortgage-backed securities. Under normal circumstances, the Sub-Adviser
intends to keep the Portfolio essentially fully invested with at least 65% of
the Portfolio's assets invested in bonds.
ELITEVALUE ASSET ALLOCATION PORTFOLIO
The Portfolio's fundamental investment objective is to achieve growth of
capital over time through investment in a portfolio consisting of common
stocks, bonds and cash equivalents, the percentages of which will vary based
on the Sub-Adviser's assessments of the relative outlook for such investments.
In seeking to achieve its investment objective, the types of equity securities
in which the Portfolio may invest are likely to be primarily those of
companies that are believed by the Sub-Adviser to be undervalued in the
marketplace in relation to factors such as the companies' assets or earnings.
Debt securities are expected to be predominantly investment-grade,
intermediate to long-term U.S. Government and corporate debt, although the
Portfolio will also invest in high-quality, short-term money market and cash
equivalent securities and may invest almost all of its assets in such
securities when the Sub-Adviser deems it advisable in order to preserve
capital. In addition, the Portfolio may also purchase foreign securities,
provided that they are listed on a domestic or foreign securities exchange or
are represented by American Depository Receipts ("ADRs") listed on a domestic
securities exchange or traded in domestic or foreign over-the-counter markets.
Investing in foreign securities generally involves risks not ordinarily
associated with investing in securities of domestic issuers. (See "Appendix -
Foreign Investments" and the SAI for a discussion of the risks involved in
foreign investing.) The allocation of the Portfolio's assets among the
different types of permitted investments will vary from time to time based
upon the Sub-Adviser's evaluation of economic and market trends and its
perception of the relative values available from such types of securities at
any given time. There is neither a minimum nor a maximum percentage of the
Portfolio's assets that may, at any given time, be invested in any of the
types of investments identified above.
SALOMON BROTHERS U.S. GOVERNMENT SECURITIES PORTFOLIO
The Portfolio's fundamental investment objective is to seek a high level of
current income. The Portfolio seeks to attain its objective by investing a
substantial portion of its assets in debt obligations and mortgage-backed
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and collateralized mortgage obligations backed by such
securities. The Portfolio may also invest a portion of its assets in U.S.
dollar-denominated corporate debt securities.
GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO
The Portfolio's fundamental investment objective is to provide total returns
that exceed over time the Standard & Poor's 500 Composite Stock Price Index
through investment in equity securities. Equity securities will be selected on
the basis of a proprietary analytical model of the Portfolio's Sub-Adviser.
Each security will be ranked according to two separate and uncorrelated
measures: value and the momentum of Wall Street sentiment. The Portfolio will
invest at least 65% of its total assets in equity securities. However, the
Portfolio may invest temporarily for defensive purposes, without limitation,
in certain short-term, fixed-income securities. Such securities may be used to
invest uncommitted cash balances or to maintain liquidity.
GLOBAL ADVISORS MONEY MARKET PORTFOLIO
The Portfolio's fundamental investment objective is to maximize current
income, to the extent consistent with the preservation of capital and
liquidity, and the maintenance of a stable $1.00 per share net asset value, by
investing in dollar-denominated securities with remaining maturities of one
year or less. The Portfolio attempts to meet its investment objective by
investing in high-quality money market instruments. An investment in this
Portfolio is neither insured nor guaranteed by the U.S. Government.
The investment objectives, policies and restrictions of a Portfolio
specifically cited as fundamental may not be changed without the approval of a
majority of the outstanding shares of that Portfolio. Other investment
policies and practices described in this Prospectus and the SAI are not
fundamental, and the Board of Trustees may change them without shareholder
approval. A complete list of investment restrictions, including those
restrictions which cannot be changed without shareholder approval, is
contained in the SAI. There is no assurance that a Portfolio will meet its
stated objective.
INVESTMENT RISKS
The value of a Portfolio's shares will fluctuate with the value of the
underlying securities in its portfolio, and in the case of debt securities,
with the general level of interest rates. When interest rates decline, the
value of an investment portfolio invested in fixed-income securities can be
expected to rise. Conversely, when interest rates rise, the value of an
investment portfolio invested in fixed-income securities can be expected to
decline. In the case of foreign currency-denominated securities, these trends
may be offset or amplified by fluctuations in foreign currencies. Investments
by a Portfolio in foreign securities may be affected by adverse political,
diplomatic, and economic developments, changes in foreign currency exchange
rates, taxes or other assessments imposed on distributions with respect to
those investments, and other factors generally affecting foreign investments.
High-yielding, high-risk, fixed-income securities, which are commonly known as
"junk bonds," are subject to greater market fluctuations and risk of loss of
income and principal than investments in lower-yielding, fixed-income
securities. The Emerging Growth, Growth Equity and Money Market Portfolios
will not invest in "junk bonds," while each of the other Portfolios may invest
up to 5% of its respective total assets in "junk bonds." Certain Portfolios
intend to employ, from time to time, certain investment techniques which are
designed to enhance income or total return or hedge against market or currency
risks but which themselves involve additional risks. These techniques include
options on securities, futures, options on futures, options on indexes,
options on foreign currencies, foreign currency exchange transactions, lending
of securities and when-issued securities and delayed-delivery transactions.
The Portfolios may have higher-than-average portfolio turnover which may
result in higher-than-average brokerage commissions and transaction costs.
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of the Life Company as a
funding vehicle for the VA Contracts offered by the Life Company. No fee is
charged upon the sale or redemption of the Trust's shares. Expenses of the
Trust will be passed through to the separate accounts of the Life Company, and
therefore, will be ultimately borne by VA Contract owners. In addition, other
fees and expenses will be assessed by the Life Company at the separate account
level. (See the Prospectus for the VA Contract for a description of all fees
and charges relating to the VA Contract.)
FINANCIAL HIGHLIGHTS
The following tables include selected data, derived from the financial
statements, for a share outstanding throughout the period shown for each of
the Portfolios. The tables should be read in conjunction with the financial
statements and notes thereto included in the Trust's Annual Report to
Shareholders which are included in the SAI in reliance upon the report of
Coopers & Lybrand L.L.P., independent auditors.
Further information about the performance of the Trust is contained in the
Trust's December 31, 1995 Annual Report which may be obtained without charge
by calling the Life Company at (800) 910-4455.
WNL SERIES TRUST
FOR A SHARE OUTSTANDING FOR THE PERIOD ENDED
DECEMBER 31, 1995*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
BEA Credit Global Global
Growth Suisse Advisors Advisors
and International Growth Money
Income Equity Equity Market
-------- --------------- ---------- ----------
Net asset value, beginning of period... $ 10.00 $ 10.00 $ 10.00 $ 1.00
-------- --------------- ---------- ----------
Net investment income(1)............... 0.14 0.06 0.05 0.01
Net realized and unrealized gain on
investments......................... 0.51 0.33 0.31 ----
-------- --------------- ---------- ----------
Total from investment operations....... 0.65 0.39 0.36 0.01
-------- --------------- ---------- ----------
Distributions:
From net investment income........... (0.14) (0.06) (0.05) (0.01)
In excess of net realized gains...... (0.05) --- ---` ---
-------- --------------- ---------- ----------
Total distributions.................... (0.19) (0.06) (0.05) (0.01)
-------- --------------- ---------- ----------
Net asset value, end of period......... $ 10.46 $ 10.33 $ 10.31 $ 1.00
-------- --------------- ---------- ----------
TOTAL RETURN(2)........................ 6.57% 3.93% 3.57% 1.17%
RATIOS/SUPPLEMENTAL DATA:
Operating expenses to average net
assets(3)........................... 0.12% 0.12% 0.12% 0.12%
Net investment income to average net
assets(4)........................... 6.99% 2.89% 2.46% 5.25%
Portfolio turnover rate(5)............. 75% 2% 9% N/A
Net assets, at end of period (000's)... $ 2,136 $ 2,083 $ 2,073 $ 126
<FN>
* The Money Market Portfolio commenced investment operations on October 10, 1995. The
Growth and Income, International Equity, and Growth Equity Portfolios commenced investment
operations on October 20, 1995.
(1) Net investment income is after waiver of fees and reimbursement of certain
expenses by the Adviser, State Street Bank and Trust Company, as Sub-Administrator, and
the Life Company, an affiliate of the Adviser (see Note 2 to the financial statements in
the SAI). If the Adviser and State Street Bank and Trust Company, as Sub-Administrator,
had not waived fees and the Life Company had not reimbursed expenses, net investment
income (loss) per share would have been $(0.06) for the BEA Growth and Income Portfolio,
$(0.18) for the Credit Suisse International Equity Portfolio, $(0.15) for the Global
Advisors Growth Equity Portfolio, and $(0.35) for the Global Advisors Money Market
Portfolio.
(2) Total return represents aggregate total return for the period indicated.
(3) If the Adviser and State Street Bank and Trust Company, as Sub-Administrator,
had not waived fees and Life Company had not reimbursed expenses, the ratio of
operating expenses to average net assets would have been 9.95% for the BEA Growth and
Income Portfolio, 11.83% for the Credit Suisse International Equity Portfolio, 9.94%
for the Global Advisors Growth Equity Portfolio, and 161.83% for the Global Advisors
Money Market Portfolio.
(4) Annualized.
(5) Not annualized.
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
Each Portfolio of the Trust has a different investment objective or objectives
which it pursues through separate investment policies as described below. The
differences in objectives and policies among the Portfolios can be expected to
affect the return of each Portfolio and the degree of market and financial
risk to which each Portfolio is subject. An investment in a single Portfolio
should not be considered a complete investment program. The investment
objective(s) and policies of each Portfolio, unless otherwise specifically
stated, are non-fundamental and may be changed by the Trustees of the Trust
without a vote of the shareholders. There is no assurance that any Portfolio
will achieve its objective(s). United States Treasury Regulations applicable
to portfolios that serve as the funding vehicles for variable annuity and
variable life insurance contracts generally require that such portfolios
invest no more than 55% of the value of their assets in one investment, 70% in
two investments, 80% in three investments, and 90% in four investments. The
Portfolios intend to comply with the requirements of these Regulations.
In order to comply with regulations which may be issued by the U.S. Treasury,
the Trust may be required to limit the availability, or change the investment
policies, of one or more Portfolios, or to take steps to liquidate one or more
Portfolios. The Trust will not change any fundamental investment policy of a
Portfolio without a vote of shareholders of that Portfolio.
In addition, the State of California currently imposes diversification
requirements on variable insurance products portfolios investing in non-U.S.
securities. Under these requirements, a Portfolio investing at least 80% of
its assets in non-U.S. securities must be invested in at least five countries;
less than 80% but at least 60%, in at least four countries; less than 60% but
at least 40%, in at least three countries; and less than 40% but at least 20%,
in at least two countries, except that up to 35% of a Portfolio's assets may
be invested in securities of issuers located in any of the following
countries: Australia, Canada, France, Japan, the United Kingdom or Germany. A
Portfolio's investments in United States' issuers are not subject to these
diversification requirements. The Trust intends to comply with the California
diversification requirements for the Portfolios which invest in non-U.S.
securities, to the extent applicable.
Except as otherwise noted herein, if the securities rating of a debt security
held by a Portfolio declines below the minimum rating for securities in which
the Portfolio may invest, the Portfolio will not be required to dispose of the
security, but the Portfolio's Sub-Adviser will consider whether continued
investment in the security is consistent with the Portfolio's investment
objective.
In implementing its investment objectives and policies, each Portfolio uses a
variety of instruments, strategies and techniques which are described in more
detail in the Appendix and the SAI. With respect to each Portfolio's
investment policies, use of the term "primarily" means that under normal
circumstances, at least 65% of such Portfolio's assets will be invested as
indicated. A description of the ratings systems used by the following
nationally recognized statistical rating organizations ("NRSROs") is also
contained in the SAI: Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Corporation ("S&P"), Duff & Phelps, Inc. ("Duff"), Fitch Investors
Service, Inc. ("Fitch"), Thomson Bankwatch, Inc., IBCA Limited and IBCA Inc.
New instruments, strategies and techniques, however, are evolving continually
and the Trust reserves authority to invest in or implement them to the extent
consistent with its investment objectives and policies. If new instruments,
strategies or techniques would involve a material change to the information
contained herein, they will not be purchased or implemented until this
Prospectus is appropriately supplemented.
VAN KAMPEN AMERICAN CAPITAL EMERGING GROWTH PORTFOLIO
The Portfolio seeks to provide capital appreciation for its shareholders; any
ordinary income received from portfolio securities is entirely incidental.
This objective is not fundamental and may be changed by the Trust's Board of
Trustees without shareholder approval, but no change is anticipated. If there
is a change in the investment objective of the Portfolio, shareholders should
consider whether the Portfolio remains an appropriate investment in light of
their then current financial position and needs. There can, of course, be no
assurance that the objective of capital appreciation will be realized;
therefore, full consideration should be given to the risks inherent in the
investment techniques that the Sub-Adviser may use to achieve such objective.
As a fundamental investment policy, the Portfolio under normal conditions
invests at least 65% of its total assets in common stocks of small and
medium-sized companies, both domestic and foreign, in the early stages of
their life cycle that the Sub-Adviser believes have the potential to become
major enterprises. Investments in such companies may offer greater
opportunities for growth of capital than larger, more established companies,
but also may involve certain special risks. Emerging growth companies often
have limited product lines, markets, or financial resources, and they may be
dependent upon one person or a few key people for management. The securities
of such companies may be subject to more abrupt or erratic market movements
than securities of larger, more established companies or the market averages
in general. While the Portfolio will invest primarily in common stocks, to a
limited extent, it may invest in other securities, such as preferred stocks,
convertible securities and warrants.
The Portfolio does not limit its investment to any single group or
type of security. The Portfolio may also invest in special situations
involving new management, special products and techniques, unusual
developments, mergers or liquidations. Investments in unseasoned companies
and special situations often involve much greater risks than are inherent in
ordinary investments, because securities of such companies may be more
likely to experience unexpected fluctuations in price.
The Portfolio's primary approach is to seek what the Sub-Adviser believes to
be unusually attractive growth investments on an individual company basis. The
Portfolio may invest in securities that have above-average volatility of price
movement. Because prices of common stocks and other securities fluctuate, the
value of an investment in the Portfolio will vary based upon the Portfolio's
investment performance. The Portfolio attempts to reduce overall exposure to
risk from declines in securities prices by spreading its investments over many
different companies in a variety of industries. There is, however, no
assurance that the Portfolio will be successful in achieving its objective.
The Portfolio may invest up to 20% of its total assets in securities of
foreign issuers. (See "Appendix - Foreign Investments" and the SAI for a
discussion of the risks involved in foreign investing.) Additionally, the
Portfolio may invest up to 10% of the value of its assets in restricted
securities (i.e., securities which may not be sold without registration under
the Securities Act of 1933 ("1933 Act")) and in other securities not having
readily available market quotations. The Portfolio may enter into repurchase
agreements with domestic banks and broker-dealers which involve certain risks.
The Portfolio does not presently expect to commit as much as 5% of its total
assets to investments in either warrants or restricted securities. The risks
involved in investing in restricted securities, warrants and repurchase
agreements are described under "Investment Objectives and Policies" in the
SAI.
The Portfolio may invest in options, futures contracts and related options.
These investments and transactions are described in greater detail in the
Appendix and SAI.
BEA GROWTH AND INCOME PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio's goal is to provide long-term capital growth, current
income and growth of income, consistent with reasonable investment risk. This
investment objective is fundamental and may not be changed without the
affirmative vote of a majority of the Portfolio's outstanding shares (as
defined in the Investment Company Act of 1940, as amended ("1940 Act").
MANAGEMENT POLICIES
The Portfolio will invest primarily in domestic equity and debt
securities and cash equivalent instruments. The Portfolio may also invest in
securities of foreign issuers. The proportion of the Portfolio's assets to
be invested in each type of security will vary from time to time in
accordance with the Sub-Adviser's assessment of economic conditions and
investment opportunities. The asset allocation strategy is based on the
premise that, from time to time, certain asset classes are more attractive
long-term investments than others. Timely shifts among equity securities, debt
securities, and cash equivalent instruments, as determined by their relative
over-valuation or under-valuation, should produce superior investment returns
over the long term. In general, the Portfolio will not attempt to predict
short-term market movements or interest rate changes, focusing instead upon a
longer-term outlook. The Sub-Adviser anticipates that under normal market
conditions, between 35% and 65% of the Portfolio's total assets will be
invested in equity securities, and between 35% and 65% will be invested in
debt securities.
