As filed with the Securities and Exchange Commission
on May 1, 1997
Registration Nos. 33-87380
811-8912
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 2 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 3 [X]
(Check appropriate box or boxes.)
WNL SERIES TRUST
_________________________________________________
(Exact name of registrant as specified in charter)
5555 San Felipe
Suite 900
Houston, Texas 77056
________________________________________ _________
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (713) 888-7800
Dwight L. Cramer, Esq.
Senior Vice President - Law and Secretary
Western National Life Insurance Company
5555 San Felipe, Suite 900
Houston, Texas 77056
(Name and Address of Agent For Service)
Copies to:
Raymond A. O'Hara III, Esq.
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866
It is proposed that this filing will become effective (check appropriate box)
__X__ immediately upon filing pursuant to paragraph (b)
_____ on (date) pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
_____ on (date) pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
__ this post-effective amendment designates a new effective date for
a
previously filed post-effective amendment.
Registrant has declared that it has registered an indefinite number or amount
of securities under the Securities Act of 1933 pursuant to Investment Company
Act Rule 24f-2 and the Rule 24f-2 Notice for Registrant's fiscal year 1996
was filed on March 3, 1997.
WNL SERIES TRUST
CROSS REFERENCE SHEET
(as required by Rule 404 (c))
PART A
N-1A
- - ----
Item No. Location
- - --------- --------
1. Cover Page Cover Page
2. Synopsis. Summary
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Cover Page; The Trust;
Investment Objectives
and Policies of the
Portfolios; Additional
Information; Appendix
5. Management of the Fund Management of the Trust;
Additional Information
6. Capital Stock and Other Securities Sales and Redemptions;
Net Asset Value; Tax
Status, Dividends and
Distributions;
Additional Information
7. Purchase of Securities Being Offered. The Trust; Net Asset
Value; Sales and
Redemptions
8. Redemption or Repurchase Sales and Redemptions;
Net Asset Value
9. Pending Legal Proceedings Not Applicable
PART B
10. Cover Page Cover Page
11. Table of Contents Cover Page
12. General Information and History Not Applicable
13. Investment Objectives and Policies Investment Objectives
and Policies of the
Trust; Investment
Restrictions;
Portfolio Turnover
CROSS REFERENCE SHEET (CONT'D)
(as required by Rule 404 (c))
N-1A
- - ----
Item No. Location
- - --------- --------
Item 14. Management of the Fund Management of the Trust
Item 15. Control Persons and Principal Holders
of Securities Management of the Trust
Item 16. Investment Advisory and Other
Services. Management of the Trust;
Independent Auditors;
Custodian
Item 17. Brokerage Allocation and Other
Practices Management of the Trust
(Brokerage and Research
Services)
Item 18. Capital Stock and Other Securities Sales and Redemptions;
Net Asset Value; Tax
Status, Dividends and
Distributions; Organiza-
tion and Capitalization;
Additional Information
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered Determination of Net
Asset Value; Sales and
Redemptions
Item 20. Tax Status Taxes; Dividends and
Distributions
Item 21. UnderwritersNot Applicable
Item 22. Calculations of Performance DataPerformance Information
Item 23. Financial StatementsFinancial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of the Registration Statement.
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: BEA Growth and Income Portfolio,
BlackRock Managed Bond Portfolio, Credit Suisse International Equity
Portfolio,
EliteValue Asset Allocation Portfolio, Global Advisors Growth Equity
Portfolio, Global Advisors Money Market Portfolio, Salomon Brothers U.S.
Government Securities Portfolio, and Van Kampen American Capital Emerging
Growth 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, 1997, 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, 1290 Silas Deane
Highway, Wethersfield, CT 06109-4303. 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, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
SUMMARY
THE PORTFOLIOS
BEA Growth and Income Portfolio
BlackRock Managed Bond Portfolio
Credit Suisse International Equity Portfolio
EliteValue Asset Allocation Portfolio
Global Advisors Growth Equity Portfolio
Global Advisors Money Market Portfolio
Salomon Brothers U.S. Government Securities Portfolio
Van Kampen American Capital Emerging Growth Portfolio
Investment Risks
Sales and Redemptions
FINANCIAL HIGHLIGHTS
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
BEA Growth and Income Portfolio
BlackRock Managed Bond Portfolio
Credit Suisse International Equity Portfolio
EliteValue Asset Allocation Portfolio
Global Advisors Growth Equity Portfolio
Global Advisors Money Market Portfolio
Salomon Brothers U.S. Government Securities Portfolio
Van Kampen American Capital Emerging Growth 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:
Sub-Adviser Name of Portfolio
- - ----------- -------------------
BEA Associates BEA Growth and Income
BlackRock Financial Management BlackRock Managed Bond
Credit Suisse Investment Management Ltd. Credit Suisse International
Equity
OpCap Advisors EliteValue Asset Allocation
State Street Global Advisors Global Advisors Growth Equity
Global Advisors Money Market
Salomon Brothers Asset Management Inc Salomon Brothers U.S.
Government Securities
Van Kampen American Capital Asset
Management, Inc. Van Kampen American Capital
Emerging Growth
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
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.
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.
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.)
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.
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.
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.
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.)
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, 1996 Annual Report which may be obtained without charge
by calling the Life Company at (800) 910-4455.
WNL SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
BLACKROCK CREDIT SUISSE
BEA GROWTH AND INCOME MANAGED BOND INTERNATIONAL EQUITY
------------------------ ------------ ---------------------
Year Ended Period Ended Period Ended Year Ended Period
December 31, December 31, December 31, December 31, December 31,
1996 1995* 1996* 1996 1995*
- - ------- ------------- ----------- ------------ -------------
NET ASSET VALUE
Net asset value,
beginning of
period $ 10.46 $ 10.00 $ 10.00 $ 10.33 $ 10.00
--------- --------- --------- --------- ---------
INVESTMENT
OPERATIONS
Net investment
income (1) 0.47 0.14 0.58 0.15
0.06
Net realized and
unrealized gain
(loss) 0.96 0.51 (0.22) 1.56
------------ --------- ---------- ---------
0.33
- - ----
Total from
investment
operations 1.43 0.65 0.36 1.71
------------- --------- --------- ---------
0.39
- - ----
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment
income (0.47) (0.14) (0.58) (0.15)
(0.06)
In excess of net
investment income
gains (0.24)
Net realized gains (0.38) 0.00 (0.98)
0.00
In excess of net
realized gains (0.05)
--------- --------- --------- ---------
- - ---------
Total distributions
to shareholders (0.85) (0.19) (0.58) (1.37)
(0.06)
--------- --------- --------- ---------
- - ---------
Net asset value,
end of period $ 11.04 $ 10.46 $ 9.78 $ 10.67
$ 10.33
========= ========= ========= =========
=========
TOTAL RETURN 13.82% 6.57%(2) 3.76%(2) 16.50%
3.93%(2)
RATIOS AND
SUPPLEMENTAL DATA
Expenses to average
net assets (3) 0.49% 0.12%(4) 0.28%(4) 0.60%
0.12%(4)
Net investment
income to average
average net assets 4.65% 6.99%(4) 6.02%(4) 1.09%
2.89%(4)
Portfolio turnover
rate 217% 75% 488% 79%
2%
Average commission
rate (5) $ 0.0600 $ 0.0623 $ 0.0134
$ 0.0371
Net assets, end
of period (000's) $ 3,145 $ 2,136 $ 3,376 $ 2,727
$ 2,083
ELITEVALUE
ASSET ALLOCATION
-----------------
Period
Ended
December 31,
1996*
--------------
[C]
NET ASSET VALUE
Net asset value, beginning of period $ 10.00
-------------
INVESTMENT OPERATIONS
Net investment income (1) 0.18
Net realized and
unrealized gain (loss) 2.48
-------------
Total from investment operations 2.66
-------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.18)
In excess of net investment income gains -
Net realized gains (0.16)
In excess of net realized gains -
-------------
Total distributions to shareholders (0.34)
-------------
Net asset value, end of period $ 12.32
=============
TOTAL RETURN 26.70%(2)
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets (3) 0.36%(4)
Net investment income to
average net assets 1.74%(4)
Portfolio turnover rate 21%
Average commission rate (5) $ 0.0545
Net assets, end of period (000's) $ 2,307
* -The Growth and Income and International Equity Portfolios commenced
investment
operations on October 20, 1995, and the Managed Bond and Asset
Allocation
Portfolios commenced investment operations on January 2, 1996.
(1) Net investment income is after waiver of fees and reimbursement of
certain
expenses by the Investment Adviser, the Sub-administrator, the Custodian
and
Western National Life Insurance Company, an affiliate of the Adviser (see
Note 2
to the financial statements). If the Investment Adviser, the
Sub-administrator
and the Custodian had not waived fees and Western National Life Insurance
Company had not reimbursed expenses for the periods ended December 31,
1996, and
December 31, 1995, net investment income (loss) per share would have been
$0.00
and $(0.06) for the Growth and Income Portfolio, respectively, and
$(1.25) and
$(0.18) for the International Equity Portfolio, respectively. For the
period
ended December 31,1996, the net investment income (loss) per share would
have
been $0.23 and $(0.54) for the Managed Bond and Asset Allocation
Portfolios,
respectively.
(2) Total return represents aggregate total return for the period indicated
and is not
annualized.
(3) If the Investment Adviser, the Sub-administrator and the Custodian had not
waived
fees and Western National Life Insurance Company had not reimbursed
expenses for
the periods ended December 31, 1996, and December 31, 1995, the ratio of
operating
expenses to average net assets would have been 5.15% and 9.95% for
the Growth
and Income Portfolio, respectively, and 6.41% and 11.83% for the
International
Equity Portfolio, respectively. For the period ended December 31,1996,
the ratio of
operating expenses to average net assets would have been 3.93% and 7.45%
for the
Managed Bond and Asset Allocation Portfolios, respectively.
(4) Annualized.
(5) Represents the average commission rate paid on equity security
transactions on
which commissions are charged.
WNL SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SALOMON
BROTHERS
U.S.
GLOBAL ADVISORS GLOBAL ADVISORS
GOVERNMENT
GROWTH EQUITY MONEY MARKET
SECURITIES
--------------- ---------------
- - ----------
Year Ended Period Ended Year Ended Period Ended
Period Ended
December 31, December 31, December 31, December 31,
December 31,
1996 1995* 1996 1995*
1996*
------------ ------------ ------------ ------------
- - ------------
[C] [C] [C] [C]
[C]
NET ASSET VALUE
Net asset value,
beginning of
period $ 10.31 $ 10.00 $ 1.00 $ 1.00
$ 10.00
------- -------- ------- ------
- - -------
INVESTMENT OPERATIONS
Net investment
income (1) 0.20 0.05 0.05 0.01
0.53
Net realized and
unrealized gain
(loss) 1.99 0.31 0.00 0.00
(0.21)
------- ------- ------ -----
- - -------
Total from
investment
operations 2.19 0.36 0.05 0.01
0.32
------- ------- ------ -----
- - -------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment
income (0.20) (0.05) (0.05) (0.01)
(0.53)
Net realized gains (0.45) (0.00) 0.00 (0.00)
0.00
------- ------- ------ -----
- - -------
Total distributions
to shareholders (0.65) (0.05) (0.05) (0.01)
(0.53)
------- ------- ------ -----
- - -------
Net asset value,
end of period $ 11.85 $ 10.31 $ 1.00 $ 1.00
$ 9.79
======= ======= ====== ======
=======
TOTAL RETURN 21.36% 3.57%(2) 5.19% 1.17%(2)
3.40%(2)
RATIOS AND
SUPPLEMENTAL DATA
Expenses to average
net assets (3) 0.39% 0.12%(4) 0.29% 0.12%(4)
0.22%(4)
Net investment
income to average
net assets 1.80% 2.46%(4) 5.23% 5.25%(4)
5.91%(4)
Portfolio turnover
rate 89% 9% N/A N/A
297%
Average commission
rate (5) $0.0326 $0.0226
Net assets,
end of period
(000's) $ 3,420 $ 2,073 $ 1,291 $ 126
$ 2,347
VAN KAMPEN
AMERICAN CAPITAL
EMERGING GROWTH
----------------
Period
Ended
December 31,
1996*
--------------
[C]
NET ASSET VALUE
Net asset value, beginning of period $10.00
--------------
INVESTMENT OPERATIONS
Net investment income (1) 0.05
Net realized and
unrealized gain (loss) 1.86
--------------
Total from investment operations 1.91
--------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (0.05)
Net realized gains (0.32)
--------------
Total distributions
to shareholders (0.37)
--------------
Net asset value, end of period $11.54
==============
TOTAL RETURN 19.06% (2)
RATIOS AND SUPPLEMENTAL
DATA
Expenses to average
net assets (3) 0.46% (4)
Net investment income to
average net assets 0.40% (4)
Portfolio turnover rate 154%
Average commission rate (5) $0.0419
Net assets, end of period (000's) $1,882
* -The Growth Equity Portfolio, Money Market Portfolio, U.S. Government
Securities
Portfolio and Emerging Growth Portfolio commenced operations on
October 20, 1995,
October 10, 1995, February 6, 1996 and January 2, 1996, respectively.
(1) Net investment income is after waiver of fees and reimbursement of
certain expenses by
the Investment Adviser, the Sub-administrator, the Custodian and
Western National
Life Insurance Company, an affiliate of the Adviser (see Note 2 to the
financial
statements). If the Investment Adviser, the Sub-administrator and the
Custodian had not
waived fees and Western National Life Insurance Company had not
reimbursed expenses
for the periods ended December 31, 1996, and December 31, 1995, net
investment income
(loss) per share would have been $(0.29) and $(0.15) for the Growth Equity
Portfolio,
respectively, and $(0.08) and $(0.35) for the Money Market Portfolio,
respectively. For
the period ended December 31,1996, the net investment income (loss) per
share would
have been $0.10 and $(1.29) for the U.S. Government Securities and
Emerging Growth
Portfolios, respectively.
(2) Total return represents aggregate total return for the period
indicated and
is not annualized.
(3) If the Investment Adviser, the Sub-administrator and the Custodian had not
waived fees
and Western National Life Insurance Company had not reimbursed
expenses for the
periods ended December 31, 1996, and December 31, 1995, the ratio of
operating
expenses to average net assets would have been 4.83% and 9.94% for the
Growth Equity
Portfolio, respectively, and 14.15% and 161.83% for the Money Market
Portfolio,
respectively. For the period ended December 31, 1996, the ratio of
operating expenses
to average net assets would have been 5.26% and 11.22% for the U.S.
Government
Securities and Emerging Growth Portfolios, respectively.
(4) Annualized.
(5) Represents the average commission rate paid on equity security
transactions on which
commissions are charged.
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.
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.
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.
High rates of portfolio turnover necessarily result in correspondingly greater
brokerage and portfolio trading costs, which are paid by the Portfolio. The
portfolio turnover rate for the Portfolio for the period ended December 31,
1996 was 217%. (See "Portfolio Turnover" in the SAI.)
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. 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 3.5 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.