In selecting equity securities in which to invest, the Sub-Adviser generally
employs a value-oriented approach that combines "top-down" and "bottom-up"
elements. The process begins with a top-down thematic approach, by which the
Sub-Adviser attempts to identify the three or four macroeconomic variables
most likely to drive equity returns in the medium term, and the sectors,
industries and stocks most likely to benefit as those themes are played out.
This is combined with a bottom-up approach to stock selection which identifies
value through the application of "cash on cash analysis." The Sub-Adviser
looks at the free cash flow produced by a company within the context of the
total cash value of the enterprise. This ratio of cash flow to "enterprise
value" permits a comparative analysis of companies across industries and
sectors, and provides a tool with which to analyze the quality and priorities
of the company's management. The Portfolio's approach is based upon the
observation that a company focusing upon cash flow will generally be one in
which management's overarching concern is the maximization of shareholder
value. Equity securities may include common stocks, preferred stocks, and
securities which are convertible into common stock and readily marketable
securities, such as rights and warrants, which derive their value from common
stock.
In selecting debt securities in which to invest, the Sub-Adviser generally
employs an approach that focuses upon the exploitation of market
inefficiencies, which exist primarily due to the differing objectives of
various investors and to the varying restrictions that limit their investment
choices. In determining whether the Portfolio should invest in a particular
debt security, the Sub-Adviser reviews the terms of the instrument and
evaluates the creditworthiness of the issuer of the instrument, considering
short-term debt, leverage, capitalization, the quality and depth of
management, profitability, return on assets, and economic factors relative to
the issuer's industry or market sector. The Sub-Adviser then performs relative
valuation analysis, comparing the value in sectors and securities with regard
to price as well as yield. The Sub-Adviser generally does not rely on its
ability to correctly predict movements in the direction of interest rates.
Debt securities may include bonds, debentures, notes, equipment lease and
trust certificates, mortgage-related securities, and obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities. The
Sub-Adviser's Fixed-Income Management Team will manage the Fixed-Income
portion of the Portfolio, which will invest primarily in domestic fixed-income
securities consistent with comparable broad market fixed-income indexes, such
as the Lehman Brothers Aggregate Bond Index. The Sub-Adviser estimates that
the average weighted maturity of the debt securities held by the Portfolio
will range between 5 and 15 years. Depending upon prevailing market
conditions, the Portfolio may purchase debt securities at a discount from face
value, which produces a yield greater than the coupon rate. Conversely, if
debt securities are purchased at a premium over face value, the yield will be
lower than the coupon rate. An increase in interest rates will generally
reduce the value of the fixed-income investments in the Portfolio and a
decline in interest rates will generally increase the value of those
investments.
The cash equivalent instruments in which the Portfolio may invest consist of
U.S. Government securities, certificates of deposit, time deposits, bankers'
acceptances, short-term investment-grade corporate bonds and short-term debt
instruments, and repurchase agreements. While the Portfolio does not intend to
limit the amount of its assets invested in cash equivalent instruments, except
to the extent believed necessary to achieve its investment objective, it does
not expect under normal market conditions to have a substantial portion of its
assets invested in money market instruments. However, when the Sub-Adviser
determines that adverse market conditions exist, the Portfolio may adopt a
temporary defensive posture and invest its entire portfolio in cash equivalent
instruments. In addition, the Portfolio may invest in cash equivalent
instruments in anticipation of investing cash positions. To the extent the
Portfolio is so invested, the Portfolio's investment objective may not be
achieved. See the Appendix and the SAI for a discussion of these and other
investment policies and strategies with respect to this Portfolio.
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
The Portfolio's investment objective is long-term capital appreciation. This
investment objective is fundamental and may not be changed without the
affirmative vote of a majority of the Portfolio's outstanding shares (as
defined in the 1940 Act). The Portfolio will seek to achieve its objective
primarily by investing in equity and equity-related securities of companies
from at least five different countries, excluding the United States.
The Portfolio 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
Portfolio generally employs.
Under normal conditions, the Portfolio will invest at least 65% of its total
assets in equity securities of issuers whose principal places of business (as
determined by the location of the issuer's principal headquarters) are located
in countries other than the United States.
FOREIGN EQUITY SECURITIES
The Portfolio will invest, under normal conditions, at least 65% of its
total assets in issuers located in at least five different countries,
excluding the United States. The Sub-Adviser expects that the majority of the
Portfolio's investments will be in issuers in the following markets: United
States, Canada, Japan, the United Kingdom, Germany, France, Malaysia, the
Netherlands, Italy, Singapore, Switzerland, Spain, Mexico, Australia, New
Zealand, Hong Kong and Sweden. However, the Portfolio will also invest in
other European, Pacific Rim, African and Latin American markets. As market and
global conditions change, the Portfolio will change its allocations among the
countries of the world and nothing herein will limit the Portfolio's ability
to invest in or avoid any particular countries or regions. The Portfolio may
also invest in the securities of issuers traded on quoted markets of other
countries.
The equity and equity-related securities in which the Portfolio will primarily
invest are common stock, preferred stock, convertible debt obligations,
convertible preferred stock and warrants, or other rights to acquire stock
that the Sub-Adviser believes offer the potential for long-term capital
appreciation. The Portfolio also may invest in securities of foreign issuers
in the form of sponsored and unsponsored ADRs, GDRs, EDRs, IDRs, or other
similar instruments representing securities of foreign issuers. See the
Appendix and the SAI for a description of these investments.
While the investment policy of the Portfolio is to be diversified as to both
countries and individual issuers, the Sub-Adviser selects individual countries
and securities on the basis of several factors. In allocating the Portfolio's
assets among various countries, the Sub-Adviser will seek economic and market
environments favorable for capital appreciation and, with respect to
developing countries, those with economic, political, and stock market
environments with prospects of stabilizing or improving.
In analyzing foreign companies for investment, the Sub-Adviser will ordinarily
look for one or more of the following characteristics in relation to the
prevailing prices of the securities of such companies: prospects for
above-average earnings growth per share; high return on invested capital;
sound balance sheet, financial and accounting policies, and overall financial
strength; strong competitive advantages; effective research, product
development, and marketing; efficient service; pricing flexibility; strength
of management; and general operating characteristics that will enable the
companies to compete successfully in their respective marketplaces. The
Sub-Adviser will aim to invest in companies which have growth prospects or
whose value it believes is not fully reflected in the relevant markets.
TEMPORARY INVESTMENTS
The Portfolio may, when the Sub-Adviser determines that market conditions
warrant, adopt a temporary defensive position and may hold cash (U.S. dollars
or foreign currencies) and may invest up to 100% of its assets in money market
instruments or debt securities of U.S. or foreign issuers. The Portfolio may
also invest cash held to meet redemption requests and expenses in such money
market instruments and debt securities. For these purposes, such money market
instruments are: banker's acceptances, certificates of deposit, time deposits,
commercial paper, short-term government and corporate-obligations. The debt
securities of U.S. issuers or foreign entities in which the Portfolio will
invest primarily will be investment-grade debt securities except that the
Portfolio may invest up to 5% of its total assets in non-investment-grade debt
securities. Investment-grade debt securities include (i) bonds rated in one of
the four highest rating categories by any NRSRO (e.g., BBB or higher by S&P);
(ii)U.S. Government securities; (iii) commercial paper rated in one of the two
highest rating categories of any NRSRO (e.g., A-2 or higher by S&P); (iv) bank
obligations (certificates of deposit, banker's acceptances, and time deposits)
with a long-term rating in one of the four highest categories by any NRSRO
(e.g., BBB or higher by S&P), with respect to bank obligations of more than
one year, or in one of the three highest categories by any NRSRO (e.g., A-3 or
higher by S&P), with respect to bank obligations maturing in one year or less;
(v) repurchase agreements involving these securities; or (vi) unrated debt
securities which are deemed by the Sub-Adviser to be of comparable quality.
All ratings are determined at the time of investment. Securities rated in the
fourth highest category, although considered investment-grade, have
speculative characteristics and may be subject to greater fluctuations in
value than higher-rated securities. Non-investment-grade debt securities
include (i) securities rated as low as C by S&P or their equivalents, which
are commonly known as "junk bonds"; (ii) commercial paper rated as low as A-3
by S&P or their equivalents; and (iii) unrated debt securities determined to
be of comparable quality by the Sub-Adviser. (See "Appendix -- Lower-Rated
Securities" and the SAI for a discussion of the risks involved in investing in
non-investment-grade securities.) U.S. Government securities are securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
The Portfolio may enter into repurchase agreements to earn a return on
temporarily available cash. The Portfolio will not invest in repurchase
agreements maturing in more than seven days if any such investment, together
with any other illiquid securities held by the Portfolio, exceeds 10% of the
value of the Portfolio's net assets. The Portfolio may also 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 Portfolio's assets, and
(b) any securities loan is collateralized in accordance with applicable
regulatory requirements.
The Portfolio may invest in restricted securities and other illiquid assets.
See the Appendix and the SAI for further information relating to
restricted and illiquid securities.
The Portfolio may purchase and sell foreign currencies on a spot basis in
connection with the settlement of transactions in securities traded in such
foreign currencies. The Portfolio may enter into forward foreign currency
contracts and foreign currency futures and option contracts primarily for
hedging purposes. This includes entering into forward foreign currency
contracts and foreign currency futures contracts in anticipation of
investments in companies whose securities are denominated in those currencies.
International investing, in general, may involve greater risks than U.S.
investments. These risks may be intensified in the case of investments in
emerging markets or countries with limited or developing capital markets. (See
"Appendix -- Foreign Investments" and the SAI for a discussion of the risks
involved in foreign investing.)
BLACKROCK MANAGED BOND PORTFOLIO
The Portfolio's investment objective is to provide a high total return
consistent with moderate risk of capital and maintenance of liquidity. This
investment objective is fundamental and may not be changed without the
affirmative vote of a majority of the Portfolio's outstanding shares (as
defined in the 1940 Act). Total return will consist of income, plus realized
and unrealized capital gains and losses. Although the net asset value of the
Portfolio will fluctuate, the Portfolio attempts to preserve the value of its
investments to the extent consistent with its objective.
The Portfolio 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. It may also be a convenient way to add fixed-income
exposure to diversify an existing portfolio.
The Sub-Adviser actively manages the Portfolio's duration, the allocation of
securities across market sectors, and the selection of specific securities
within sectors. The Sub-Adviser also actively allocates the Portfolio's assets
among the broad sectors of the fixed-income market, including but not limited
to, U.S. Government and agency securities, corporate securities, private
placements, and asset-backed and mortgage-related securities, including
residential and commercial mortgage-backed securities. Specific securities
which the Sub-Adviser 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, the Sub-Adviser
intends to keep the Portfolio essentially fully invested with at least 65% of
the Portfolio's assets invested in bonds.
Duration is a measure of the weighted average maturity of the bonds held in
the Portfolio and can be used as a measure of the sensitivity of the
Portfolio's market value to changes in interest rates. Under normal market
conditions, the Portfolio'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 Portfolio's benchmark. Currently, the benchmark's duration is
approximately 4.6 years. The maturities of the individual securities in the
Portfolio may vary widely, however.
The Sub-Adviser intends to manage its portfolio actively in pursuit of its
investment objective. Portfolio transactions are undertaken principally to
accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates, but the Portfolio may also engage in
short-term trading consistent with its objective. To the extent the Portfolio
engages in short-term trading, it may incur increased transaction costs.
CORPORATE BONDS, ETC. The Portfolio 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, mortgage securities,
equipment trust certificates and other collateralized securities and zero
coupon securities. Collateralized securities are backed by a pool of assets
such as loans or receivables which generate cash flow to cover the payments
due on the securities. Collateralized securities are subject to certain risks,
including a decline in the value of the collateral backing the security,
failure of the collateral to generate the anticipated cash flow, or in certain
cases, more rapid prepayment because of events affecting the collateral, such
as accelerated prepayment of mortgages or other loans backing these securities
or destruction of equipment subject to equipment trust certificates. In the
event of any such prepayment, the Portfolio will be required to reinvest the
proceeds of prepayments at interest rates prevailing at the time of
reinvestment, which may be lower. In addition, the value of zero coupon
securities that do not pay interest is more volatile than that of
interest-bearing debt securities with the same maturity. The Portfolio does
not intend to invest in common stock but may invest to a limited extent in
convertible debt or preferred stock. The Portfolio does not expect to invest
more than 25% of its assets in securities of foreign issuers. If the Portfolio
invests in non-U.S. dollar-denominated securities, it hedges the foreign
currency exposure into the U.S. dollar. See the Appendix and the SAI for
further information on foreign investments and convertible securities,
including a discussion of risks.
GOVERNMENT OBLIGATIONS, ETC. The Portfolio 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.
GNMA Certificates are mortgage-backed securities which evidence an undivided
interest in mortgage pools. These securities are subject to more rapid
repayment than their stated maturity would indicate because prepayments of
principal on mortgages in the pool are passed through to the holder of the
securities. During periods of declining interest rates, prepayments of
mortgages in the pool can be expected to increase. The pass-through of these
prepayments would have the effect of reducing the Portfolio's positions in
these securities and requiring the Portfolio to reinvest the prepayments at
interest rates prevailing at the time of reinvestment. The Portfolio may also
invest in obligations issued or guaranteed by U.S. Government agencies or
instrumentalities where the Portfolio must look principally to the issuing or
guaranteeing agency for ultimate repayment; some examples of agencies or
instrumentalities issuing these obligations are the Federal Farm Credit
System, the Federal Home Loan Banks, the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). Although
these governmental issuers are responsible for payments on their obligations,
they do not guarantee their market value.
The Portfolio may invest in debt securities of foreign governments and
governmental entities. International investing may involve greater risks than
U.S. investments. (See "Appendix -- Foreign Investments" and the SAI for a
discussion of the risks involved in foreign investing.)
MONEY MARKET INSTRUMENTS. The Portfolio may purchase money market
instruments to invest temporary cash balances or to maintain liquidity to meet
withdrawals. However, the Portfolio may also invest up to 100% of its total
assets in money market instruments as a temporary defensive measure taken
during, or in anticipation of, adverse market conditions. To the extent that
the Portfolio is invested in temporary defensive instruments, it will not be
pursuing its investment objective. The money market investments permitted for
the Portfolio include obligations of the U.S. Government and its agencies and
instrumentalities, other debt securities, commercial paper, bank obligations
and repurchase agreements. For more detailed information about these money
market investments, see Investment Objectives and Policies in the SAI.
QUALITY INFORMATION. It is a current policy of the Portfolio that under
normal circumstances at least 65% of its total assets will consist of
securities that are rated at least "A" by Moody's or S&P or that are unrated,
and in the Sub-Adviser's opinion, are of comparable quality. In the case of
30% of the Portfolio's investments, the Portfolio may purchase debt securities
that are rated Baa or better by Moody's or BBB or better by S&P or are
unrated, and in the Sub-Adviser's opinion, are of comparable quality. The
remaining 5% of the Portfolio's assets may be invested in debt securities that
are rated Ba or better by Moody's or BB or better by S&P or are unrated, and
in the Sub-Adviser's opinion, are of comparable quality. Securities rated Baa
by Moody's or BBB by S&P, although considered investment-grade, have some
speculative characteristics and such bonds, along with bonds rated below these
ratings, are commonly referred to as "junk bonds." "Investment-grade" debt
securities are those receiving one of the four highest ratings from Moody's,
S&P or another NRSRO or, if unrated by any NRSRO, deemed comparable by the
Sub-Adviser to such rated securities under guidelines established by the Board
of Trustees of the Trust. Bonds in the lowest rating categories may involve a
substantial risk of default or may be in default. Changes in economic
conditions, or developments regarding the individual issuer, are more likely
to cause price volatility and weaken the capacity of the issuers of such
securities to make principal and interest payments than is the case for
higher-grade debt securities. An economic downturn affecting the issuer may
result in an increased incidence of default. The market for lower-rated
securities may be thinner and less active than for higher-rated securities.
The Sub-Adviser will invest in such securities only when it concludes that the
anticipated return to the Portfolio on such an investment warrants exposure to
the additional level of risk. Rating standards must be satisfied at the time
an investment is made. If the quality of the investment later declines, the
Portfolio may continue to hold the investment. See the SAI for more detailed
information on these ratings.
The Portfolio may also purchase obligations on a when-issued or
delayed-delivery basis, enter into repurchase and reverse repurchase
agreements, loan its portfolio securities, purchase certain privately-placed
securities and enter into certain hedging transactions that may involve
options on securities and securities indexes, futures contracts and options on
futures contracts. For a discussion of these investments and investment
techniques, see the Appendix and the SAI.
ELITEVALUE ASSET ALLOCATION PORTFOLIO
The investment objective of the Portfolio is to achieve growth of capital over
time through investment in a portfolio consisting of common stocks, bonds and
cash equivalents, the percentage of which will vary based on the Sub-Adviser's
assessments of the relative outlook for such investments. This investment
objective is fundamental and may not be changed without the affirmative vote
of a majority of the Portfolio's outstanding shares (as defined in the 1940
Act). In seeking to achieve its investment objective, the types of equity
securities in which the Portfolio may invest are likely to be primarily equity
securities of companies that are believed by the Sub-Adviser to be undervalued
in the marketplace in relation to factors such as the companies' assets or
earnings. It is the Sub-Adviser's intention to invest in securities of
companies which in the Sub-Adviser's opinion possess one or more of the
following characteristics: undervalued assets, valuable consumer or commercial
franchises, securities valuation below peer companies, substantial and growing
cash flow and/or a favorable price to book value relationship. Investments for
the equity portion of the Portfolio will primarily consist of equity
securities, such as common stocks, preferred stocks, convertible securities,
rights and warrants in proportions which will vary from time to time. The
equity portion of the Portfolio will be invested primarily in stocks listed on
the New York Stock Exchange. In addition, the Portfolio may also purchase
securities listed on other domestic securities exchanges, securities traded in
the domestic over-the-counter market and foreign securities, provided that
they are listed on a domestic or foreign securities exchange or represented by
American depository receipts listed on a domestic securities exchange or
traded in domestic or foreign over-the-counter markets.
To a lesser extent, the equity portion of the Portfolio will be invested in
equity securities of companies with market capitalizations of less than $1
billion. Smaller-capitalization companies are often under-priced for the
following reasons: (i) institutional investors, which currently represent a
majority of the trading volume in the shares of publicly-traded companies, are
often less interested in such companies, because in order to acquire an equity
position that is large enough to be meaningful to an institutional investor,
such an investor may be required to buy a large percentage of the company's
outstanding equity securities, and (ii) such companies may not be regularly
researched by stock analysts, thereby resulting in greater discrepancies in
valuation. The Portfolio may also purchase securities in initial public
offerings, or shortly after such offerings have been completed, when the
Sub-Adviser believes that such securities have greater-than-average market
appreciation potential. Debt securities invested in by the Portfolio are
expected to be predominantly investment-grade intermediate to long-term U.S.
Government and corporate debt, although the Portfolio will also invest in
high-quality, short-term money market and cash equivalent securities and may
invest almost all of its assets in such securities when the Sub-Adviser deems
it advisable in order to preserve capital.
The allocation of the Portfolio's assets among the different types of
permitted investments will vary from time to time based upon the Sub-Adviser's
evaluation of economic and market trends and its perception of the relative
values available from such types of securities at any given time. There is
neither a minimum nor a maximum percentage of the Portfolio's assets that may,
at any given time, be invested in any of the types of investments identified
above. Consequently, while the Portfolio will earn income to the extent it is
invested in bonds or cash equivalents, the Portfolio does not have any
specific income objective.
The Portfolio may dispose of investments (including money market instruments)
regardless of the holding period if, in the opinion of the Sub-Adviser, an
issuer's creditworthiness or perceived changes in a company's growth prospects
or asset value make selling them advisable. Such an investment decision may
result in capital gains or losses and could result in a high portfolio
turnover rate during a given period, resulting in increased transaction costs
related to equity securities. Disposing of debt securities in these
circumstances should not increase direct transaction costs, since debt
securities are normally traded on a principal basis without brokerage
commissions. However, such transactions do involve a mark-up or mark-down of
the price.
It is anticipated that the Portfolio will have an annual turnover rate
(excluding turnover of securities having a maturity of one year or less) of
100% or less. A 100% annual turnover rate would occur, for example, if all the
securities in the Portfolio's investment portfolio were replaced once in a
period of one year. An investment in the Portfolio will entail both market and
financial risk, the extent of which depends on the amount of the Portfolio's
assets which are committed to equity, longer-term debt or money market
securities at any particular time. As the Portfolio may invest in
mortgage-backed securities, such securities, while similar to other
fixed-income securities, involve the additional risk of prepayment because
mortgage prepayments are passed through to the holder of the mortgage-backed
security and must be reinvested. Prepayments of mortgage principal reduce the
stream of future payments and generate cash which must be reinvested. When
interest rates fall, prepayments tend to rise. As such, the Portfolio may have
to reinvest that portion of its assets invested in such securities more
frequently when interest rates are low than when interest rates are high.
There is no limit to the amount of foreign securities that the Portfolio may
acquire. Certain factors and risks are presented by investment in foreign
securities which are in addition to the usual risks inherent in domestic
securities. (See "Appendix - Foreign Investments" and the SAI for a discussion
of the risks involved in foreign investing.)
It is the present intention of the Sub-Adviser to invest no more than 5% of
the Portfolio's net assets in bonds rated below Baa3 by Moody's or BBB by S&P
(commonly known as "junk bonds"). In the event that the Sub-Adviser intends in
the future to invest more than 5% of the Portfolio's net assets in junk bonds,
appropriate disclosures will be made to existing and prospective shareholders.
For information about the possible risks of investing in junk bonds, see
"Appendix - Lower-Rated Investments" and the SAI.
The Portfolio may also engage in repurchase agreements, lend portfolio
securities (up to 10% of the value of the Portfolio's total assets), enter
into forward foreign currency contracts and invest in modified pass-through
certificates. These investments and transactions are described in greater
detail in the Appendix and the SAI.
SALOMON BROTHERS U.S. GOVERNMENT SECURITIES PORTFOLIO
The investment objective of the Portfolio is to seek a high level of current
income. This investment objective is fundamental and may not be changed
without the affirmative vote of a majority of the Portfolio's outstanding
shares (as defined in the 1940 Act). The Sub-Adviser seeks to attain the
Portfolio's objective by investing a substantial portion of its assets in debt
obligations and mortgage-backed securities issued or guaranteed by the U.S.
Government and its agencies or instrumentalities, and collateralized mortgage
obligations backed by such securities.
At least 80% of the total assets of the Portfolio will be invested in:
(1) U.S. Treasury obligations;
(2) Obligations issued or guaranteed by agencies or instrumentalities of
the U.S. Government which are backed by their own credit and may not be backed
by the full faith and credit of the U.S. Government;
(3) Mortgage-backed securities guaranteed by the Government National
Mortgage Association ("GNMA"), popularly known as "Ginnie Maes," that are
supported by the full faith and credit of the U.S. Government and
mortgage-backed securities guaranteed by agencies or instrumentalities of the
U.S. Government, which are supported by their own credit but not the full
faith and credit of the U.S. Government,such as the Federal Home Loan Mortgage
Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA");
and
(4) Collateralized mortgage obligations issued by private issuers for
which the underlying mortgage-backed securities serving as collateral are
backed (i) by the credit alone of the U.S. Government agency or
instrumentality which issues or guarantees the mortgage-backed securities, or
(ii) by the full faith and credit of the U.S. Government.
Up to 20% of the total assets of the Portfolio may be invested in U.S.
dollar-denominated marketable corporate debt securities (such as bonds and
debentures) of domestic and foreign issuers rated at the time of purchase "A"
or better by Moody's or S&P, or of comparable quality thereto as determined by
the Sub-Adviser. The risks associated with such investments are described in
greater detail in the Appendix.
From time to time, a significant portion of the Portfolio's assets may be
invested in mortgage-backed securities. The mortgage-backed securities in
which the Portfolio invests represent participating interests in pools of
fixed rate and adjustable rate residential mortgage loans issued or guaranteed
by agencies or instrumentalities of the U.S. Government. However, any
guarantee of these types of securities runs only to the principal and interest
payments on the securities and not to the market value of such securities or
the principal and interest payments on the underlying mortgages. In addition,
the guarantee only runs to the portfolio securities held by the Portfolio and
not to the purchase of shares of the Portfolio.
Mortgage-backed securities are issued by lenders such as mortgage bankers,
commercial banks, and savings and loan associations. Mortgage-backed
securities generally provide monthly payments which are, in effect, a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans.
Principal prepayments result from the sale of the underlying property or the
refinancing or foreclosure of underlying mortgages.
The yield of mortgage-backed securities is based on the prepayment rates of
the underlying pool of securities. Prepayments tend to increase during periods
of falling interest rates, while during periods of rising interest rates
prepayments will most likely decline. Reinvestments by the Portfolio of
scheduled principal payments and unscheduled prepayments may occur at higher
or lower rates than the original investment, thus affecting the yield of
the Portfolio. Monthly interest payments received by the Portfolio have a
compounding effect which will increase the yield to shareholders as
compared to debt obligations that pay interest semiannually. For a further
description of mortgage-backed securities, see the Appendix and the SAI.
The Portfolio will not knowingly invest in a high-risk mortgage security. The
term "high-risk mortgage security" is defined generally as any mortgage
security that exhibits significantly greater price volatility than a benchmark
security, the FNMA current coupon 30-year mortgage-backed pass-through
security. Shares of the Portfolio are neither insured nor guaranteed by the
U.S. Government, its agencies or instrumentalities. Neither the issuance by,
nor the guarantee of, a U.S. Government agency for a security constitutes
assurance that the security will not significantly fluctuate in value or that
the Portfolio will receive the originally anticipated yield on the security.
The Portfolio may engage in various hedging and other strategic transactions
including that it may: write covered call options and put options on
securities and purchase call and put options on securities, write covered call
and put options on securities indexes and purchase call and put options on
securities indexes, and, may enter into futures contracts on financial
instruments and indexes and write and purchase put and call options on such
futures contracts. It is not presently anticipated that any of these
strategies will be used to a significant degree by the Portfolio. The Appendix
and the SAI contain a description of these strategies and of certain risks
associated therewith.
The Portfolio may purchase debt securities on a "when-issued" or
"forward-delivery" basis, loan portfolio securities (up to 20% of total
Portfolio assets), engage in repurchase agreements, reverse repurchase
agreements and dollar roll transactions, and invest in illiquid securities (up
to 15% of the Portfolio's net assets, not including restricted securities for
which a ready market is available pursuant to exemption provided by Rule 144A
under the 1933 Act.) These investments and transactions are described in
greater detail in the Appendix and the SAI.
GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO
The Portfolio's investment objective is to provide total returns that exceed
over time the S&P 500 Index through investment in equity securities. This
objective may be changed only with the approval of a majority of the
Portfolio's shareholders as defined by the 1940 Act.
Equity securities will be selected by the Portfolio on the basis of a
proprietary analytical model of the Sub-Adviser. Each security will be ranked
according to two separate and uncorrelated measures: value and the momentum of
Wall Street sentiment. The value measure compares a company's assets,
projected earnings growth and cash flow growth with its stock price within the
context of its historical valuation. The measure of Wall Street sentiment
examines changes in Wall Street analysts' earnings estimates and ranks stocks
by the strength and consistency of those changes. These two measures are
combined to create a single composite score of each stock's attractiveness.
These scores are then plotted on a matrix according to their relative
attractiveness. Sector weights are maintained at a similar level to that of
the S&P 500 Index to avoid unintended exposure to factors such as the
direction of the economy, interest rates, energy prices and
inflation.
The Portfolio will invest at least 65% of its total assets in equity
securities. However, the Portfolio may invest temporarily for defensive
purposes, without limitation, in certain high-quality, short-term,
fixed-income securities. Such securities may be used to invest uncommitted
cash balances or to maintain liquidity to meet shareholder redemptions. These
securities include obligations issued or guaranteed as to principal and
interest by the U.S. Government, its agencies and instrumentalities and
repurchase agreements collateralized by these obligations, commercial paper,
bank certificates of deposit, bankers' acceptances and time deposits.
The Portfolio may invest in U.S. Government securities, which include U.S.
Treasury bills, notes and bonds and other obligations issued or guaranteed as
to interest and principal by the U.S. Government, its agencies and
instrumentalities. Obligations issued or guaranteed as to interest and
principal by the U.S. Government, its agencies and instrumentalities include
securities that are supported by the full faith and credit of the United
States Treasury, securities that are supported by the right of the issuer to
borrow from the United States Treasury, discretionary authority of the U.S.
Government agency or instrumentality, and securities supported solely by the
creditworthiness of the issuer.
The Portfolio may enter into or invest in repurchase agreements, reverse
repurchase agreements, forward commitments, when-issued transactions (up to
25% of the Portfolio's net assets), illiquid securities (up to 15% of the
Portfolio' s net assets), restricted securities (up to 10% of the Portfolio's
net assets) and variable amount master demand notes. The Portfolio also may
enter into futures contracts, options on futures, covered put and call options
on securities in which it may directly invest, and purchase or sell options on
securities indexes that are comprised of securities in which the Portfolio may
directly invest. The Portfolio may lend portfolio securities with a value of
up to 33 1/3% of the Portfolio's total assets.
In addition to the policies noted above, the Portfolio may also invest in
obligations of foreign issuers which are U.S. dollar-denominated, ADRs,
corporate bonds, debentures, notes and warrants. During the coming year,
investment in each of these instruments will not exceed 5% of the Portfolio's
total net assets.
These investments and transactions are described in greater detail in the
Appendix and the SAI.
GLOBAL ADVISORS MONEY MARKET PORTFOLIO
The Portfolio's investment objective is to maximize current income, to the
extent consistent with the preservation of capital and liquidity and the
maintenance of a stable $1.00 per share net asset value, by investing in
dollar-denominated securities with remaining maturities of one year or less.
This investment objective is fundamental and may not be changed without the
affirmative vote of a majority of the Portfolio's outstanding shares (as
defined in the 1940 Act).
The Portfolio attempts to meet its investment objective by investing in
high-quality money market instruments. Such instruments include: (1) U.S.
Treasury bills, notes and bonds; (2) other obligations issued or guaranteed as
to interest and principal by the U.S. Government, its agencies and
instrumentalities; (3) instruments of U.S. and foreign banks, including
certificates of deposit, banker's acceptances and time deposits; these
instruments may include Eurodollar Certificates of Deposit ("ECDs"),
Eurodollar Time Deposits ("ETDs") and Yankee Certificates of Deposit ("YCDs");
(4) commercial paper of U.S. and foreign companies; (5) asset-backed
securities; (6) corporate obligations; (7) variable amount master demand
notes; and (8) repurchase agreements.
The Portfolio will limit its portfolio investments, including puts and
repurchase agreements, if any, to those United States dollar-denominated
instruments which at the time of acquisition the Sub-Adviser determines
present minimal credit risk and which are: (a) rated as a First Tier or Second
Tier security (as defined in Rule 2a-7 under the 1940 Act) by any two NRSROs;
(b) long-term securities with a remaining maturity of 397 days or less and
which have been assigned a short-term rating in the two highest rating
categories by any two NRSROs or whose issuer has outstanding short-term
obligations of comparable priority and security which are rated in the two
highest short-term rating categories by any two NRSROs; (c) if rated by only
one NRSRO, rated by the NRSRO as a First Tier or Second Tier security; or (d)
if unrated, determined by the Sub-Adviser to be of a quality comparable to a
First or Second Tier security.
The Portfolio may invest in U.S. Government securities which include U.S.
Treasury bills, notes and bonds and other obligations issued or guaranteed as
to interest and principal by the U.S. Government, its agencies and
instrumentalities. Obligations issued or guaranteed as to interest and
principal by the U.S. Government, its agencies and instrumentalities include
securities that are supported by the full faith and credit of the United
States Treasury, securities that are supported by the right of the issuer to
borrow from the United States Treasury, discretionary authority of the U.S.
Government agency or instrumentality, and securities supported solely by the
creditworthiness of the issuer.
The Portfolio may enter into or invest in repurchase agreements, reverse
repurchase agreements, forward commitments, when-issued transactions (up to
25% of the Portfolio's net assets), illiquid securities (up to 10% of the
Portfolio's net assets), restricted securities (up to 10% of the Portfolio's
net assets) and variable amount master demand notes.