High rates of portfolio turnover necessarily result in correspondingly greater
brokerage and portfolio trading costs, which are paid by the Portfolio. The
portfolio turnover rate for the Portfolio for the period ended December 31,
1996 was 48%. (See "Portfolio Turnover" in the SAI.)
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.
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.)
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.
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. 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.
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.
High rates of portfolio turnover necessarily result in correspondingly greater
brokerage and portfolio trading costs, which are paid by the Portfolio. The
portfolio turnover rate for the Portfolio for the period ended December 31,
1996 was 297%. (See "Portfolio Turnover" in the SAI.)
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.
High rates of portfolio turnover necessarily result in correspondingly greater
brokerage and portfolio trading costs, which are paid by the Portfolio. The
portfolio turnover rate for the Portfolio for the period ended December 31,
1996 was 154%. (See "Portfolio Turnover" in the SAI.)
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.
ADVISORY FEE
PORTFOLIO % OF AVERAGE NET ASSETS
- - --------- ---------------------------
BEA Growth and Income .75%
BlackRock Managed Bond .55%
Credit Suisse International Equity .90%
EliteValue Asset Allocation .65%
Global Advisors Growth Equity .61%
Global Advisors Money Market .45%
Salomon Brothers U.S. Government Securities .475%
Van Kampen American Capital Emerging Growth .75%
ADVISORY FEE WAIVER AND EXPENSE CAP
The Adviser has voluntarily 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, 1998. The Adviser has reserved the right to withdraw or modify its
agreement to waive a portion of its advisory fee.
For the periods ended December 31, 1996 and 1995, the Adviser waived its
advisory fees in the following amounts with respect to the Portfolios which
were operational for such period:
ADVISORY FEES WAIVED
1996 or
Inception to Inception to
Portfolio December 31, 1996 December 31, 1995
BEA Growth and Income Portfolio $ 9,918 $ 3,106
BlackRock Managed Bond Portfolio 12,335 N/A
Credit Suisse International Equity
Portfolio 10,342 3,643
EliteValue Asset Allocation Portfolio 6,128 N/A
Global Advisors Growth Equity Portfolio 9,010 2,490
Global Advisors Money Market Portfolio 1,984 106
Salomon Brothers U.S. Government
Securities Portfolio 7,227 N/A
Van Kampen American Capital Emerging
Growth Portfolio 5,171 N/A
In addition, Western National Life Insurance Company, an affiliate of the
Adviser, has undertaken to bear until May 1, 1998, all operating expenses of
each Portfolio, excluding the compensation of the Adviser, that exceed .12% of
each Portfolio's average daily net assets. The Life Company has reserved the
right to withdraw or modify its policy of expense reimbursement for the Trust.
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:
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.
BEA has been affiliated with Credit Suisse since 1990. BEA is a New York
general partnership whose interests are indirectly owned by Credit Suisse
Group. Credit Suisse Group is the largest global financial services group
based in Switzerland.
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, 1996,
BEA managed approximately $30 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.
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
investment grade, fixed income portfolios. BlackRock currently manages more
than $47
billion of government, mortgage-backed, corporate, asset-backed, municipal,
and non-U.S. dollar denominated 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 investment grade, fixed income portfolios. BlackRock
has
more than 175 professionals, including 16 portfolio managers and 59
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. Since 1994, BlackRock has been an
indirect subsidiary of PNC Bank, the nation's tenth largest banking
organization.
The day-to-day portfolio management of the Portfolio is the responsibility of
Keith Anderson and Bob Michele.
Keith Anderson is a Managing Director 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 (now Nicholas-Applegate Capital Management) 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 authored 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 earned a BS degree in economics and finance from
Nichols College in 1981 and an MBA degree in business administration from Rice
University in 1983.
Robert Michele, CFA, is a Managing Director and Portfolio Manager at
BlackRock. Mr. Michele is a member of both the firm's Investment Strategy
Group and its Credit Committee. Mr. Michele has primary responsibility for
managing client portfolios with special emphasis on total return accounts. He
is also responsible for overseeing the firm's corporate bond investments. His
areas of expertise include corporates, asset- and mortgage-backed securities
(ABS/MBS).
Prior to joining BlackRock in 1995, Mr. Michele was a Director and Head of
U.S. Fixed Income investments with CS First Boston Investment Management
Corporation. While with the firm, Mr. Michele's respnsibilities included
setting U.S. fixed income investment policy and coordinating the firm's
multi-sector fixed income product. Mr. Michele focused on managing total
return oriented portfolios for foreign central banks and government entities,
domestic pension, corporate, and mutual fund accounts. From 1985 to 1993, he
served as Deputy Manager and Senior Portfolio Manager at Brown Brothers
Harriman & Co., responsible for managing total return oriented fixed income
portfolios for predominately non-U.S. institutional clients. Mr. Michele
began his investment career with Bankers Trust Company in 1981 where he was an
investment associate working on balanced, equity and fixed income portfolios.
Mr. Michele earned a BA degree in classical studies from the University of
Pennsylvania in 1981 and received his Chartered Financial Analyst (CFA)
designation in 1987.
CREDIT SUISSE ASSET MANAGEMENT, LTD. ("CSAM"), One Cabot Square, London,
England, is the Sub-Adviser for the Credit Suisse International Equity
Portfolio of the Trust. CSAM is an indirect wholly-owned subsidiary of Credit
Suisse Group, the largest global financial services group based in
Switzerland.
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, 1996, Credit Suisse Investment Management Group provided
investment advice for approximately $30 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 CSAM, 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.
OPCAP 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. OpCap Advisors is a
majority-owned subsidiary of Oppenheimer Capital, a registered investment
adviser, whose employees perform all investment advisory services provided to
the Portfolio by the Sub-Adviser. Oppenheimer Financial Corp., a holding
company, is a 1.0% general partner of OpCap Advisors and holds a one-third
managing general partner interest in Oppenheimer Capital. Oppenheimer
Capital, L.P., a Delaware limited partnership whose units are traded on The
New York Stock Exchange and of which Oppenheimer Financial Corp. is the sole
1% general partner, owns
the remaining two-thirds interest. Oppenheimer Capital has operated as an
investment adviser since 1968, and had more than $49 billion under management
as of March 31, 1997. The investments of the Portfolio are managed by Richard
J. Glasebrook II, a Managing Director of Oppenheimer Capital.
On February 13, 1997, PIMCO Advisors L.P., a registered investment adviser
with $110 billion in assets under management through various subsidiaries,
signed an Agreement and Plan of Merger with Oppenheimer Group, Inc. and its
subsidiary, Oppenheimer Financial Corp., pursuant to which PIMCO Advisors L.P.
and its affiliate, Thomson Advisory Group, Inc. will acquire the one-third
managing general partner interest in Oppenheimer Capital, the 1.0% general
partner interest in OpCap Advisors, and the 1.0% general partner interest in
Oppenheimer Capital L.P. The completion of the transaction is subject to
certain conditions being satisfied prior to closing, including consent from
certain lenders, approvals from regulatory authorities, including a favorable
tax ruling from the Internal Revenue Service and consent of certain clients.
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, 1996, SBAM had investment
advisory responsibility for approximately $20 billion of assets. SBAM has
access to Salomon Brothers Inc's more than 400 economists, mortgage, bond,
sovereign and equity analysts.
Mr. 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 Corporation, a publicly held bank holding company. State Street Global
Advisors, with over $300 billion (U.S.) under management as of December 31,
1996, 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.
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC. ("VAN KAMPEN
AMERICAN CAPITAL"), One Parkview Plaza, Oakbrook Terrace, Illinois 60181, 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 more than $57 billion
under management or supervision. Van Kampen American Capital's more
than 40 open-end and 38 closed-end funds and more than 2,500 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 MSAM Holding II,
Inc. which, in turn, is a wholly-owned subsidiary of Morgan Stanley Group Inc.
Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading, merger,
acquisition, restructuring and other corporate finance advisory activities;
merchant banking; stock brokerage and research services; asset management;
trading of futures, options, foreign exchange, commodities and swaps
(involving foreign exchange, commodities, indices and interest rates); real
estate advice, financing and investing; and global custody, securities
clearance services and securities lending.
On February 5, 1997, Morgan Stanley Group Inc. and Dean Witter, Discover & Co.
announced that they had entered into an Agreement and Plan of Merger to form a
new company to be named Morgan Stanley, Dean Witter, Discover & Co.
Subsequent to certain conditions being met, it is currently anticipated that
the transaction will close in mid-1997. Thereafter, Van Kampen American
Capital Asset Management, Inc. will be an indirect subsidiary of Morgan
Stanley, Dean Witter, Discover & Co.
Dean Witter, Discover & Co. is a financial services company with three major
businesses; full service brokerage, credit services and asset management of
more than $100 billion in customer accounts.
Gary M. Lewis is primarily responsible for the day-to-day management of the
Portfolio's investment portfolio. Mr. Lewis has been Senior Vice President
of Van Kampen American Capital Asset Management, Inc. since October 31, 1995.
He was previously Vice President-Portfolio Manager of Van Kampen American
Capital Asset management, Inc. Since June 1995, Mr. Lewis has been a Senior
Vice President of Van Kampen American Capital Investment Advisory Corp.
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.
SUB-ADVISORY FEE
PORTFOLIO % OF AVERAGE NET ASSETS
- - --------- ---------------------------
BEA Growth and Income .50%
BlackRock Managed Bond .30%
Credit Suisse International Equity .65%
EliteValue Asset Allocation .40%
Global Advisors Growth Equity .36%
Global Advisors Money Market .20%
Salomon Brothers U.S. Government Securities .225%
Van Kampen American Capital Emerging Growth .50%
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, 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, such as 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 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
Stripped 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 adverse 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.
WNL SERIES TRUST
FORM N-1A
PART B
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1997
This Statement of Additional Information (this "Statement") contains
information which may be of interest to investors but which is not included in
the Prospectus of WNL Series Trust (the "Trust"). This Statement is not a
prospectus and is only authorized for distribution when accompanied or
preceded by the Prospectus of the Trust dated May 1, 1997. This Statement
should be read together with the Prospectus. Investors may obtain a free copy
of the Prospectus by calling Western National Life Insurance Company ("Life
Company") at (800) 910-4455.
TABLE OF CONTENTS
PAGE
DEFINITIONS
INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST
Options
Futures Contracts
Special Risks of Transactions in Futures Contracts and Related Options
Forward Commitments
Repurchase Agreements
Reverse Repurchase Agreements
When-Issued Securities
Loans of Portfolio Securities
Foreign Securities
Foreign Currency Transactions
Commercial Mortgage-Backed Securities
Zero-Coupon Securities
Variable- or Floating-Rate Securities
Lower-Grade Securities
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
Non-Fundamental Investment Restrictions
MANAGEMENT OF THE TRUST
Substantial Shareholders
Investment Adviser
Trust Administration
Sub-Advisers
Brokerage and Research Services
Investment decisions
DETERMINATION OF NET ASSET VALUE
TAXES
DIVIDENDS AND DISTRIBUTIONS
PERFORMANCE INFORMATION
SHAREHOLDER COMMUNICATIONS
TURNOVER
CUSTODIAN
LEGAL COUNSEL
INDEPENDENT AUDITORS
SHAREHOLDER LIABILITY
DESCRIPTION OF NRSRO RATINGS
Description of Moody's Corporate Ratings
Description of S&P's Corporate Ratings
Description of Duff Corporate Ratings
Description of Fitch Corporate Ratings
Description of Thomson Bankwatch, Inc. Corporate Ratings
Description of IBCA Limited and IBCA Inc. Corporate Ratings
Description of S&P's Commercial Paper Ratings
Description of Moody's Commercial Paper Ratings
Description of Duff Commercial Paper Ratings
Description of Fitch Commercial Paper Ratings
Description of IBCA Limited and IBCA Inc. Commercial Paper Ratings
Description of Thomson Bankwatch, Inc. Commercial Paper Ratings
FINANCIAL STATEMENTS
WNL SERIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
DEFINITIONS
THE "TRUST" -- WNL Series Trust.
"ADVISER" -- WNL Investment Advisory Services, Inc., the Trust's investment
adviser.
INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST
The Trust currently offers shares of beneficial interest of eight series (the
"Portfolios") with separate investment objectives and policies. The investment
objectives and policies of each of the Portfolios of the Trust are described
in the Prospectus. This Statement contains additional information concerning
certain investment practices and investment restrictions of the Trust.
Except as described below under "Investment Restrictions," the investment
objectives and policies described in the Prospectus and in this Statement are
not fundamental, and the Trustees may change the investment objectives and
policies of a Portfolio without an affirmative vote of shareholders of the
Portfolio.
Except as otherwise noted below, the following descriptions of certain
investment policies and techniques are applicable to all of the Portfolios.
OPTIONS
Each Portfolio other than the Global Advisors Money Market Portfolio 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.
COVERED CALL OPTIONS. Each Portfolio other than the Global Advisors Money
Market Portfolio may write covered call options on portfolio securities to
realize a greater current return through the receipt of premiums than it would
realize on portfolio securities alone. Such option transactions may also be
used as a limited form of hedging against a decline in the price of securities
owned by the Portfolio.
A call option gives the holder the right to purchase, and obligates the writer
to sell, a security at the exercise price at any time before the expiration
date. A call option is "covered" if the writer, at all times while obligated
as a writer, either owns the underlying securities (or comparable securities
satisfying the cover requirements of the securities exchanges), or has the
right to acquire such securities through immediate conversion of portfolio
securities.
In return for the premium received when it writes a covered call option, the
Portfolio gives up some or all of the opportunity to profit from an increase
in the market price of the securities covering the call option during the life
of the option. The Portfolio retains the risk of loss should the price of such
securities decline. If the option expires unexercised, the Portfolio realizes
a gain equal to the premium, which may be offset by a decline in price of the
underlying security. If the option is exercised, the Portfolio realizes a gain
or loss equal to the difference between the Portfolio's cost for the
underlying security and the proceeds of sale (exercise price minus
commissions) plus the amount of the premium. Portfolio may terminate a
call
option that it has written before it expires by entering into a closing
purchase transaction. A Portfolio may enter into closing purchase transactions
in order to free itself to sell the underlying security or to write another
call on the security, realize a profit on a previously written call option, or
protect a security from being called in an unexpected market rise. Any profits
from a closing purchase transaction may be offset by a decline in the value of
the underlying security. Conversely, because increases in the market price of
a call option will generally reflect increases in the market price of the
underlying security, any loss resulting from a closing purchase transaction is
likely to be offset in whole or in part by unrealized appreciation of the
underlying security owned by the Trust.
COVERED PUT OPTIONS. Each Portfolio other than the Global Advisors Money
Market Portfolio may write covered put options in order to enhance its current
return. Such options transactions may also be used as a limited form of
hedging against an increase in the price of securities that the Portfolio
plans to purchase. A put option gives the holder the right to sell, and
obligates the writer to buy, a security at the exercise price at any time
before the expiration date. A put option is "covered" if the writer segregates
cash and high-grade short-term debt obligations or other permissible
collateral equal to the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, the Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes
the risk that it may be required to purchase the underlying security for an
exercise price higher than its then current market value, resulting in a
potential capital loss unless the security later appreciates in value.