The Portfolio may also purchase asset-backed securities representing undivided
fractional interests in pools of instruments, such as consumer loans. The
Portfolio may invest in mortgage-related pass-through securities, including
GNMA Certificates ("Ginnie Maes"), FHLMC Mortgage Participation Certificates
("Freddie Macs") and FNMA Guaranteed Mortgage Pass-Through Certificates
("Fannie Maes"). Mortgage pass-through certificates are mortgage-backed
securities representing undivided fractional interests in pools of
mortgage-backed loans. These loans are made by mortgage bankers, commercial
banks, savings and loan associations and other lenders. Ginnie Maes are
guaranteed by the full faith and credit of the U.S. Government, but Freddie
Macs and Fannie Maes are not.
The Portfolio may invest in zero coupon securities and variable and floating
rate securities. As stated above, the Portfolio may invest in ECDs, ETDs, and
YCDs. ECDs are U.S. dollar-denominated certificates of deposit issued by
foreign branches of domestic banks. ETDs are U.S. dollar-denominated deposits
in foreign branches of U.S. banks and foreign banks. YCDs are U.S.
dollar-denominated certificates of deposit issued by U.S. branches of foreign
banks.
The Portfolio may lend portfolio securities with a value of up to 33 1/3% of
its total assets.
These investments and transactions are described in greater detail in the
Appendix and the SAI.
The Portfolio must limit investments to securities with remaining maturities
of 397 days or less and must maintain a dollar-weighted average maturity of 90
days or less. The Portfolio normally holds instruments to maturity but may
dispose of them prior to maturity if the Sub-Adviser finds it advantageous to
do so.
MANAGEMENT OF THE TRUST
INVESTMENT ADVISER
Under an Investment Advisory Agreement dated August 23, 1995, WNL Investment
Advisory Services, Inc., 5555 San Felipe, Suite 900, Houston, Texas 77056 (the
"Adviser"), manages the business and affairs of the Portfolios and the Trust,
subject to the control of the Trustees.
The Adviser is a Delaware corporation which was incorporated in 1994. The
Adviser has had no previous experience in advising a mutual fund. The Adviser
is a subsidiary of Western National Corporation ("Western National"), a
Delaware corporation organized in October 1993 to serve as the holding company
for the Life Company.
On December 23, 1994, AGC Life Insurance Company ("AGC Life"), a Missouri
domiciled life insurer, purchased 24,947,500 shares (the "Shares") of common
stock, par value $.001 per share, of Western National, from Conseco Investment
Holding Company, a wholly-owned subsidiary of Conseco, Inc., representing
approximately 40% of the outstanding common stock of Western National. The
Shares represent all of the common stock of Western National then held by
Conseco and its subsidiaries. AGC Life is a wholly-owned subsidiary of
American General Corporation, a Texas corporation ("AGC"). References to
"American General" are references to AGC and its direct and indirect
majority-controlled subsidiaries. Prior to the above-described transaction,
American General held no voting securities of Western National.
Under the Investment Advisory Agreement, the Adviser is obligated to formulate
a continuing program for the investment of the assets of each Portfolio of the
Trust in a manner consistent with each Portfolio's investment objectives,
policies and restrictions and to determine from time to time securities to be
purchased, sold, retained or lent by the Trust and to implement those
decisions. The Investment Advisory Agreement also provides that the Adviser
shall manage the Trust's business and affairs and shall provide such services
required for effective administration of the Trust as are now provided by
employees or other agents engaged by the Trust. The Investment Advisory
Agreement further provides that the Adviser shall furnish the Trust with
office space and necessary personnel, pay ordinary office expenses, pay all
executive salaries of the Trust and furnish, without expense to the Trust, the
services of such members of its organization as may be duly elected officers
or Trustees of the Trust. The Investment Advisory Agreement provides that
Adviser may retain sub-advisers, at the Adviser's own cost and expense, for
the purpose of managing the investment of the assets of one or more Portfolios
of the Trust.
As full compensation for its services under the Investment Advisory Agreement,
the Trust will pay the Adviser a monthly fee at the following annual rates
shown in the table below based on the average daily net assets of each
Portfolio.
<TABLE>
<CAPTION>
<S> <C>
Portfolio Advisory Fee
- ------------------------------------------- ---------------------------
Van Kampen American Capital Emerging Growth .75% of average net assets
BEA Growth and Income .75% of average net assets
Credit Suisse International Equity .90% of average net assets
BlackRock Managed Bond .55% of average net assets
EliteValue Asset Allocation .65% of average net assets
Salomon Brothers U.S. Government Securities .475% of average net assets
Global Advisors Growth Equity .61% of average net assets
Global Advisors Money Market .45% of average net assets
</TABLE>
ADVISORY FEE WAIVER AND EXPENSE CAP
The Adviser has agreed to waive its entire advisory fee for each of the
Portfolios for the initial six (6) months of each Portfolio's investment
operations. Additionally, the Adviser has agreed to waive that portion of
its advisory fee which is in excess of the amount payable by the Adviser to
each sub-adviser pursuant to the respective sub-advisory agreements for each
Portfolio until May 1, 1997.
For the period ended December 31, 1995, the Adviser waived its advisory fees
in the following amounts with respect to the Portfolios which were operational
for such period:
<TABLE>
<CAPTION>
<S> <C>
PORTFOLIO ADVISORY FEES WAIVED
Growth and Income $ 3,106
International Equity 3,643
Growth Equity 2,490
Money Market 106
</TABLE>
In addition, Western National Life Insurance Company, an affiliate of the
Adviser, has undertaken to bear until May 1, 1997, all operating expenses of
each Portfolio, excluding the compensation of the Adviser, that exceed .12% of
each Portfolio's average daily net assets.
The Adviser and the Life Company have entered into an Investment Advisory
Services Agreement, dated August 23, 1995, the purpose of which is to ensure
that the Adviser, which is minimally capitalized, has adequate facilities and
financing for the carrying on of its business. Under the terms of this
Agreement, the Life Company is obligated to provide the Adviser with adequate
capitalization in order for the Adviser to meet any minimum capital
requirements. The Life Company is further obligated to reimburse the Adviser
or assume payment for any obligation incurred by the Adviser. The Life
Company is also obligated to provide the Adviser with facilities and
personnel sufficient for the Adviser to perform its obligations under the
Investment Advisory Agreement.
The Adviser retains State Street Bank and Trust Company, a Massachusetts
trust company, to supervise various aspects of the Trust's administrative
operations and to perform certain specific services including, but not
limited to, the preparation and filing of Trust reports and tax returns,
pursuant to a Subadministration Agreement for Reporting and Accounting
Services between the Adviser, the Trust and State Street Bank and Trust
Company.
EXPENSES OF THE TRUST
The organizational expenses of the Trust were paid for by the Life
Company. The Life Company also contributed the initial working capital to
the Trust.
SUB-ADVISERS
In accordance with each Portfolio's investment objective and policies and
under the supervision of Adviser and the Trust's Board of Trustees, each
Portfolio's Sub-Adviser is responsible for the day-to-day investment
management of the Portfolio, makes investment decisions for the Portfolio and
places orders on behalf of the Portfolio to effect the investment decisions
made as provided in separate Sub-Advisory Agreements among each Sub-Adviser,
the Adviser and the Trust. The following organizations act as Sub-Advisers to
the Portfolios:
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC. ("VAN KAMPEN
AMERICAN CAPITAL"), 2800 Post Oak Boulevard, Houston, Texas 77056, is the
Sub-Adviser for the Van Kampen American Capital Emerging Growth Portfolio
of the Trust. Van Kampen American Capital is a diversified asset management
company with more than two million retail investor accounts, extensive
capabilities for managing institutional portfolios, and nearly $50 billion
under management or supervision. Van Kampen American Capital's more
than 40 open-end and 38 closed-end funds and more than 2,800 unit investment
trusts are professionally distributed by leading financial advisers
nationwide.
Van Kampen American Capital is a wholly-owned subsidiary of Van Kampen
American Capital, Inc., which is a wholly-owned subsidiary of VK/AC Holding,
Inc. VK/AC Holding, Inc. is controlled, through the ownership of a substantial
majority of its common stock, by The Clayton & Dubilier Private Equity Fund IV
Limited Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P.
is managed by Clayton, Dubilier & Rice, Inc., a New York-based private
investment firm. The General Partner of C&D L.P. is Clayton & Dubilier
Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice III, B. Charles Ames,
Alberto Cribiore, William Barbe, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrell E. Pearson, each of whom is a principal of
Clayton, Dubilier & Rice, Inc.
Gary M. Lewis is primarily responsible for the day-to-day management of the
Portfolio's investment portfolio. Mr. Lewis has been Vice President -
Portfolio Manager of Van Kampen American Capital since December 1987.
BEA ASSOCIATES ("BEA"), One Citicorp Center, 153 East 53rd Street, New
York, New York 10022, is the Sub-Adviser for the BEA Growth and Income
Portfolio of the Trust. BEA is a general partnership organized under the laws
of the State of New York and, together with its predecessor firms, has been
engaged in the investment advisory business for over 50 years. Credit Suisse
Capital Corporation ("CS Capital") is an 80% partner and Basic Appraisals,
Inc. is a 20% partner in BEA. CS Capital is a wholly-owned subsidiary of
Credit Suisse Investment Corporation, which is a wholly-owned subsidiary of
Credit Suisse, the second largest Swiss bank, which in turn is a subsidiary of
CS Holding, a Swiss corporation. No one person or entity possesses a
controlling interest in Basic Appraisals, Inc.
BEA is a diversified asset manager, handling global equity, balanced,
fixed-income and derivative securities accounts for private individuals, as
well as corporate pension and profit-sharing plans, state pension funds, union
funds, endowments and other charitable institutions. As of December 31, 1995,
BEA managed approximately $27 billion in assets.
BEA currently acts as investment adviser for 74 registered investment
companies and 40 offshore funds.
The portfolio is managed by teams of BEA managers, each dedicated to
managing a portion of the Portfolio's assets. The BEA Domestic Equity
Management Team manages the Equity Portion of the Portfolio. The BEA Fixed
Income Management Team manages the Fixed-Income portion of the Portfolio.
CREDIT SUISSE INVESTMENT MANAGEMENT, LTD. ("CSIM"), One Cabot Square,
London, England, is the Sub-Adviser for the Credit Suisse International Equity
Portfolio of the Trust. CSIM is an indirect wholly-owned subsidiary of Credit
Suisse, the largest global financial services group based in Switzerland,
which in turn is a subsidiary of CS Holding, a Swiss corporation.
The firm, which prior to June 1995 was owned by an affiliate of Credit Suisse
and was doing business under the name CS First Boston Investment Management
Limited, has been offering diverse global fixed-income and equity investment
strategies for institutional clients in over 35 countries worldwide since
1983. Clients include central banks and other government entities, insurance
companies, pension funds, multinational corporations, commercial banks and
other institutions. Individual portfolio holdings are denominated in more than
15 currencies. The team of 51 investment professionals is dedicated to adding
value to the investment process by creating and implementing portfolio
strategies tailored to each client's needs.
At December 31, 1995, Credit Suisse Investment Management Group provided
investment advice for approximately $20 billion of assets.
The day-to-day management of the Portfolio is the responsibility of Glenn
Wellman, who joined the firm in 1993 as a Managing Director and Head of Global
Equity Portfolio Management. Mr. Wellman has been investing in international
markets since 1970. He has managed Europe Australia Far East (EAFE) benchmark
mutual funds as well as private accounts for Fortune 100 clients since 1982. A
worldwide equity team of 24 professionals supports Mr. Wellman. Prior to
joining CSIM, Mr. Wellman spent 14 years with Alliance Capital Limited, most
recently as Chief Investment Officer with responsibility for developing
Alliance's global equity management service. He has been an Associate of the
Institute of Investment Management and Research since 1974. Mr. Wellman earned
a BSc (Hons) in Chemistry from the University of London and an MBA from
Manchester Business School.
BLACKROCK FINANCIAL MANAGEMENT ("BLACKROCK"), 345 Park Avenue, New York,
New York, 10154, is the Sub-Adviser for the BlackRock Managed Bond Portfolio
of the Trust. BlackRock is an independent adviser that specializes in managing
high-quality, fixed-income portfolios. BlackRock currently manages over $39
billion of government, mortgage-backed, corporate, asset-backed, and municipal
securities.
BlackRock was founded in 1988 on the belief that experienced professionals
using a disciplined process and advanced analytical tools will consistently
add value to client portfolios. The firm has extensive experience creating,
analyzing and managing high-quality, fixed-income portfolios. BlackRock has
over 110 professionals including 16 portfolio managers and 25 quantitative,
credit and computer analysts. BlackRock provides fixed-income investment
management services to public and private pension plans, insurance companies,
mutual funds and international investors.
On June 16, 1994, BlackRock announced a definitive agreement to merge with a
subsidiary of PNC Bank, the nation's tenth largest banking organization. The
transaction closed on February 28, 1995, and resulted in no change of senior
portfolio management or client service personnel at BlackRock. In addition,
BlackRock professionals retained a significant ongoing economic interest in
the future earnings of BlackRock. BlackRock also retained its name and
location.
The day-to-day portfolio management of the Portfolio is the responsibility of
Keith Anderson and Glenn Henricksen.
Keith Anderson is a Partner at BlackRock, and co-head of the Portfolio
Management Group. Mr. Anderson is a member of both the firm's Management
Committee and its Investment Strategy Committee. Mr. Anderson has primary
responsibility for managing client portfolios and for acting as a specialist
in the government and mortgage sectors. His areas of expertise include
Treasuries, agencies, futures, options, swaps and a wide range of traditional
and non-traditional mortgage securities.
Prior to founding BlackRock in 1988, Mr. Anderson was a Vice President in
Fixed-Income Research at The First Boston Corporation. Mr. Anderson joined
First Boston in 1987 as a mortgage securities and derivative products
strategist working with institutional money managers. From 1983 to 1987, Mr.
Anderson was a Vice President and Portfolio Manager at Criterion Investment
Management Company where he had primary responsibility for a $2.8 billion
fixed-income portfolio and was an integral part of the firm's portfolio
management team.
Mr. Anderson has published numerous articles on fixed-income strategies,
including two articles in THE HANDBOOK OF FIXED INCOME OPTIONS: "Scenario
Analysis and the Use of Options in Total Return Portfolio Management" and
"Measuring, Interpreting, and Applying Volatility within the Fixed Income
Market." Mr. Anderson received a Bachelor of Science in Economics and Finance
from Nichols College in 1981 and an MBA from Rice University in 1983.
Glenn Henricksen is a Vice President and Portfolio Manager at BlackRock. Mr.
Henricksen is a member of both the firm's Investment Strategy Committee and
its Credit Committee. Mr. Henricksen's primary responsibility is the
management of corporate securities in client portfolios.
Prior to joining BlackRock in 1992, Mr. Henricksen was a Portfolio Manager at
New York Life Insurance Company. Mr. Henricksen joined New York Life in 1988,
and was responsible for managing over $6 billion in corporate debt securities
and developing a Latin and emerging markets debt unit. Mr. Henricksen
previously worked as a corporate bond trader at Prudential-Bache Securities
and as an equity research analyst at Value Line.
Mr. Henricksen received a Bachelor of Science in Business in 1981, and an MBA
in Finance in 1982 from the State University of New York at Buffalo.
OPCAP ADVISORS, FORMERLY QUEST FOR VALUE ADVISORS ("ADVISORS"), One World
Financial Center, 200 Liberty Street, New York, New York 10281, is the
Sub-Adviser for the EliteValue Asset Allocation Portfolio of the Trust.
Advisors is a subsidiary of Oppenheimer Capital, a general partnership which
is registered as an investment adviser under the Investment Advisers Act of
1940, by whose employees all investment management services performed under
the Sub-Advisory Agreement are rendered to the Portfolio. Oppenheimer
Financial Corp., a holding company, holds a 33% interest in Oppenheimer
Capital, and Oppenheimer Capital, L.P., a Delaware limited partnership of
which Oppenheimer Financial Corp. is the sole general partner and whose units
are traded on the New York Stock Exchange, owns the remaining 67% interest.
Advisors and its affiliates have operated as investment advisers to both
mutual funds and other clients since 1968, and had over $39 billion under
management as of March 31, 1996.
The investments of the Portfolio are managed by Richard J. Glasebrook II,
Managing Director for Oppenheimer Capital.
SALOMON BROTHERS ASSET MANAGEMENT INC ("SBAM"), 7 World Trade Center, New
York, New York 10048, is the Sub-Adviser for the Salomon Brothers U.S.
Government Securities Portfolio of the Trust. SBAM is an indirect,
wholly-owned subsidiary of Salomon Inc incorporated in 1987, and an affiliate
of Salomon Brothers Inc. Through its office in New York and affiliates in
London, Frankfurt, Hong Kong and Tokyo, SBAM provides a full range of
fixed-income and equity investment advisory services for its individual and
institutional clients around the world, including central banks, pension
funds, endowments, insurance companies, and various investment companies
(including portfolios thereof). As of December 31, 1995, SBAM had investment
advisory responsibility for approximately $13 billion of assets. SBAM has
access to Salomon Brothers Inc's more than 400 economists, mortgage, bond,
sovereign and equity analysts.
Steven Guterman is primarily responsible for the day-to-day management of the
Portfolio. Mr. Guterman is assisted in the management of the Portfolio by
Roger Lavan.
Mr. Guterman, who joined SBAM in 1990, is a Senior Portfolio Manager, and is
responsible for the day-to-day management of SBAM managed portfolios which
invest primarily in mortgage-backed and U.S. Government securities. Mr.
Guterman joined Salomon Brothers Inc in 1983. He initially worked in the
mortgage research group where he became a Research Director and later traded
derivative mortgage-backed securities for Salomon Brothers Inc.
Mr. Lavan, who joined SBAM in 1990, is a Portfolio Manager, and is responsible
for investment company and institutional portfolios which invest in
mortgage-backed and U.S. Government securities. Prior to joining SBAM, Mr.
Lavan spent four years analyzing portfolios for Salomon Brothers Inc's Fixed
Income Sales Group and Product Support Divisions. Mr. Lavan is a Chartered
Financial Analyst, a member of the New York Society of Security Analysts, and
received his MBA from Fordham University in 1990.
STATE STREET GLOBAL ADVISORS, Two International Place, Boston, MA 02110,
the investment management division of State Street Bank and Trust Company, is
the Sub-Adviser for the Global Advisors Growth Equity and Global Advisors
Money Market Portfolios of the Trust. State Street Bank and Trust Company, one
of the largest providers of securities processing and recordkeeping services
for U.S. mutual funds and pension funds, is a wholly-owned subsidiary of State
Street Boston Corporation, a publicly held bank holding company. State Street
Global Advisors, with over $225 billion (U.S.) under management as of December
31, 1995 provides complete global investment management services from offices
in the United States, London, Sydney, Hong Kong, Tokyo, Toronto, Luxembourg,
Melbourne, Montreal and Paris.
Investment decisions regarding the Global Advisors Growth Equity Portfolio are
made by committee, and no one person is primarily responsible for making
recommendations to that committee.
SUB-ADVISORY FEES
Under the terms of the Sub-Advisory Agreements, the Adviser shall pay to the
Sub-Advisers, as full compensation for services rendered under the respective
Agreements with respect to the various Portfolios, monthly fees at the
following annual rates shown in the table below based on the average daily net
assets of each Portfolio.
<TABLE>
<CAPTION>
<S> <C>
Portfolio Sub-Advisory Fee
- ------------------------------------------- ---------------------------
Van Kampen American Capital Emerging Growth .50% of average net assets
BEA Growth and Income .50% of average net assets
Credit Suisse International Equity .65% of average net assets
BlackRock Managed Bond .30% of average net assets
EliteValue Asset Allocation .40% of average net assets
Salomon Brothers U.S. Government Securities .225% of average net assets
Global Advisors Growth Equity .36% of average net assets
Global Advisors Money Market .20% of average net assets
</TABLE>
SUB-ADVISORY FEE WAIVER
Each of the Sub-Advisers has agreed to waive its sub-advisory fees due under
the Sub-Advisory Agreements for the initial six (6) months of each respective
Portfolio's investment operations. The sub-advisory fee waivers with respect
to the Portfolios sub-advised by BEA Associates, Credit Suisse Investment
Management, Ltd. and State Street Global Advisors have terminated as of May 1,
1996.
SALES AND REDEMPTIONS
The separate account of the Life Company places orders to purchase and redeem
shares of each Portfolio based on, among other things, the amount of premium
payments to be invested and surrender and transfer requests to be effected on
that day pursuant to the VA contracts issued by the Life Company. Orders
received by the Trust are effected on days on which the New York Stock
Exchange is open for trading, at the net asset value per share next determined
after receipt of the order, except that, in the case of the Global Advisors
Money Market Portfolio, purchases will not be effected until the next
determination of net asset value after federal funds have been made available
to the Trust. For orders received before 4:00 p.m. New York time, such
purchases and redemptions of shares of each Portfolio are effected at the
respective net asset values per share determined as of 4:00 p.m. New York time
on that day. See "Net Asset Value," below, and "Determination of Net Asset
Value" in the Trust's Statement of Additional Information. Payment for
redemptions will be made within seven days after receipt of a redemption
request in good order. No fee is charged the separate account of the Life
Company when it redeems Portfolio shares. The Trust may suspend the sale of
shares at anytime and may refuse any order to purchase shares.
The Trust may suspend the right of redemption of shares of any Portfolio and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than for customary weekend and holiday closings or
during which trading on the New York Stock Exchange is restricted; (ii) when
the Securities and Exchange Commission determines that a state of emergency
exists, which makes the sale of portfolio securities or the determination of
net asset value not reasonably practicable; (iii) as the Securities and
Exchange Commission may by order permit for the protection of the security
holders of the Trust; or (iv) at anytime when the Trust may, under applicable
laws and regulations, suspend payment on the redemption of its shares.
NET ASSET VALUE
Each Portfolio calculates the net asset value of a share by dividing the total
value of its assets, less liabilities, by the number of shares outstanding.
Shares are valued as of 4:00 p.m. New York time on each day the New York Stock
Exchange is open.
The Global Advisors Money Market Portfolio's securities are valued at their
amortized cost, which does not take into account unrealized gains or losses on
securities. This method involves initially valuing an instrument at its cost
and thereafter assuming a constant amortization to maturity of any premium
paid or discount received. For a more complete description of amortized cost
valuation, see "Determination of Net Asset Value" in the SAI.
Because foreign securities are quoted in foreign currencies, which will be
translated into U.S. dollars at the New York cable transfer rates or at such
other rates as the Trustees may determine in computing net asset value,
fluctuations in the value of such currencies in relation to the U.S. dollar
will affect the net asset value of shares of a Portfolio investing in foreign
securities even though there has not been any change in the local currency
values of such securities.
PERFORMANCE INFORMATION
Global Advisors Money Market Portfolio: From time to time, the Global Advisors
Money Market Portfolio's annualized "yield" and "effective yield" may be
presented in advertisements and sales literature. These yield figures are
based on historical earnings and are not intended to indicate future
performance. The "yield" of the Global Advisors Money Market Portfolio refers
to the income generated by an investment in the shares of that Portfolio over
a seven-day period (which period will be stated in the advertisement). This
income is then "annualized." That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a
52-week period and is shown as a percentage of the investment. The "effective
yield" is calculated similarly but, when annualized, the income earned by an
investment in the shares of the Global Advisors Money Market Portfolio is
assumed to be reinvested. The "effective yield" will be slightly higher than
the "yield" because of the compounding effect of this assumed reinvestment.
For more information regarding the computation of "yield" and "effective
yield," see "Performance Information" in the SAI.
Other Portfolios: Performance information for each of the other Portfolios may
also be presented from time to time in advertisements and sales literature.
The Portfolios may advertise several types of performance information. These
are the "yield," "average annual total return" and "aggregate total return."
Each of these figures is based upon historical results and is not necessarily
representative of the future performance of any Portfolio.
The yield of a Portfolio's shares is determined by annualizing net investment
income earned per share for a stated period (normally one month or 30 days)
and dividing the result by the net asset value per share at the end of the
valuation period. The average annual total return and aggregate total return
figures measure both the net investment income generated by, and the effect of
any realized or unrealized appreciation or depreciation of the underlying
investments in, the Portfolio's portfolio for the period in question, assuming
the reinvestment of all dividends. Thus, these figures reflect the change in
the value of an investment in a Portfolio's shares during a specified period.
Average annual total return will be quoted for at least the one-, five- and
ten-year periods ending on a recent calendar quarter (or if such periods have
not yet elapsed, at the end of a shorter period corresponding to the life of
the Portfolio). Average annual total return figures are annualized and,
therefore, represent the average annual percentage change over the period in
question. Total return figures are not annualized and represent the aggregate
percentage or dollar value change over the period in question. For more
information regarding the computation of yield, average annual total return
and aggregate total return, see "Performance Information" in the SAI.
Any Portfolio performance information presented will also include performance
information for the insurance company separate accounts investing in the Trust
which will take into account insurance-related charges and expenses under such
insurance policies and contracts.
Advertisements concerning the Trust may from time to time compare the
performance of one or more Portfolios to various indexes. Advertisements may
also contain the performance rankings assigned certain Portfolios or their
advisers by various publications and statistical services, including, for
example, SEI, Lipper Analytical Services Mutual Funds Survey, Lipper Variable
Insurance Products Performance Analysis Service, Morningstar, Intersec
Research Survey of Non U.S. Equity Fund Returns, Frank Russell International
Universe, Kiplinger's Personal Finance, and Financial Services Week. Any such
comparisons or rankings are based on past performance and the statistical
computation performed by publications and services, and are not necessarily
indications of future performance. Because the Portfolios are managed
investment vehicles investing in a wide variety of securities, the securities
owned by a Portfolio will not match those making up an index.
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
Each Portfolio of the Trust intends to qualify and elects to be treated as a
regulated investment company that is taxed under the rules of Subchapter M of
the Internal Revenue Code. As an electing regulated investment company, a
Portfolio will not be subject to federal income tax on its net ordinary income
and net realized capital gains to the extent such income and gains are
distributed to the separate account of the Life Company which holds its
shares. For further information concerning federal income tax consequences for
the holders of the VA Contracts of the Life Company, investors should consult
the prospectus used in connection with the issuance of their VA Contracts.
The Global Advisors Money Market Portfolio will declare a dividend of its net
ordinary income daily and distribute such dividend monthly. The Global
Advisors Money Market Portfolio does not anticipate that it will normally
realize any long-term capital gains with respect to its portfolio securities.
Distributions will be made shortly after the first business day of each month
following declaration of the dividend. Each of the other Portfolios will
declare and distribute dividends from net ordinary income at least annually
and will distribute its net realized capital gains, if any, at least annually.
Distributions of ordinary income and capital gains will be made in shares of
such Portfolios unless an election is made on behalf of a separate account to
receive distributions in cash. The Life Company will be informed at least
annually about the amount and character of distributions from the Trust for
federal income tax purposes.
ADDITIONAL INFORMATION
The Trust was established as a Massachusetts business trust under the laws of
Massachusetts by a Declaration of Trust dated December 12, 1994, as amended
April 19, 1995 (the "Declaration of Trust"). Under Massachusetts law,
shareholders of such a trust may, under certain circumstances, be held
personally liable as partners for the obligations of the trust. The
Declaration of Trust contains an express disclaimer of shareholder liability
in connection with Trust property or the acts, obligations, or affairs of the
Trust. The Declaration of Trust also provides for indemnification out of a
Portfolio's property of any shareholder of that Portfolio held personally
liable for the claims and liabilities to which a shareholder may become
subject by reason of being or having been a shareholder. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the Portfolio itself would be unable to meet
its obligations. A copy of the Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts.
The Trust has an unlimited authorized number of shares of beneficial interest.
Shares of the Trust are entitled to one vote per share (with proportional
voting for fractional shares) and are freely transferable, and, in liquidation
of a Portfolio, shareholders of the Portfolio are entitled to receive pro rata
the net assets of the Portfolio. Although no Portfolio is required to hold
annual meetings of its shareholders, shareholders have the right to call a
meeting to elect or remove Trustees or to take other actions as provided in
the Declaration of Trust. Shareholders have no preemptive rights. The Trust's
custodian, sub-administrator and transfer and dividend-paying agent
is State Street Bank and Trust Company.
To mitigate the possibility that a Portfolio will be adversely affected by
personal trading of employees, the Trust, the Adviser and the Sub-Advisers
have adopted policies that restrict securities trading in personal accounts of
the portfolio managers and others who normally come into possession of
information on portfolio transactions. These policies comply, in all material
respects, with the recommendations of the Investment Company Institute.
APPENDIX
SECURITIES AND INVESTMENT PRACTICES
In attempting to achieve its investment objective or policies each Portfolio
employs a variety of instruments, strategies and techniques, which are
described in greater detail below. Risks and restrictions associated with
these practices are also described. Policies and limitations are considered at
the time a security or instrument is purchased or a practice initiated.
Generally, securities need not be sold if subsequent changes in market value
result in applicable limitations not being met.
A Portfolio might not buy all of these securities or use all of these
techniques to the full extent permitted unless the Sub-Adviser, subject to
oversight by Adviser, believes that doing so will help the Portfolio achieve
its goal. As a shareholder, you will receive Portfolio reports every six
months detailing the Trust's holdings and describing recent investment
practices.
Except where noted otherwise, the investment guidelines set forth
below may be changed at anytime without shareholder consent by vote of the
Board of Trustees of the Trust. A complete list of investment restrictions
that identifies additional restrictions that cannot be changed without the
approval of a majority of an affected Portfolio's outstanding shares is
contained in the SAI.
AMERICAN DEPOSITORY RECEIPTS AND EUROPEAN DEPOSITORY RECEIPTS
Certain Portfolios may invest in securities of foreign issuers directly or in
the form of American Depository Receipts ("ADRs"), European Depository
Receipts ("EDRs") or other similar securities representing securities of
foreign issuers. These securities may not necessarily be denominated in the
same currency as the securities they represent. ADRs are receipts typically
issued by a United States bank or trust company evidencing beneficial
ownership of the underlying foreign securities. EDRs are receipts issued by a
European financial institution evidencing a similar arrangement. Generally,
ADRs, in registered form, are designed for use in the United States securities
markets, and EDRs, in bearer form, are designed for use in European securities
markets.
ASSET-BACKED SECURITIES
Certain Portfolios may purchase asset-backed securities, which represent a
participation in, or are secured by and payable from, a stream of payments
generated by particular assets, most often a pool of assets similar to one
another. Assets generating such payments may include motor vehicle installment
purchase obligations, company receivables, truck and auto loans,
leases, credit card receivables and home equity loans. Such securities are
generally issued as pass-through certificates, which represent undivided
fractional ownership interests in the underlying pools of assets. Such
securities also may be debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity, such as a trust, organized solely for the purpose of owning
such assets and issuing such debt.
Asset-backed securities are not issued or guaranteed by the United States
Government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts and for a certain period by a letter of credit issued by a financial
institution (such as a bank or insurance company) unaffiliated with the
issuers of such securities. The purchase of asset-backed securities raises
risk considerations peculiar to the financing of the instruments underlying
such securities. For example, there is a risk that another party could acquire
an interest in the obligations superior to that of the holders of the
asset-backed securities. There also is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on those securities. Asset-backed securities entail prepayment risk,
which may vary depending on the type of asset, but is generally less than the
prepayment risk associated with mortgage-backed securities. In addition,
credit card receivables are unsecured obligations of the card holder.
BANK OBLIGATIONS
All of the Portfolios may invest in Bank Obligations, which include
certificates of deposit, time deposits and bankers' acceptances of U.S.
commercial banks or savings and loan institutions which are determined by the
Sub-Advisers to present minimal credit risks. Certain Portfolios may invest in
foreign currency-denominated Bank Obligations, including Eurocurrency
instruments and securities of U.S. and foreign banks and thrifts.
BORROWING
Each of the Portfolios may borrow money (including reverse repurchase
agreements, if permitted by the Portfolio's investment objectives and policies)
(up to 33 1/3% of its assets) for temporary or emergency purposes. In
addition, the Global Advisors Money Market Portfolio may borrow to facilitate
redemptions. A Portfolio may borrow for leveraging or investment with respect
to reverse repurchase agreements and dollar roll transactions (including covered
rolls), to the extent such investments are permitted under the Portfolio's
investment objectives and policies. If a Portfolio borrows money,
its share price may be subject to greater fluctuation until the borrowing is
paid off. If the Portfolio makes additional investments while borrowings are
outstanding, this may be construed as a form of leverage.
Borrowing, including reverse repurchase agreements and, in certain
circumstances, dollar rolls, creates leverage which increases a Portfolio's
investment risk. If the income and gains on the securities purchased with the
proceeds of borrowings exceed the cost of the arrangements, the Portfolio's
earnings or net asset value will increase faster than would be the case
otherwise. Conversely, if the income and gains fail to exceed the costs,
earnings or net asset value will decline faster than would otherwise be the
case.