A Portfolio may terminate a put option that it has written before it expires
by a closing purchase transaction. Any loss from this transaction may be
partially or entirely offset by the premium received on the terminated option.
PURCHASING PUT AND CALL OPTIONS. Each Portfolio other than the Global
Advisors Money Market Portfolio may also purchase put options to protect
portfolio holdings against a decline in market value. This protection lasts
for the life of the put option because the Portfolio, as a holder of the
option, may sell the underlying security at the exercise price regardless of
any decline in its market price. In order for a put option to be profitable,
the market price of the underlying security must decline sufficiently below
the exercise price to cover the premium and transaction costs that the
Portfolio must pay. These costs will reduce any profit the Portfolio might
have realized had it sold the underlying security instead of buying the put
option.
Each Portfolio other than the Global Advisors Money Market Portfolio may
purchase call options to hedge against an increase in the price of securities
that the Portfolio wants ultimately to buy. Such hedge protection is provided
during the life of the call option since the Portfolio, as holder of the call
option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying
security must rise sufficiently above the exercise price to cover the premium
and transaction costs. These costs will reduce any profit the Portfolio might
have realized had it bought the underlying security at the time it purchased
the call option.
OPTIONS ON FOREIGN SECURITIES. The Trust may, on behalf of each of the
Portfolios other than the Global Advisors Money Market Portfolio, purchase and
sell options on foreign securities if in the opinion of the Sub-Adviser of the
particular Portfolio the investment characteristics of such options, including
the risks of investing in such options, are consistent with the Portfolio's
investment objectives. It is expected that risks related to such options will
not differ materially from risks related to options on U.S. securities.
However, position limits and other rules of foreign exchanges may differ from
those in the United States. In addition, options markets in some countries,
many of which are relatively new, may be less liquid than comparable markets
in the United States.
RISKS INVOLVED IN THE SALE OF OPTIONS. Options transactions involve
certain risks, including the risks that a Portfolio's Sub-Adviser will not
forecast interest rate or market movements correctly, that a Portfolio may be
unable at times to close out such positions, or that hedging transactions may
not accomplish their purpose because of imperfect market correlations. The
successful use of these strategies depends on the ability of a Portfolio's
Sub-Adviser to forecast market and interest rate movements correctly.
An exchange-listed option may be closed out only on an exchange which provides
a secondary market for an option of the same series. There is no assurance
that a liquid secondary market on an exchange will exist for any particular
option or at any particular time. If no secondary market were to exist, it
would be impossible to enter into a closing transaction to close out an option
position. As a result, a Portfolio may be forced to continue to hold, or to
purchase at a fixed price, a security on which it has sold an option at a time
when a Portfolio's Sub-Adviser believes it is inadvisable to do so.
Higher than anticipated trading activity or order flow or other unforeseen
events might cause The Options Clearing Corporation or an exchange to
institute special trading procedures or restrictions that might restrict the
Trust's use of options. The exchanges have established limitations on the
maximum number of calls and puts of each class that may be held or written by
an investor or group of investors acting in concert. It is possible that the
Trust and other clients of a Sub-Adviser may be considered such a group. These
position limits may restrict the Trust's ability to purchase or sell options
on particular securities.
Options which are not traded on national securities exchanges may be closed
out only with the other party to the option transaction. For that
reason, it may be more difficult to close out unlisted options than listed
options. Furthermore, unlisted options are not subject to the protection
afforded purchasers of listed options by The Options Clearing Corporation.
Government regulations, particularly the requirements for qualification as a
"regulated investment company" under the Internal Revenue Code, may also
restrict the Trust's use of options.
FUTURES CONTRACTS
The Trust may, on behalf of each Portfolio that may invest in debt securities,
other than the Global Advisors Money Market Portfolio, buy and sell futures
contracts on debt securities of the type in which the Portfolio may invest and
on indexes of debt securities. In addition, the Trust may, on behalf of each
Portfolio that may invest in equity securities, purchase and sell stock index
futures for hedging and non-hedging purposes. The Trust may also, for hedging
and non-hedging purposes, purchase and write options on futures contracts of
the type which such Portfolios are authorized to buy and sell and may engage
in related closing transactions. All futures and related options which are
traded in the United States will, as may be required by applicable law, be
traded on exchanges that are licensed and regulated by the Commodity Futures
Trading Commission ("CFTC"). Trading on foreign commodity exchanges is not
regulated by the CFTC.
FUTURES ON DEBT SECURITIES AND RELATED OPTIONS. A futures contract on a
debt security is a binding contractual commitment which, if held to maturity,
will result in an obligation to make or accept delivery, during a particular
month, of securities having a standardized face value and rate of return. By
purchasing futures on debt securities -- assuming a "long" position -- the
Trust will legally obligate itself on behalf of the Portfolios to accept the
future delivery of the underlying security and pay the agreed price. By
selling futures on debt securities -- assuming a "short" position -- it will
legally obligate itself to make the future delivery of the security against
payment of the agreed price. Open futures positions on debt securities will be
valued at the most recent settlement price, unless that price does not in the
judgment of persons acting at the direction of the Trustees as to the
valuation of the Trust's assets reflect the fair value of the contract, in
which case the positions will be valued by or under the direction of the
Trustees or such persons.
Positions taken in the futures markets are not normally held to maturity, but
are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures positions taken by the Trust on behalf of a
Portfolio will usually be liquidated in this manner, the Trust may instead
make or take delivery of the underlying securities whenever it appears
economically advantageous to the Portfolio to do so. A clearing corporation
associated with the exchange on which futures are traded assumes
responsibility for such closing transactions and guarantees that the Trust's
sale and purchase obligations under closed-out positions will be performed at
the termination of the contract.
Hedging by use of futures on debt securities seeks to establish more certainly
than would otherwise be possible the effective rate of return on portfolio
securities. A Portfolio may, for example, take a "short" position in the
futures market by selling contracts for the future delivery of debt securities
held by the Portfolio (or securities having characteristics similar to those
held by the Portfolio) in order to hedge against an anticipated rise in
interest rates that would adversely affect the value of the Portfolio's
portfolio securities. When hedging of this character is successful, any
depreciation in the value of portfolio securities may substantially be offset
by appreciation in the value of the futures position.
On other occasions, the Portfolio may take a "long" position by purchasing
futures on debt securities. This would be done, for example, when the Trust
expects to purchase for the Portfolio particular securities when it has the
necessary cash, but expects the rate of return available in the securities
markets at that time to be less favorable than rates currently available in
the futures markets. If the anticipated rise in the price of the securities
should occur (with its concomitant reduction in yield), the increased cost to
the Portfolio of purchasing the securities may be offset, at least to some
extent, by the rise in the value of the futures position taken in anticipation
of the subsequent securities purchase.
Successful use by the Trust of futures contracts on debt securities is subject
to the ability of a Portfolio's Sub-Adviser to predict correctly movements in
the direction of interest rates and other factors affecting markets for debt
securities. For example, if a Portfolio has hedged against the possibility of
an increase in interest rates which would adversely affect the market prices
of debt securities held by it, and the prices of such securities increase
instead the Portfolio will lose part or all of the benefit of the increased
value of its securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the
Portfolio has insufficient cash, it may have to sell securities to meet daily
maintenance margin requirements, and thus the Portfolio may have to sell
securities at a time when it may be disadvantageous to do so. Trust
may
purchase and write put and call options on certain debt futures contracts, as
they become available. Such options are similar to options on securities
except that options on futures contracts give the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the period of the
option. As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an option of the same series.
There is no guarantee that such closing transactions can be effected. The
Trust will be required to deposit initial margin and maintenance margin with
respect to put and call options on futures contracts written by it pursuant to
brokers' requirements, and, in addition, net option premiums received will be
included as initial margin deposits. See "Margin Payments" below. Compared to
the purchase or sale of futures contracts, the purchase of call or put options
on futures contracts involves less potential risk to the Trust because the
maximum amount at risk is the premium paid for the options plus transactions
costs. However, there may be circumstances when the purchase of call or put
options on a futures contract would result in a loss to the Trust when the
purchase or sale of the futures contracts would not, such as when there is no
movement in the prices of debt securities. The writing of a put or call option
on a futures contract involves risks similar to those risks relating to the
purchase or sale of futures contracts.
INDEX FUTURES CONTRACTS AND OPTIONS. The Trust may invest in debt index
futures contracts and stock index futures contracts, and in related options. A
debt index futures contract is a contract to buy or sell units of a specified
debt index at a specified future date at a price agreed upon when the contract
is made. A unit is the current value of the index. Debt index futures in which
the Trust presently expects to invest are not now available, although the
Trust expects such futures contracts to become available in the future. A
stock index futures contract is a contract to buy or sell units of a stock
index at a specified future date at a price agreed upon when the contract is
made. A unit is the current value of the stock index.
The following example illustrates generally the manner in which index futures
contracts operate. The Standard & Poor's 100 Stock Index is composed of 100
selected common stocks, most of which are listed on the New York Stock
Exchange. The S&P 100 Index assigns relative weightings to the common stocks
included in the Index, and the Index fluctuates with changes in the market
values of those common stocks. In the case of the S&P 100 Index, contracts are
to buy or sell 100 units. Thus, if the value of the S&P 100 Index were $180,
one contract would be worth $18,000 (100 units x $180). The stock index
futures contract specifies that no delivery of the actual stocks making up the
index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration
of the contract. For example, if a Portfolio enters into a futures contract to
buy 100 units of the S&P 100 Index at a specified future date at a contract
price of $180 and the S&P 100 Index is at $184 on that future date, the
Portfolio will gain $400 (100 units x gain of $4). If the Portfolio enters
into a futures contract to sell 100 units of the stock index at a specified
future date at a contract price of $180 and the S&P 100 Index is at $182 on
that future date, the Portfolio will lose $200 (100 units x loss of $2).
The Trust does not presently expect to invest in debt index futures contracts.
Stock index futures contracts are currently traded with respect to
the S&P 100 Index on the Chicago Mercantile Exchange, and with respect to
other broad stock market indexes, such as the New York Stock Exchange
Composite Stock Index, which is traded on the New York Futures Exchange, and
the Value Line Composite Stock Index, which is traded on the Kansas City Board
of Trade, as well as with respect to narrower "sub-indexes" such as the S&P
100 Energy Stock Index and the New York Stock Exchange Utilities Stock Index.
To the extent permitted under applicable law, a Portfolio may trade futures
contracts and options on futures contracts on exchanges created outside the
United States, such as the London International Financial Futures Exchange and
the Sydney Futures Exchange Limited. Foreign markets may offer advantages such
as trading in commodities that are not currently traded in the United States
or arbitrage possibilities not available in the United States. Foreign
markets, however, may have greater risk potential than domestic markets. A
Portfolio may purchase or sell futures contracts with respect to any stock.
Positions in index futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures.
In order to hedge a Portfolio's investments successfully using futures
contracts and related options, the Trust must invest in futures contracts with
respect to indexes or sub-indexes, the movements of which will, in its
judgment, have a significant correlation with movements in the prices of the
Portfolio's securities.
Options on index futures contracts are similar to options on securities except
that options on index futures contracts give the purchaser the right, in
return for the premium paid, to assume a position in an index futures contract
(a long position if the option is a call and a short position if the option is
a put) at a specified exercise price at any time during the period of the
option. Upon exercise of the option, the holder would assume the underlying
futures position and would receive a variation margin payment of cash or
securities approximating the increase in the value of the holder's option
position. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
based on the difference between the exercise price of the option and the
closing level of the index on which the futures contract is based on the
expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
As an alternative to purchasing and selling call and put options on index
futures contracts, each of the Portfolios which may purchase and sell index
futures contracts may purchase and sell call and put options on the underlying
indexes themselves to the extent that such options are traded on national
securities exchanges. Index options are similar to options on individual
securities in that the purchaser of an index option acquires the right to buy
(in the case of a call) or sell (in the case of a put), and the writer
undertakes the obligation to sell or buy (as the case may be), units of an
index at a stated exercise price during the term of the option. Instead of
giving the right to take or make actual delivery of securities, the holder of
an index option has the right to receive a cash "exercise settlement amount."
This amount is equal to the amount 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 the exercise,
multiplied by a fixed "index multiplier."
A Portfolio may purchase or sell options on stock indexes in order to close
out its outstanding positions in options on stock indexes which it has
purchased. A Portfolio may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of call or
put options on an index involves less potential risk to the Trust because the
maximum amount at risk is the premium paid for the options plus transactions
costs. The writing of a put or call option on an index involves risks similar
to those risks relating to the purchase or sale of index futures contracts.
MARGIN PAYMENTS. When a Portfolio purchases or sells a futures contract,
it is required to deposit with the Custodian an amount of cash, U.S. Treasury
bills, or other permissible collateral equal to a small percentage of the
amount of the futures contract. This amount is known as "initial margin." The
nature of initial margin is different from that of margin in security
transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to the Trust upon termination of the contract,
assuming the Trust satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a process
known as "marking to market". These payments are called "variation margin" and
are made as the value of the underlying futures contract fluctuates. For
example, when a Portfolio sells a futures contract and the price of the
underlying debt security rises above the delivery price, the Portfolio's
position declines in value. The Portfolio then pays the broker a variation
margin payment equal to the difference between the delivery price of the
futures contract and the market price of the securities underlying the futures
contract. Conversely, if the price of the underlying security falls below the
delivery price of the contract, the Portfolio's futures position increases in
value. The broker then must make a variation margin payment equal to the
difference between the delivery price of the futures contract and the market
price of the securities underlying the futures contract.
When a Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to
the Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.
SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS
LIQUIDITY RISKS. Positions in futures contracts may be closed out only on
an exchange or board of trade which provides a secondary market for such
futures. Although the Trust intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract or at any particular
time. If there is not a liquid secondary market at a particular time, it may
not be possible to close a futures position at such time and, in the event of
adverse price movements, the Trust would continue to be required to make daily
cash payments of variation margin. However, in the event financial futures are
used to hedge portfolio securities, such securities will not generally be sold
until the financial futures can be terminated. In such circumstances, an
increase in the price of the portfolio securities, if any, may partially or
completely offset losses on the financial futures.
In addition to the risks that apply to all options transactions, there are
several special risks relating to options on futures contracts. The ability to
establish and close out positions in such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain
that such a market will develop. Although the Trust generally will purchase
only those options for which there appears to be an active secondary market,
there is no assurance that a liquid secondary market on an exchange will exist
for any particular option or at any particular time. In the event that no such
market exists for particular options, it might not be possible to effect
closing transactions in such options with the result that the Trust would have
to exercise the options in order to realize any profit.
HEDGING RISKS. There are several risks in connection with the use by a
Portfolio of futures contracts and related options as a hedging device. One
risk arises because of the imperfect correlation between movements in the
prices of the futures contracts and options and movements in the underlying
securities or index or movements in the prices of the Trust's securities which
are the subject of the hedge. A Portfolio's Sub-Adviser will, however, attempt
to reduce this risk by purchasing and selling, to the extent possible, futures
contracts and related options on securities and indexes the movements of which
will, in its judgment, correlate closely with movements in the prices of the
underlying securities or index and the Trust's portfolio securities sought to
be hedged.