As a matter of operating policy, no Portfolio will borrow more than 10% of
its total net asset value when borrowing for general purposes and none will
borrow an amount equal to more than 25% of its total net asset value when
borrowing as a temporary measure or to facilitate redemptions. For these
purposes, net asset value is the market value of all investments or assets
less outstanding liabilities at the time that the new or additional
borrowing is undertaken. Also for these purposes, securities purchased
on a when-issued or delayed delivery basis and short sales of securities are
considered borrowing. Reverse repurchase agreements and dollar rolls
(including covered rolls), are not considered borrowings for purposes of this
operating policy. A Portfolio will not purchase investments once
borrowed funds (including reverse repurchase agreements) exceed 5% of its
total assets. This 5% limitation is a fundamental investment restriction of
the Trust which may not be changed without shareholder approval.
COMMON STOCK AND OTHER EQUITY SECURITIES
Common Stocks represent an equity (ownership) interest in a corporation. This
ownership interest generally gives a Portfolio the right to vote on measures
affecting the company's organization and operations.
Certain Portfolios may also buy securities such as convertible debt, preferred
stock, warrants or other securities exchangeable for shares of Common Stock.
In selecting equity investments for a Portfolio, each Portfolio's Sub-Adviser
will generally invest the Portfolio's assets in industries and companies that
it believes are experiencing favorable demand for their products and services
and which operate in a favorable competitive and regulatory climate.
Investments in equity securities in general are subject to market risks that
may cause their prices to fluctuate over time. The value of convertible equity
securities is also affected by prevailing interest rates, the credit quality
of the issuer and any call provision. Fluctuations in the value of equity
securities in which a Portfolio invests will cause the net asset value of a
Portfolio to fluctuate.
CONVERTIBLE SECURITIES
Convertible securities are corporate securities that are exchangeable for a
set number of another security at a prestated price. Convertible securities
typically have characteristics similar to both fixed income and equity
securities.
Because of the conversion feature, the market value of convertible securities
tends to move with the market value of the underlying stock. The value of a
convertible security is also affected by prevailing interest rates, the credit
quality of the issuer, and any call provisions.
CURRENCY MANAGEMENT
A Portfolio's flexibility to participate in higher-yielding debt markets
outside of the United States may allow the Portfolio to achieve higher yields
than those generally obtained by domestic money market funds and short-term
bond investments. When a Portfolio invests significantly in securities
denominated in foreign currencies, however, movements in foreign currency
exchange rates vs. the U.S. dollar are likely to impact the Portfolio's share
price stability relative to domestic short-term income funds. Fluctuations in
foreign currencies can have a positive or negative impact on returns.
Normally, to the extent that the Portfolio is invested in foreign securities,
a weakening in the U.S. dollar relative to the foreign currencies underlying a
Portfolio's investments should help increase the net asset value of the
Portfolio. Conversely, a strengthening in the U.S. dollar vs. the foreign
currencies in which a Portfolio's securities are denominated will generally
lower the net asset value of the Portfolio. Each Portfolio's Sub-Adviser
attempts to minimize exchange rate risk through active portfolio management,
including hedging currency exposure through the use of futures, options and
forward currency transactions and attempting to identify bond markets with
strong or stable currencies. There can be no assurance that such hedging will
be successful and such transactions, if unsuccessful, could result in
additional losses or expenses to a Portfolio.
DOLLAR ROLL TRANSACTIONS
Certain Portfolios seeking a high level of current income may enter into
dollar rolls and "covered rolls" in which the Portfolio sells securities
(usually Mortgage-Backed Securities) and simultaneously contracts to purchase,
typically in 30 to 60 days, substantially similar, but not identical
securities, on a specified future date. The proceeds of the initial sale of
securities in such transactions may be used to purchase long-term securities
which will be held during the roll period. During the roll period, the
Portfolio forgoes principal and interest paid on the securities sold at the
beginning of the roll period. The Portfolio is compensated by the difference
between the current sales price and the forward price for the future purchase
(often referred to as the "drop") as well as by the interest earned on the
cash proceeds of the initial sale. A "covered roll" is a specific type of
dollar roll for which there is an offsetting cash position or cash equivalent
securities position that matures on or before the forward settlement date of
the dollar roll transaction. As used herein the term "dollar roll" refers to
dollar rolls that are not "covered rolls." At the end of the roll commitment
period, the Portfolio may or may not take delivery of the securities the
Portfolio has contracted to purchase.
A Portfolio will establish a segregated account with its custodian in which it
will maintain cash, U.S. Government Securities or other liquid high-grade debt
obligations equal in value at all times to its obligations in respect of
dollar rolls, and, accordingly, the Portfolio will not treat such obligations
as senior securities for purposes of the 1940 Act. "Covered rolls" are not
subject to these segregation requirements. Dollar rolls and covered rolls may
be considered borrowings and are, therefore, subject to the borrowing
limitations applicable to the Portfolios , except that dollar rolls
(including covered rolls), shall not be considered to be "borrowed funds" for
purposes of the 5% limitation described under "Borrowing" above. Dollar
rolls involve the risk that the market value of the securities the
Portfolio is obligated to repurchase under the agreement may decline below
the repurchase price. In the event the buyer of securities under a dollar
roll files for bankruptcy or becomes insolvent, the Portfolio's use of
proceeds of the dollar roll may be restricted pending a determination
by the other party, or its trustee or receiver, whether to enforce the
Portfolio's obligation to repurchase the securities.
EQUITY AND DEBT SECURITIES ISSUED OR GUARANTEED BY SUPRANATIONAL ORGANIZATIONS
Portfolios authorized to invest in securities of foreign issuers may invest
assets in equity and debt securities issued or guaranteed by Supranational
Organizations, such as obligations issued or guaranteed by the Asian
Development Bank, InterAmerican Development Bank, International Bank for
Reconstruction and Development (World Bank), African Development Bank,
European Coal and Steel Community, European Economic Community, European
Investment Bank and the Nordic Investment Bank.
EXCHANGE RATE-RELATED SECURITIES
Certain Portfolios may invest in securities which are indexed to certain
specific foreign currency exchange rates. The terms of such security would
provide that the principal amount or interest payments are adjusted upwards or
downwards (but not below zero) at payment to reflect fluctuations in the
exchange rate between two currencies while the obligation is outstanding,
depending on the terms of the specific security. A Portfolio will purchase
such security with the currency in which it is denominated and will receive
interest and principal payments thereon in the currency, but the amount of
principal or interest payable by the issuer will vary in proportion to the
change (if any) in the exchange rate between the two specific currencies
between the date the instrument is issued and the date the principal or
interest payment is due. The staff of the SEC is currently considering whether
a mutual fund's purchase of this type of security would result in the issuance
of a "senior security" within the meaning of the 1940 Act. The Trust believes
that such investments do not involve the creation of such a senior security,
but nevertheless undertakes, pending the resolution of this issue by the
staff, to establish a segregated account with respect to such investments and
to maintain in such account cash not available for investment or U.S.
Government Securities or other liquid, high-quality debt securities having a
value equal to the aggregate principal amount of outstanding securities of
this type.
Investment in Exchange Rate-Related Securities entails certain risks. There is
the possibility of significant changes in rates of exchange between the U.S.
dollar and any foreign currency to which an Exchange Rate-Related Security is
linked. In addition, there is no assurance that sufficient trading interest to
create a liquid secondary market will exist for a particular Exchange
Rate-Related Security due to conditions in the debt and foreign currency
markets. Illiquidity in the forward foreign exchange market and the high
volatility of the foreign exchange market may from time to time combine to
make it difficult to sell an Exchange Rate-Related Security prior to maturity
without incurring a significant price loss.
FIXED-INCOME SECURITIES
Fixed income securities consist of bonds, notes, debentures and other
interest-bearing securities that represent indebtedness. The market value of
fixed-income obligations held by the Portfolios and, consequently, the net
asset value per share of the Portfolios can be expected to vary inversely to
changes in prevailing interest rates. Investors should also recognize that, in
periods of declining interest rates, the yields of the fixed-income Portfolios
will tend to be somewhat higher than prevailing market rates and, in periods
of rising interest rates, the fixed-income Portfolios' yields will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to the fixed-income Portfolios from the continuous sales of their shares
will likely be invested in instruments producing lower yields than the balance
of their assets, thereby reducing current yields. In periods of rising
interest rates, the opposite can be expected to occur. Prices of longer-term
securities generally increase or decrease more sharply than those of
shorter-term securities in response to interest rate changes. In addition,
obligations purchased by certain of the fixed-income Portfolios that are rated
in the lower of the top four ratings (Baa by Moody's or BBB by S&P, Duff or
Fitch) are considered to have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case
with higher-grade securities. (See "Lower-Rated Securities" in this Appendix.)
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Certain Portfolios may engage in foreign currency exchange transactions.
Portfolios that buy and sell securities denominated in currencies other than
the U.S. dollar, and receive interest, dividends and sale proceeds in
currencies other than the U.S. dollar, may enter into foreign currency
exchange transactions to convert to and from different foreign currencies and
to convert foreign currencies to and from the U.S. dollar. A Portfolio can
either enter into these transactions on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or use forward
contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by a Portfolio
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. Forward foreign currency
exchange contracts establish an exchange rate at a future date. These
contracts are transferable in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward foreign currency exchange contract generally has no deposit
requirement, and is traded at a net price without a commission. The Portfolio
maintains with its Custodian, in a segregated account, high-grade liquid
assets in an amount at least equal to its obligations under each forward
foreign currency exchange contract. Neither spot transactions nor forward
foreign currency exchange contracts eliminate fluctuations in the prices of
the Portfolio's portfolio securities or in foreign exchange rates, or prevent
loss if the prices of these securities should decline.
A Portfolio may enter into foreign currency exchange transactions for hedging
purposes as well as for non-hedging purposes. Transactions are entered into
for hedging purposes in an attempt to protect against changes in foreign
currency exchange rates between the trade and settlement dates of specific
securities transactions or changes in foreign currency exchange rates that
would adversely affect a portfolio position or an anticipated portfolio
position. Although these transactions tend to minimize the risk of loss due to
a decline in the value of the hedged currency, at the same time they tend to
limit any potential gain that might be realized should the value of the hedged
currency increase. 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 these securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The
projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain. In addition,
when the Sub-Adviser believes that the currency of a specific country may
deteriorate against another currency, it may enter into a forward contract to
sell the less attractive currency and buy the more attractive one. The amount
in question could be less than or equal to the value of the Portfolio's
securities denominated in the less attractive currency. The Portfolio may also
enter into a forward contract to sell a currency which is linked to a currency
or currencies in which some or all of the Portfolio's portfolio securities are
or could be denominated, and to buy U.S. dollars. These practices are referred
to as "cross hedging" and "proxy hedging."
A Portfolio may enter into foreign currency exchange transactions for other
than hedging purposes which presents greater profit potential but also
involves increased risk. For example, if the Sub-Adviser believes that the
value of a particular foreign currency will increase or decrease relative to
the value of the U.S. dollar, the Portfolio may purchase or sell such
currency, respectively, through a forward foreign currency exchange contract.
If the expected changes in the value of the currency occur, the Portfolio will
realize profits which will increase its gross income. Where exchange rates do
not move in the direction or to the extent anticipated, however, the Portfolio
may sustain losses which will reduce its gross income. Such transactions,
therefore, could be considered speculative.
Forward currency exchange contracts are agreements to exchange one currency
for another -- for example, to exchange a certain amount of U.S. dollars for a
certain amount of Japanese yen -- at a future date and specified price.
Typically, the other party to a currency exchange contract will be a
commercial bank or other financial institution. Because there is a risk of
loss to the Portfolio if the other party does not complete the transaction,
the Portfolio's Sub-Adviser will enter into foreign currency exchange
contracts only with parties approved by the Trust's Board of Trustees.
A Portfolio may maintain "short" positions in forward currency exchange
transactions in which the Portfolio agrees to exchange currency that it
currently does not own for another currency -- for example, to exchange an
amount of Japanese yen that it does not own for a certain amount of U.S.
dollars -- at a future date and specified price in anticipation of a decline
in the value of the currency sold short relative to the currency that the
Portfolio has contracted to receive in the exchange.
While such actions are intended to protect the Portfolio from adverse currency
movements, there is a risk that currency movements involved will not be
properly anticipated. Use of this technique may also be limited by
management's need to protect the status of the Portfolio as a regulated
investment company under the Internal Revenue Code of 1986, as amended. The
projection of currency market movements is extremely difficult, and the
successful execution of currency strategies is highly uncertain.
FOREIGN INVESTMENTS
Certain Portfolios may invest in securities of foreign issuers. There are
certain risks involved in investing in foreign securities, including those
resulting from fluctuations in currency exchange rates, devaluation of
currencies, future political or economic developments and the possible
imposition of currency exchange blockages or other foreign governmental laws
or restrictions, reduced availability of public information concerning
issuers, and the fact that foreign companies are not generally subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to
domestic companies. Moreover, securities of many foreign companies may be less
liquid and the prices more volatile than those of securities of comparable
domestic companies. With respect to certain foreign countries, there is the
possibility of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of funds or other assets of the Portfolios,
including the withholding of dividends.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and the Portfolios hold various foreign
currencies from time to time, the value of the net assets of the Portfolios as
measured in U.S. dollars will be affected favorably or unfavorably by changes
in exchange rates. The cost of the Portfolio's currency exchange transactions
will generally be the difference between the bid and offer spot rate of the
currency being purchased or sold. In order to protect against uncertainty in
the level of future foreign currency exchange rates, the Portfolios are
authorized to enter into certain foreign currency exchange transactions.
Investors should be aware that exchange rate movements can be significant and
can endure for long periods of time. Extensive research of the economic,
political and social factors that influence global markets is conducted by the
Sub-Advisers. Particular attention is given to country-specific analysis,
reviewing the strengths or weaknesses of a country's overall economy, the
government policies influencing business conditions and the outlook for the
country's currency. Certain Portfolios are authorized to engage in foreign
currency options, futures, options on futures and forward currency contract
transactions for hedging and/or other permissible purposes.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of the NYSE. Accordingly, the Portfolios' foreign investments may
be less liquid and their prices may be more volatile than comparable
investments in securities of U.S. companies. Moreover, the settlement periods
for foreign securities, which are often longer than those for securities of
U.S. issuers, may affect portfolio liquidity. In buying and selling securities
on foreign exchanges, the Portfolio normally pays fixed commissions that are
generally higher than the negotiated commissions charged in the United States.
In addition, there is generally less governmental supervision and regulation
of securities exchanges, brokers and issuers in foreign countries than in the
United States.
Certain Portfolios may invest a portion of their assets in developing markets.
The risks of investing in foreign markets are generally intensified for
investments in developing markets. Additional risks of investing in such
markets include: (i) less social, political, and economic stability; (ii) the
smaller size of the securities markets in such countries and the lower volume
of trading, which may result in a lack of liquidity and in greater price
volatility; (iii) certain national policies which may restrict a Portfolio's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interest; and (iv) less developed
legal structures governing private or foreign investment or allowing for
judicial redress for injury to private property.
FUTURES AND OPTIONS ON FUTURES
When deemed appropriate by its Sub-Adviser, certain Portfolios may enter into
financial or currency futures and related options that are traded on a U.S.
exchange or board of trade or, to the extent permitted under applicable law,
on exchanges located outside the United States, for hedging purposes or for
non-hedging purposes to the extent permitted by applicable law. A Portfolio
may not enter into futures and options contracts for which aggregate initial
margin deposits and premiums paid for unexpired futures options entered into
for purposes other than "bona fide hedging" positioning as defined in
regulations adopted by the Commodities Futures Trading Commission exceed 5% of
the fair market value of the Portfolio's net assets, after taking into account
unrealized profits and unrealized losses on futures contracts into which it
has entered. With respect to each long position in a futures contract or
option thereon, the underlying commodity value of such contract will always be
covered by cash and cash equivalents set aside plus accrued profits held at
the futures commission merchant.
A financial or currency futures contract provides for the future sale by one
party and the purchase by the other party of a specified amount of a
particular financial instrument or currency (e.g.,debt security or currency)
at a specified price, date, time and place. An index futures contract is an
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. An option on a futures contract generally
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at anytime prior
to the expiration date of the option.