Successful use of futures contracts and options by a Portfolio for hedging
purposes is also subject to a Portfolio's Sub-Adviser's ability to predict
correctly movements in the direction of the market. It is possible that, where
a Portfolio has purchased puts on futures contracts to hedge its portfolio
against a decline in the market, the securities or index on which the puts are
purchased may increase in value and the value of securities held in the
portfolio may decline. If this occurred, the Portfolio would lose money on the
puts and also experience a decline in value in its portfolio securities. In
addition, the prices of futures, for a number of reasons, may not correlate
perfectly with movements in the underlying securities or index due to certain
market distortions. First, all participants in the futures market are subject
to margin deposit requirements. Such requirements may cause investors to close
futures contracts through offsetting transactions which could distort the
normal relationship between the underlying security or index and futures
markets. Second, the margin requirements in the futures markets are less
onerous than margin requirements in the securities markets in general, and as
a result the futures markets may attract more speculators than the securities
markets do. Increased participation by speculators in the futures markets may
also cause temporary price distortions. Due to the possibility of price
distortion, even a correct forecast of general market trends by a Portfolio's
Sub-Adviser may still not result in a successful hedging transaction over a
very short time period.
FOREIGN TRANSACTION RISKS. Unlike trading on domestic commodity
exchanges, trading on foreign commodity exchanges is not regulated by the CFTC
and may be subject to greater risks than trading on domestic exchanges. For
example, some foreign exchanges are principal markets so that no common
clearing facility exists and a trader may look only to the broker for
performance of the contract. In addition, unless a Portfolio hedges against
fluctuations in the exchange rate between the U.S. dollar and the currencies
in which trading is done on foreign exchanges, any profits that the Portfolio
might realize in trading could be eliminated by adverse changes in the
exchange rate, or the Portfolio could incur losses as a result of those
changes. Transactions on foreign exchanges may include both commodities which
are traded on domestic exchanges and those which are not.
OTHER RISKS. Portfolios will incur brokerage fees in connection with
their futures and options transactions. In addition, while futures contracts
and options on futures will be purchased and sold to reduce certain risks,
those transactions themselves entail certain other risks. Thus, while a
Portfolio may benefit from the use of futures and related options,
unanticipated changes in interest rates or stock price movements may result in
a poorer overall performance for the Portfolio than if it had not entered into
any futures contracts or options transactions. Moreover, in the event of an
imperfect correlation between the futures position and the portfolio position
which is intended to be protected, the desired protection may not be obtained
and the Portfolio may be exposed to risk of loss.
FORWARD COMMITMENTS
The Trust may, on behalf of each Portfolio, enter into contracts to purchase
securities for a fixed price at a future date beyond customary settlement time
("forward commitments") if the Portfolio holds, and maintains until the
settlement date in a segregated account maintained by the Custodian with
assets selected by the Custodian, cash or high-grade debt obligations in an
amount sufficient to meet the purchase price, or if the Portfolio enters into
offsetting contracts for the forward sale of other securities it owns. Forward
commitments may be considered securities in themselves, and involve a risk of
loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in the value
of the Portfolio's other assets. Where such purchases are made through
dealers, the Portfolio relies on the dealer to consummate the sale. The
dealer's failure to do so may result in the loss to the Portfolio of an
advantageous yield or price.
Although a Portfolio will generally enter into forward commitments with the
intention of acquiring securities for its portfolio or for delivery pursuant
to options contracts it has entered into, a Portfolio may dispose of a
commitment prior to settlement if a Portfolio's Sub-Adviser deems it
appropriate to do so. A Portfolio may realize short-term profits or losses
upon the sale of forward commitments.
REPURCHASE AGREEMENTS
On behalf of each Portfolio, the Trust may enter into repurchase agreements. A
repurchase agreement is a contract under which the Portfolio acquires a
security for a relatively short period (usually not more than one week)
subject to the obligation of the seller to repurchase and the Portfolio to
resell such security at a fixed time and price (representing the Portfolio's
cost plus interest). It is the Trust's present intention to enter into
repurchase agreements only with member banks of the Federal Reserve System and
securities dealers meeting certain criteria as to creditworthiness and
financial condition established by the Trustees of the Trust and only with
respect to obligations of the U.S. Government or its agencies or
instrumentalities or other high quality short term debt obligations.
Repurchase agreements may also be viewed as loans made by the Trust which are
collateralized by the securities subject to repurchase. The Sub-Advisers will
monitor such transactions to ensure that the value of the underlying
securities will be at least equal at all times to the total amount of the
repurchase obligation, including the interest factor. If the seller defaults,
the Trust could realize a loss on the sale of the underlying security to the
extent that the proceeds of sale including accrued interest are less than the
resale price provided in the agreement including interest. In addition, if the
seller should be involved in bankruptcy or insolvency proceedings, the Trust
may incur delay and costs in selling the underlying security or may suffer a
loss of principal and interest if the Trust is treated as an unsecured
creditor and required to return the underlying collateral to the seller's
estate.
REVERSE REPURCHASE AGREEMENTS
The Trust may, on behalf of each of the Portfolios, enter into reverse
repurchase agreements, which involve the sale by the Portfolio of securities
held by it with an agreement to repurchase the securities at an agreed upon
price, date, and interest payment. The Portfolios will use the proceeds of the
reverse repurchase agreements to purchase securities either maturing, or under
an agreement to resell, at a date simultaneous with or prior to the expiration
of the reverse repurchase agreement. A Portfolio will use reverse repurchase
agreements when the interest income to be earned from the investment of the
proceeds of the transaction is greater than the interest expense of the
reverse repurchase transaction. Reverse repurchase agreements into which the
Portfolios will enter require that the market value of the underlying security
and other collateral equal or exceed the repurchase price (including interest
accrued on the security), and require the Portfolios to provide additional
collateral if the market value of such security falls below the repurchase
price at any time during the term of the reverse repurchase agreement. At all
times that a reverse repurchase agreement is outstanding, the Portfolio will
maintain cash, liquid high-grade debt obligations, or U.S. Government
Securities, as the case may be, in a segregated account at its custodian with
a value at least equal to its obligations under the agreement.
WHEN-ISSUED SECURITIES
The Trust may, on behalf of each Portfolio, from time to time purchase
securities on a "when-issued" basis. Debt securities are often issued on this
basis. The price of such securities, which may be expressed in yield terms, is
fixed at the time a commitment to purchase is made, but delivery and payment
for the when-issued securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase. During the period
between purchase and settlement, no payment is made by a Portfolio and no
interest accrues to the Portfolio. To the extent that assets of a Portfolio
are held in cash pending the settlement of a purchase of securities, that
Portfolio would earn no income. While the Trust may sell its right to acquire
when-issued securities prior to the settlement date, the Trust intends
actually to acquire such securities unless a sale prior to settlement appears
desirable for investment reasons. At the time a Portfolio makes the commitment
to purchase a security on a when-issued basis, it will record the transaction
and reflect the amount due and the value of the security in determining the
Portfolio's net asset value. The market value of the when-issued securities
may be more or less than the purchase price payable at the settlement date.
Each Portfolio will establish a segregated account in which it will maintain
cash and U.S. Government Securities or other high-grade debt obligations at
least equal in value to commitments for when-issued securities. Such
segregated securities either will mature or, if necessary, be sold on or
before the settlement date.