The purpose of entering into a futures contract by a Portfolio is to either
enhance return or to protect the Portfolio from fluctuations in the value of
its securities caused by anticipated changes in interest rates, currency or
market conditions without necessarily buying or selling the securities. The
use of futures contracts and options on futures contracts involves several
risks. There can be no assurance that there will be a correlation between
price movements in the underlying securities, currencies or index, on the one
hand, and price movements in the securities which are the subject of the
futures contract or option on futures contract, on the other hand. Positions
in futures contracts and options on futures contracts may be closed out only
on the exchange or board of trade on which they were entered into, and there
can be no assurance that an active market will exist for a particular contract
or option at any particular time. If a Portfolio has hedged against the
possibility of an increase in interest rates or bond prices adversely
affecting the value of securities held in its portfolio, and rates or prices
decrease instead, a Portfolio will lose part or all of the benefit of the
increased value of securities that it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations,
if a Portfolio had insufficient cash, it may have to sell securities to meet
daily variation margin requirements at a time when it may be disadvantageous
to do so. These sales of securities may, but will not necessarily, be at
increased prices that reflect the decline in interest rates or bond prices, as
the case may be. In addition, the Portfolio would pay commissions and other
costs in connection with such investments, which may increase the Portfolio's
expenses and reduce its return. While utilization of options, futures
contracts and similar instruments may be advantageous to the Portfolio, if the
Portfolio's Sub-Adviser is not successful in employing such instruments in
managing the Portfolio's investments, the Portfolio's performance will be
worse than if the Portfolio did not make such investments.
Losses incurred in futures contracts and options on futures contracts and the
costs of these transactions will adversely affect a Portfolio's performance.
GEOGRAPHICAL AND INDUSTRY CONCENTRATION
Where a Portfolio invests at least 25% of its assets in Bank Obligations, the
Portfolio's investments may be subject to greater risk than a Portfolio that
does not concentrate in the banking industry. In particular, Bank Obligations
may be subject to the risks associated with interest rate volatility, changes
in federal and state laws and regulations governing banking and the inability
of borrowers to pay principal and interest when due. In addition, foreign
banks present the risks of investing in foreign securities generally and are
not subject to reserve requirements and other regulations comparable to those
of U.S. Banks.
GOVERNMENT STRIPPED MORTGAGE-BACKED SECURITIES
Certain Portfolios may invest in Government Stripped Mortgage-Backed
Securities issued or guaranteed by GNMA, FNMA and FHLMC. These securities
represent beneficial ownership interests in either periodic principal
distributions ("principal-only") or interest distributions ("interest-only")
on mortgage-backed certificates issued by GNMA, FNMA or FHLMC, as the case may
be. The certificates underlying the Government Stripped Mortgage-Backed
Securities represent all or part of the beneficial interest in pools of
mortgage loans. The Portfolios will invest in interest-only Government
Stripped Mortgage-Backed Securities in order to enhance yield or to benefit
from anticipated appreciation in value of the securities at times when the
appropriate Sub-Adviser believes that interest rates will remain stable or
increase. In periods of rising interest rates, the value of interest-only
Government Stripped Mortgage-Backed Securities may be expected to increase
because of the diminished expectation that the underlying mortgages will be
prepaid. In this situation the expected increase in the value of interest-only
Government Stripped Mortgage-Backed Securities may offset all or a portion of
any decline in value of the portfolio securities of the Portfolios. Investing
in Government Stripped Mortgage-Backed Securities involves the risks normally
associated with investing in mortgage-backed securities issued by government
or government-related entities. See "Mortgage-Backed Securities" below. In
addition, the yields on interest-only and principal-only Government Stripped
Mortgage-Backed Securities are extremely sensitive to the prepayment
experience on the mortgage loans underlying the certificates collateralizing
the securities. If a decline in the level of prevailing interest rates results
in a rate of principal prepayments higher than anticipated, distributions of
principal will be accelerated, thereby reducing the yield to maturity on
pped Mortgage-Backed Securities and increasing the yield to maturity on
principal-only Government Stripped Mortgage-Backed Securities. Conversely, if
an increase in the level of prevailing interest rates results in a rate of
principal prepayments lower than anticipated, distributions of principal will
be deferred, thereby increasing the yield to maturity on interest-only
Government Stripped Mortgage-Backed Securities and decreasing the yield to
maturity on principal-only Government Stripped Mortgage-Backed Securities.
Sufficiently high prepayment rates could result in the Portfolio not fully
recovering its initial investment in an interest-only Government Stripped
Mortgage-Backed Security. Government Stripped Mortgage-Backed Securities are
currently traded in an over-the-counter market maintained by several large
investment banking firms. There can be no assurance that the Portfolio will be
able to effect a trade of a Government Stripped Mortgage-Backed Security at a
time when it wishes to do so. The Portfolios will acquire Government Stripped
Mortgage-Backed Securities only if a liquid secondary market for the
securities exists at the time of acquisition.
INTEREST RATE TRANSACTIONS
Certain Portfolios may engage in certain Interest Rate Transactions, such as
swaps, caps, floors and collars. Interest rate swaps involve the exchange with
another party of commitments to pay or receive interest (e.g., an exchange of
floating rate payments for fixed rate payments). The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds
a predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase
of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive payments
of interest on a notional principal amount from the party selling such
interest rate floor. An interest rate collar combines the elements of
purchasing a cap and selling a floor. The collar protects against an interest
rate rise above the maximum amount but gives up the benefits of an interest
rate decline below the minimum amount. The net amount of the excess, if any,
of a Portfolio's obligations over its entitlements with respect to each
interest rate swap will be accrued on a daily basis and an amount of cash or
liquid securities having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account with the Trust's
custodian. If there is a default by the other party to the transaction, the
Portfolio will have contractual remedies pursuant to the agreements related to
the transactions.
ILLIQUID SECURITIES
Up to 15% (10% for Credit Suisse International Equity Portfolio and for Global
Advisors Money Market Portfolio) of the net assets of a Portfolio may be
invested in securities that are not readily marketable, including, where
applicable: (1) Repurchase Agreements with maturities greater than seven
calendar days; (2) time deposits maturing in more than seven calendar days;
(3) to the extent a liquid secondary market does not exist for the
instruments, futures contracts and options thereon (except for the Global
Advisors Money Market Portfolio); (4) certain over-the-counter options, as
described below and in the SAI; (5) certain variable rate demand notes having
a demand period of more than seven days; and (6) securities the disposition of
which is restricted under Federal securities laws (excluding Rule 144A
Securities, described below). The Portfolios will not include for purposes of
the restrictions on illiquid investments, securities sold pursuant to Rule
144A under the Securities Act of 1933, as amended, so long as such securities
meet liquidity guidelines established by the Trust's Board of Trustees. Under
Rule 144A, securities which would otherwise be restricted may be sold by
persons other than issuers or dealers to qualified institutional buyers.
INVESTMENT COMPANIES
When a Portfolio's Sub-Adviser believes that it would be beneficial for the
Portfolio and appropriate under the circumstances, the Sub-Adviser may invest
up to 10% of the Portfolio's assets in securities of mutual funds. As a
shareholder in any such mutual fund, the Portfolio will bear its ratable share
of the mutual fund's expenses, including management fees, and will remain
subject to the Portfolio's advisory and administration fees with respect to
the assets so invested.
LEASE OBLIGATION BONDS
Lease Obligation Bonds are mortgages on a facility that is secured by the
facility and are paid by a lessee over a long term. The rental stream to
service the debt as well as the mortgage are held by a collateral trustee on
behalf of the public bondholders. The primary risk of such instrument is the
risk of default. Under the lease indenture, the failure to pay rent is an
event of default. The remedy to cure default is to rescind the lease and sell
the assets. If the lease obligation is not readily marketable or market
quotations are not readily available, such lease obligations will be subject
to a Portfolio's limit on Illiquid Securities.
LENDING OF SECURITIES
All of the Portfolios have the ability to lend portfolio securities to brokers
and other financial organizations. By lending its securities, a Portfolio can
increase its income by continuing to receive interest on the loaned securities
as well as by either investing the cash collateral in short-term instruments
or obtaining yield in the form of interest paid by the borrower when U.S.
Government Securities are used as collateral. These loans, if and when made,
may not exceed 20% (except 10% with respect to the EliteValue Asset
Allocation Portfolio, 15% with respect to the Credit Suisse International
Equity Portfolio and 33 1/3% with respect to the Global Advisors Money Market
Portfolio) of a Portfolio's total assets taken at value. Loans of portfolio
securities by a Portfolio will be collateralized by cash, letters of credit or
U.S. Government Securities that are maintained at all times in an amount at
least equal to the current market value of the loaned securities. Any gain or
loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the Portfolio involved. Each
Portfolio's Sub-Adviser will monitor on an ongoing basis the creditworthiness
of the institutions to which the Portfolio lends securities.
LOWER-RATED SECURITIES
Certain Portfolios may invest in debt securities rated lower than BBB by S&P
or Baa by Moody's, or of equivalent quality as determined by the Sub-Adviser.
Securities rated BB, Ba or lower are commonly referred to as "junk bonds."
Securities rated below investment-grade as well as unrated securities are
often considered to be speculative and usually entail greater risk (including
the possibility of default or bankruptcy of the issuers). Such securities
generally involve greater price volatility and risk of principal and income,
and may be less liquid than securities in higher-rated categories. Both price
volatility and illiquidity may make it difficult for the Portfolio to value
certain of these securities at certain times and these securities may be
difficult to sell under certain market conditions. Prices for securities rated
below investment-grade may be affected by legislative and regulatory
developments. (See SAI for additional information pertaining to lower-rated
securities including risks.)
MORTGAGE-BACKED SECURITIES
Certain Portfolios may invest in Mortgage-Backed Securities, which represent
an interest in a pool of mortgage loans. The primary government issuers or
guarantors of Mortgage-Backed Securities are GNMA, FHMA and FHLMC.
Mortgage-Backed Securities generally provide a monthly payment consisting of
interest and principal payments. Additional payments may be made out of
unscheduled repayments of principal resulting from the sale of the underlying
residential property, refinancing or foreclosure, net of fees or costs that
may be incurred. Prepayments of principal on Mortgage-Backed Securities may
tend to increase due to refinancing of mortgages as interest rates decline.
Prompt payment of principal and interest on GNMA mortgage pass-through
certificates is backed by the full faith and credit of the U.S. Government.
FNMA guaranteed mortgage pass-through certificates and FHLMC participation
certificates are solely the obligations of those entities but are supported by
the discretionary authority of the U.S. Government to purchase the agencies'
obligations.
If Mortgage-Backed Securities are purchased at a premium, faster than expected
prepayments will reduce yield to maturity, while slower than expected
prepayments will increase yield to maturity. Conversely, if Mortgage-Backed
Securities are purchased at a discount, faster than expected prepayments will
increase yield to maturity, while slower than expected prepayments will reduce
yield to maturity. Accelerated prepayments on securities purchased at a
premium also impose a risk of loss of principal because the premium may not
have been fully amortized at the time the principal is prepaid in full.
Because of the reinvestment of prepayments of principal at current rates,
Mortgage-Backed Securities may be less effective than Treasury bonds of
similar maturity at maintaining yields during periods of declining interest
rates. When interest rates rise, the value and liquidity of Mortgage-Backed
Securities may decline sharply and generally will decline more than would be
the case with other fixed-income securities; however, when interest rates
decline, the value of Mortgage-Backed Securities may not increase as much as
other fixed-income securities due to the prepayment feature. Certain market
conditions may result in greater than expected volatility in the prices of
Mortgage-Backed Securities. For example, in periods of supply and demand
imbalances in the market for such securities and/or in periods of sharp
interest rate movements, the prices of Mortgage-Backed Securities may
fluctuate to a greater extent than would be expected from interest rate
movements alone.
To the extent that a Portfolio invests in adjustable rate Mortgage-Backed
Securities, the Portfolio will not benefit from increases in interest rates to
the extent that interest rates rise to the point where they cause the current
coupon of the underlying adjustable rate mortgages to exceed any maximum
allowable annual or lifetime reset limits (or "cap rates") for a particular
mortgage. In this event, the value of the Mortgage-Backed Securities in a
Portfolio would likely decrease. Also, a Portfolio's net asset value could
vary to the extent that current yields on adjustable rate mortgage securities
are different than market yields during interim periods between coupon reset
dates or if the timing of changes to the index upon which the rate for the
underlying mortgages is based lags behind changes in market rates. During
periods of declining interest rates, income to a Portfolio derived from
adjustable rate mortgages which remain in a mortgage pool will decrease in
contrast to the income on fixed rate mortgages, which will remain constant.
Adjustable rate mortgages also have less potential for appreciation in value
as interest rates decline than do fixed rate investments.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES
A Portfolio may invest in collateralized mortgage obligations. Collateralized
mortgage obligations or "CMOs" are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically, CMOs are collateralized
by Ginnie Mae, Fannie Mae or Freddie Mac Certificates, but also may be
collateralized by whole loans or private pass-throughs (such collateral
collectively hereinafter referred to as "Mortgage Assets"). Multiclass
pass-through securities are interests in a trust composed of Mortgage Assets.
Unless the context indicates otherwise, all references herein to CMOs include
multiclass pass-through securities. Payments of principal and of interest on
the Mortgage Assets, and any reinvestment income thereon, provide the funds to
pay debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities
of the U.S. Government, or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing. CMOs acquired by the Salomon Brothers U.S. Government Securities
Portfolio will be limited to those issued or guaranteed by agencies or
instrumentalities of the U.S. Government and, if available in the future, the
U.S. Government.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specified
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly or semi-annual basis. The principal of and interest on
the Mortgage Assets may be allocated among the several classes of a series of
a CMO in innumerable ways. In one structure, payments of principal, including
any principal prepayments, on the Mortgage Assets are applied to the classes
of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class
of CMOs until all other classes having an earlier stated maturity or final
distribution date have been paid in full. The Salomon Brothers U.S. Government
Securities Portfolio has no present intention to invest in CMO residuals. As
market conditions change, and particularly during periods of rapid or
unanticipated changes in market interest rates, the attractiveness of the CMO
classes and the ability of the structure to provide the anticipated investment
characteristics may be significantly reduced. Such changes can result in
volatility in the market value, and in some instances reduced liquidity, of
the CMO class.
A Portfolio may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other
CMO structures, must be retired by its stated maturity date or a final
distribution date but may be retired earlier. PAC Bonds are a type of CMO
tranche or series designed to provide relatively predictable payments of
principal provided that, among other things, the actual prepayment experience
on the underlying mortgage loans falls within a predefined range. If the
actual prepayment experience on the underlying mortgage loans is at a rate
faster or slower than the predefined range, or if deviations from other
assumptions occur, principal payments on the PAC Bond may be earlier or later
than predicted. The magnitude of the predefined range varies from one PAC Bond
to another; a narrower range increases the risk that prepayments on the PAC
Bond will be greater or smaller than predicted. Because of these features, PAC
Bonds generally are less subject to the risks of prepayment than are other
types of Mortgage-Backed Securities.
NEW ISSUERS
A Portfolio may invest up to 5% of its assets in the securities of issuers
which have been in continuous operation for less than three years.
OPTIONS ON SECURITIES
OPTION PURCHASE. Certain Portfolios may purchase put and call options on
portfolio securities in which they may invest that are traded on a U.S. or
foreign securities exchange or in the over-the-counter market. A Portfolio may
utilize up to 10% of its assets to purchase put options on portfolio
securities and may do so at or about the same time that it purchases the
underlying security or at a later time and may also utilize up to 10% of its
assets to purchase call options on securities in which it is authorized to
invest. By buying a put, the Portfolios limit their risk of loss from a
decline in the market value of the security until the put expires. Any
appreciation in the value of the underlying security, however, will be
partially offset by the amount of the premium paid for the put option and any
related transaction costs. Call options may be purchased by the Portfolio in
order to acquire the underlying securities for the Portfolio at a price that
avoids any additional cost that would result from a substantial increase in
the market value of a security. The Portfolios may also purchase call options
to increase their return to investors at a time when the call is expected to
increase in value due to anticipated appreciation of the underlying security.
Prior to their expiration, put and call options may be sold in closing sale
transactions (sales by the Portfolio, prior to the exercise of options that it
has purchased, of options of the same series), and profit or loss from the
sale will depend on whether the amount received is more or less than the
premium paid for the option, plus the related transaction costs.
COVERED OPTION WRITING. Certain Portfolios may write put and call options
on securities for hedging purposes. The Portfolios realize fees (referred to
as "premiums") for granting the rights evidenced by the options. A put option
embodies the right of its purchaser to compel the writer of the option to
purchase from the option holder an underlying security at a specified price at
anytime during the option period. In contrast, a call option embodies the
right of its purchaser to compel the writer of the option to sell to the
option holder an underlying security at a specified price at anytime during
the option period.
Upon the exercise of a put option written by a Portfolio, the Portfolio may
suffer a loss equal to the difference between the price at which the Portfolio
is required to purchase the underlying security and its market value at the
time of the option exercise, less the premium received for writing the option.
Upon the exercise of a call option written by the Portfolio, the Portfolio may
suffer a loss equal to the excess of the security's market value at the time
of the option exercise over the Portfolio's acquisition cost of the security,
less the premium received for writing the option.
The Portfolios will comply with regulatory requirements of the SEC and the
Commodities Futures Trading Commission with respect to coverage of options and
futures positions by registered investment companies and, if the guidelines so
require, will set aside cash and/or appropriate liquid assets in a segregated
custodial account in the amount prescribed. Securities held in a segregated
account cannot be sold while the futures or options position is outstanding,
unless replaced with other permissible assets. As a result, there is a
possibility that the segregation of a large percentage of a Portfolio's assets
may force the Portfolio to close out futures and options positions and/or
liquidate other portfolio securities, any of which may occur at
disadvantageous prices, in order for the Portfolio to meet redemption requests
or other current obligations.
The principal reason for writing covered call and put options on a securities
portfolio is to attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. In return for a
premium, the writer of a covered call option forfeits the rights to any
appreciation in the value of the underlying security above the strike price
for the life of the option (or until a closing purchase transaction can be
effected). Nevertheless, the call writer retains the risk of a decline in the
price of the underlying security. Similarly, the principal reason for writing
covered put options is to realize income in the form of premiums. The writer
of the covered put option accepts the risk of a decline in the price of the
underlying security. The size of the premiums that the Portfolios may receive
may be adversely affected as new or existing institutions, including other
investment companies, engage in or increase their option writing activities.
The Portfolios may engage in closing purchase transactions to realize a
profit, to prevent an underlying security from being called or put or, in the
case of a call option, to unfreeze an underlying security (thereby permitting
its sale or the writing of a new option on the security prior to the
outstanding option's expiration). To effect a closing purchase transaction,
the Portfolios would purchase, prior to the holder's exercise of an option
that the Portfolio has written, an option of the same series as that on which
the Portfolio desires to terminate its obligation. The obligation of the
Portfolio under an option that it has written would be terminated by a closing
purchase transaction, but the Portfolio would not be deemed to own an option
as the result of the transaction. There can be no assurance that the Portfolio
will be able to effect closing purchase transactions at a time when it wishes
to do so. The ability of the Portfolio to engage in closing transactions with
respect to options depends on the existence of a liquid secondary market.
While the Portfolio will generally purchase or write options only if there
appears to be a liquid secondary market for the options purchased or sold, for
some options no such secondary market may exist or the market may cease to
exist. To facilitate closing purchase transactions, however, the Portfolio
will ordinarily write options only if a secondary market for the options
exists on a U.S. securities exchange or in the over-the-counter market.
Option writing for the Portfolios may be limited by position and exercise
limits established by U.S. securities exchanges and the National Association
of Securities Dealers, Inc. and by requirements of the Internal Revenue Code
of 1986, as amended, for qualification as a regulated investment company. In
addition to writing covered put and call options to generate current income,
the Portfolios may enter into options transactions as hedges to reduce
investment risk, generally by making an investment expected to move in the
opposite direction of a portfolio position. A hedge is designed to offset a
loss on a portfolio position with a gain on the hedge position; at the same
time, however, a properly correlated hedge will result in a gain on the
portfolio position's being offset by a loss on the hedge position. The
Portfolios bear the risk that the prices of the securities being hedged will
not move in the same amount as the hedge. A Portfolio will engage in hedging
transactions only when deemed advisable by its Sub-Adviser. Successful use by
a Portfolio of options will depend on its Sub-Adviser's ability to correctly
predict movements in the direction of the stock underlying the option used as
a hedge. Losses incurred in hedging transactions and the costs of these
transactions will adversely affect the Portfolio's performance.
OPTIONS ON FOREIGN CURRENCIES
A Portfolio may purchase and write put and call options on foreign currencies
for the purpose of hedging against declines in the U.S. dollar value of
foreign currency-denominated portfolio securities and against increases in the
U.S. dollar cost of such securities to be acquired. Generally, transactions
relating to Options on Foreign Currencies occur in the over-the-counter
market. As in the case of other kinds of options, however, the writing of an
option on a foreign currency constitutes only a partial hedge, up to the
amount of the premium received, and the Portfolio could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on a foreign currency may
constitute an effective hedge against fluctuations in exchange rates,
although, in the event of rate movements adverse to the Portfolio's position,
it may forfeit the entire amount of the premium plus related transaction
costs. There is no specific percentage limitation on the Portfolio's
investments in Options on Foreign Currencies. See the SAI for further
discussion of the use, risks and costs of Options on Foreign Currencies and
Over the Counter Options.
OPTIONS ON INDEXES
A Portfolio may, subject to applicable securities regulations, purchase and
write put and call options on stock and fixed- income indexes listed on
foreign and domestic stock exchanges. A stock index fluctuates with changes in
the market values of the stocks included in the index. An example of a
domestic stock index is the Standard and Poor's 500 Stock Index. Examples of
foreign stock indexes are the Canadian Market Portfolio Index (Montreal Stock
Exchange), The Financial Times -- Stock Exchange 100 (London Stock Exchange)
and the Toronto Stock Exchange Composite 300 (Toronto Stock Exchange).
Examples of fixed-income indexes include the Lehman Government/Corporate Bond
Index and the Lehman Treasury Bond Index.
Options on Indexes are generally similar to options on securities except
that the delivery requirements are different. Instead of giving the right to
take or make delivery of a security at a specified price, an option on an
index gives the holder the right to receive a cash "exercise settlement
amount" equal to (a) the amount, if any, by which the fixed exercise price of
the option exceeds (in the case of a put) or is less than (in the case of a
call) the closing value of the underlying index on the date of exercise,
multiplied by (b) a fixed "index multiplier." Receipt of this cash amount
will depend upon the closing level of the index upon which the option is
based being greater than, in the case of a call, or less than, in the case of
a put, the exercise price of the option. The amount of cash received will be
equal to such difference between the closing price of the index and the
exercise price of the option expressed in dollars or a foreign currency,
as the case may be, times a specified multiple. The writer of the option
is obligated, in return for the premium received, to make a delivery of
this amount. The writer may offset its position in index options prior to
expiration by entering into a closing transaction on an exchange or the option
may expire unexercised.
The effectiveness of purchasing or writing options as a hedging technique will
depend upon the extent to which price movements in the portion of the
securities portfolio of a Portfolio correlate with price movements of the
stock index selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular
stock, whether a Portfolio will realize a gain or loss from the purchase or
writing of options on an index depends upon movements in the level of stock
prices in the stock market generally or, in the case of certain indexes, in an
industry or market segment, rather than movements in the price of a particular
stock. Accordingly, successful use of Options on Indexes by a Portfolio will
be subject to its Sub-Adviser's ability to predict correctly movements in the
direction of the market generally or of a particular industry. This requires
different skills and techniques than predicting changes in the price of
individual stocks.
Options on securities indexes entail risks in addition to the risks of options
on securities. Because exchange trading of options on securities indexes is
relatively new, the absence of a liquid secondary market to close out an
option position is more likely to occur, although a Portfolio generally will
only purchase or write such an option if the Sub-Adviser believes the option
can be closed out. Because options on securities indexes require settlement in
cash, a Portfolio may be forced to liquidate portfolio securities to meet
settlement obligations. A Portfolio will engage in stock index options
transactions only when determined by its Sub-Adviser to be consistent with its
efforts to control risk. There can be no assurance that such judgement will be
accurate or that the use of these portfolio strategies will be successful.
OVER THE COUNTER OPTIONS
Certain Portfolios may write or purchase options in privately negotiated
domestic or foreign transactions ("OTC Options"), as well as exchange traded
or "listed" options. OTC Options can be closed out only by agreement with the
other party to the transaction, and thus any OTC Options purchased by a
Portfolio will be considered an illiquid security. In addition, certain OTC
Options on foreign currencies are traded through financial institutions acting
as market makers in such options and the underlying currencies.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed the
maximum percentage of a Portfolio's assets allowed to be invested in illiquid
securities (the "illiquidity ceiling"). (See "Illiquid Securities" in this
Appendix.) Except as provided below, the Portfolios intend to write
over-the-counter options only with primary U.S. Government securities dealers
recognized by the Federal Reserve Bank of New York. Also, the contracts which
such Portfolios have in place with such primary dealers will provide that each
Portfolio has the absolute right to repurchase any option it writes at anytime
at a price which represents the fair market value, as determined in good faith
through negotiation between the parties, but which in no event will exceed a
price determined pursuant to a formula in the contract. Although the specific
formula may vary between contracts with different primary dealers, the formula
will generally be based on a multiple of the premium received by the Portfolio
for writing the option, plus the amount, if any, of the option's intrinsic
value (i.e., the amount that the option is in the money). The formula may also
include a factor to account for the difference between the price of the
security and the strike price of the option if the option is written
out-of-the-money. A Portfolio will treat all or a part of the formula price as
illiquid for purposes of the illiquidity ceiling. Certain Portfolios may also
write over-the-counter options with nonprimary dealers, including foreign
dealers, and will treat the assets used to cover these options as illiquid for
purposes of such illiquidity ceiling.
OTC Options entail risks in addition to the risks of exchange traded options.
Exchange traded options are in effect guaranteed by the Options Clearing
Corporation, while a Portfolio relies on the party from whom it purchases an
OTC Option to perform if the Portfolio exercises the option. With OTC Options,
if the transacting dealer fails to make or take delivery of the securities or
amount of foreign currency underlying an option it has written, in accordance
with the terms of that option, the Portfolio will lose the premium paid for
the option as well as any anticipated benefit of the transaction. Furthermore,
OTC Options are less liquid than exchange traded options.
REPURCHASE AGREEMENTS
Repurchase Agreements are agreements to purchase underlying debt obligations
from financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase the obligations at an established time and
price. The collateral for such Repurchase Agreements will be held by the
Portfolio's custodian or a duly appointed sub-custodian. The Portfolio will
enter into Repurchase Agreements only with banks and broker-dealers that have
been determined to be creditworthy by the Trust's Board of Trustees under
criteria established in consultation with the Adviser and the Sub-Adviser. The
seller under a Repurchase Agreement would be required to maintain the value of
the obligations subject to the Repurchase Agreement at not less than the
repurchase price. Default by the seller would, however, expose the Portfolio
to possible loss because of advers market action or delay in connection with
the disposition of the underlying obligations. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the obligations, the
Portfolio may be delayed or limited in its ability to sell the collateral.
REVERSE REPURCHASE AGREEMENTS
Reverse Repurchase Agreements are the same as repurchase agreements except
that, in this instance, the Portfolios would assume the role of
seller/borrower in the transaction. The Portfolios will maintain segregated
accounts with the Custodian consisting of U.S. Government Securities, cash or
money market instruments that at all times are in an amount equal to their
obligations under Reverse Repurchase Agreements. Reverse Repurchase Agreements
involve the risk that the market value of the securities sold by a Portfolio
may decline below the repurchase price of the securities and, if the proceeds
from the reverse repurchase agreement are invested in securities, that the
market value of the securities sold may decline below the repurchase price of
the securities sold. Each Portfolio's Sub-Adviser, acting under the
supervision of the Board of Trustees, reviews on an ongoing basis the
creditworthiness of the parties with which it enters into Reverse Repurchase
Agreements. Under the 1940 Act, Reverse Repurchase Agreements may be
considered borrowings by the seller. Whenever borrowings by a Portfolio,
including Reverse Repurchase Agreements, exceed 5% of the value of a
Portfolio's total assets, the Portfolio will not purchase any securities.
SMALL COMPANIES
Certain Portfolios may invest in small companies, some of which may be
unseasoned. While smaller companies generally have potential for rapid growth,
investments in such companies often involve higher risks because the companies
may lack the management experience, financial resources, product
diversification and competitive strengths of larger corporations. Moreover,
the markets for the shares of such companies typically are less liquid than
those for the shares of larger companies.
STRATEGIC TRANSACTIONS
Subject to the investment limitations and restrictions for each of the
Portfolios as stated elsewhere in the Prospectus and SAI of the Trust, each of
the Portfolios may, but is not required to, utilize various investment
strategies as described in this Appendix to hedge various market risks, to
manage the effective maturity or duration of fixed-income securities, or to
seek potentially higher returns. Utilizing these investment strategies, the
Portfolio may purchase and sell, to the extent not otherwise limited or
restricted for such Portfolio, exchange-listed and over-the-counter put and
call options on securities, equity and fixed-income indexes and other
financial instruments; purchase and sell financial futures contracts and
options thereon; enter into various Interest Rate Transactions such as swaps,
caps, floors or collars; and enter into various currency transactions such as
currency forward contracts, currency futures contracts, currency swaps or
options on currencies or currency futures (collectively, all the above are
called "Strategic Transactions").
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Portfolio's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Portfolio's unrealized gains in the value of
its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of the
Portfolio's portfolio, or to establish a position in the derivatives markets
as a temporary substitute for purchasing or selling particular securities.
Some Strategic Transactions may also be used to seek potentially higher
returns, although no more than 5% of the Portfolio's assets will be used as
the initial margin or purchase price of options for Strategic Transactions
entered into for purposes other than "bona fide hedging" positions as defined
in the regulations adopted by the Commodities Futures Trading Commission. Any
or all of these investment techniques may be used at any time, as use of any
Strategic Transaction is a function of numerous variables, including market
conditions. The ability of the Portfolio to utilize these Strategic
Transactions successfully will depend on the Sub-Adviser's ability to predict,
which cannot be assured, pertinent market movements. The Portfolio will comply
with applicable regulatory requirements when utilizing Strategic Transactions.
Strategic Transactions involving financial futures and options thereon will be
purchased, sold or entered into only for bona fide hedging, risk management or
portfolio management purposes.
U.S. GOVERNMENT SECURITIES
U.S. Government Securities include direct obligations of the U.S. Treasury
(such as U.S. Treasury bills, notes and bonds) and obligations directly issued
or guaranteed by U.S. Government agencies or instrumentalities. Some
obligations issued or guaranteed by agencies or instrumentalities of the U.S.
Government are backed by the full faith and credit of the U.S. Government
(such as GNMA certificates). Others are backed only by the right of the issuer
to borrow from the U.S. Treasury (such as securities of Federal Home Loan
Banks) and still others are backed only by the credit of the instrumentality
(such as FNMA and FHLMC certificates). Guarantees of principal by agencies or
instrumentalities of the U.S. Government may be a guarantee of payment at the
maturity of the obligation so that in the event of a default prior to maturity
there might not be a market and thus no means of realizing on the obligation
prior to maturity. Guarantees as to the timely payment of principal and
interest do not extend to the value or yield of these securities nor to the
value of a Portfolio's shares.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS
In order to secure yields or prices deemed advantageous at the time, certain
Portfolios may purchase or sell securities on a when-issued or a
delayed-delivery basis. The Portfolios will enter into a when-issued
transaction for the purpose of acquiring portfolio securities and not for the
purpose of leverage, although a Portfolio may dispose of a when-issued
security or forward commitment prior to settlement if it is deemed appropriate
to do so. In such transactions, delivery of the securities occurs beyond the
normal settlement periods, but no payment or delivery is made by, and no
interest accrues to, the Portfolios prior to the actual delivery or payment by
the other party to the transaction. Due to fluctuations in the value of
securities purchased on a when-issued or a delayed-delivery basis, the yields
obtained on such securities may be higher or lower than the yields available
in the market on the dates when the investments are actually delivered to the
buyers. Similarly, the sale of securities for delayed delivery can involve the
risk that the prices available in the market when delivery is made may
actually be higher than those obtained in the transaction itself. The
Portfolios will establish a segregated account with the Custodian consisting
of cash, U.S. Government securities or other high-grade debt obligations in an
amount equal to the amount of its when-issued and delayed-delivery
commitments.