LOANS OF PORTFOLIO SECURITIES
The Trust may lend the portfolio securities of any Portfolio, provided: (1)
the loan is secured continuously by collateral consisting of U.S. Government
Securities, cash, or cash equivalents adjusted daily to have market value at
least equal to the current market value of the securities loaned; (2) the
Trust may at any time call the loan and regain the securities loaned; (3) the
Trust will receive any interest or dividends paid on the loaned securities;
and (4) the aggregate market value of securities of any Portfolio loaned will
not at any time 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 and the Global Advisors Growth Equity Portfolio) of the
total assets of the Portfolio taken at value. In addition, it is anticipated
that the Portfolio may share with the borrower some of the income received on
the collateral for the loan or that it will be paid a premium for the loan.
Before the Portfolio enters into a loan, a Portfolio's Sub-Adviser considers
all relevant facts and circumstances including the creditworthiness of the
borrower. The risks in lending portfolio securities, as with other extensions
of credit, consist of possible delay in recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially.
Although voting rights, or rights to consent, with respect to the loaned
securities pass to the borrower, the Trust retains the right to call the loans
at any time on reasonable notice, and it will do so in order that the
securities may be voted by the Trust if the holders of such securities are
asked to vote upon or consent to matters materially affecting the investment.
The Trust will not lend portfolio securities to borrowers affiliated with the
Trust.
FOREIGN SECURITIES
Investments in foreign securities may involve considerations different from
investments in domestic securities due to limited publicly available
information, non-uniform accounting standards, lower trading volume and
possible consequent illiquidity, greater volatility in price, the possible
imposition of withholding or confiscatory taxes, the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest, expropriation of assets, nationalization, or other adverse political
or economic developments. Foreign companies may not be subject to auditing and
financial reporting standards and requirements comparable to those which apply
to U.S. companies. Foreign brokerage commissions and other fees are generally
higher than in the United States. It may also be more difficult to obtain and
enforce a judgment against a foreign issuer.
In addition, to the extent that any Portfolio's foreign investments are not
U.S. dollar-denominated, the Portfolio may be affected favorably or
unfavorably by changes in currency exchange rates or exchange control
regulations and may incur costs in connection with conversion between
currencies.
In determining whether to invest in securities of foreign issuers, the
Sub-Adviser of a Portfolio will consider the likely impact of foreign taxes on
the net yield available to the Portfolio and its shareholders. Income received
by a Portfolio from sources within foreign countries may be reduced by
withholding and other taxes imposed by such countries. Tax conventions between
certain countries and the United States may reduce or eliminate such taxes. It
is impossible to determine the effective rate of foreign tax in advance since
the amount of a Portfolio's assets to be invested in various countries is not
known, and tax laws and their interpretations may change from time to time and
may change without advance notice. Any such taxes paid by a Portfolio will
reduce its net income available for distribution to shareholders.
FOREIGN CURRENCY TRANSACTIONS
The Trust may engage in currency exchange transactions, on behalf of its
Portfolios which may invest in foreign securities, to protect against
uncertainty in the level of future foreign currency exchange rates and to
increase current return. The Trust may engage in both "transaction hedging"
and "position hedging."
When it engages in transaction hedging, the Trust enters into foreign currency
transactions with respect to specific receivables or payables of a Portfolio
generally arising in connection with the purchase or sale of its portfolio
securities. The Trust will engage in transaction hedging when it desires to
"lock-in" the U.S. dollar price of a security it has agreed to purchase or
sell, or the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. By transaction hedging the Trust will attempt to protect a
Portfolio against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the applicable foreign currency
during the period between the date on which the security is purchased or sold
or on which the dividend or interest payment is declared, and the date on
which such payments are made or received.
The Trust may purchase or sell a foreign currency on a spot (or cash) basis at
the prevailing spot rate in connection with transaction hedging. The Trust may
also enter into contracts to purchase or sell foreign currencies at a future
date ("forward contracts") and purchase and sell foreign currency futures
contracts.
transaction hedging purposes the Trust may also purchase exchange-listed and
over-the-counter call and put options on foreign currency futures contracts
and on foreign currencies. A put option on a futures contract gives the Trust
the right to assume a short position in the futures contract until expiration
of the option. A put option on currency gives the Trust the right to sell a
currency at an exercise price until the expiration of the option. A call
option on a futures contract gives the Trust the right to assume a long
position in the futures contract until the expiration of the option. A call
option on currency gives the Trust the right to purchase a currency at the
exercise price until the expiration of the option. The Trust will engage in
over-the-counter transactions only when appropriate exchange-traded
transactions are unavailable and when, in the opinion of the Portfolio's
Sub-Adviser, the pricing mechanism and liquidity are satisfactory and the
participants are responsible parties likely to meet their contractual
obligations.
When it engages in position hedging, the Trust enters into foreign currency
exchange transactions to protect against a decline in the values of the
foreign currencies in which securities held by a Portfolio are denominated or
are quoted in their principle trading markets or an increase in the value of
currency for securities which a Portfolio expects to purchase. In connection
with position hedging, the Trust may purchase put or call options on foreign
currency and foreign currency futures contracts and buy or sell forward
contracts and foreign currency futures contracts. The Trust may also purchase
or sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange transactions
and the value of the portfolio securities involved will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the values of those securities
between the dates the currency exchange transactions are entered into and the
dates they mature.
It is impossible to forecast with precision the market value of a Portfolio's
portfolio securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for the Trust to purchase
additional foreign currency on behalf of a Portfolio on the spot market (and
bear the expense of such purchase) if the market value of the security or
securities being hedged is less than the amount of foreign currency the Trust
is obligated to deliver and if a decision is made to sell the security or
securities and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received
upon the sale of the portfolio security or securities of a Portfolio if the
market value of such security or securities exceeds the amount of foreign
currency the Trust is obligated to deliver on behalf of the Portfolio.
To offset some of the costs to a Portfolio of hedging against fluctuations in
currency exchange rates, the Trust may write covered call options on those
currencies.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can
achieve at some future point in time.
Additionally, although these techniques tend to minimize the risk of loss due
to a decline in the value of the hedged currency, they tend to limit any
potential gain which might result from the increase in the value of such
currency.
Portfolio may also seek to increase its current return by purchasing and
selling foreign currency on a spot basis, and by purchasing and selling
options on foreign currencies and on foreign currency futures contracts, and
by purchasing and selling foreign currency forward contracts.
CURRENCY FORWARD AND FUTURES CONTRACTS. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract as agreed by the parties, at a price set at the time of the
contract. In the case of a cancelable forward contract, the holder has the
unilateral right to cancel the contract at maturity by paying a specified fee.
The contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. A foreign currency futures contract is a
standardized contract for the future delivery of a specified amount of a
foreign currency at a future date at a price set at the time of the contract.
Foreign currency futures contracts traded in the United States are designed by
and traded on exchanges regulated by the CFTC, such as the New York Mercantile
Exchange.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a predetermined date in a given month.
Forward contracts may be in any amounts agreed upon by the parties rather than
predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A
forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Trust may either accept
or make delivery of the currency specified in the contract, or at or prior to
maturity enter into a closing transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to forward contracts
are usually effected with the currency trader who is a party to the original
forward contract. Closing transactions with respect to futures contracts are
effected on a commodities exchange; a clearing corporation associated with the
exchange assumes responsibility for closing out such contracts.
Positions in foreign currency futures contracts and related options may be
closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although the Trust intends to purchase or
sell foreign currency futures contracts and related options only on exchanges
or boards of trade where there appears to be an active secondary market, there
is no assurance that a secondary market on an exchange or board of trade will
exist for any particular contract or option or at any particular time. In such
event, it may not be possible to close a futures or related option position
and, in the event of adverse price movements, the Trust would continue to be
required to make daily cash payments of variation margin on its futures
positions.
FOREIGN CURRENCY OPTIONS. Options on foreign currencies operate similarly
to options on securities, and are traded primarily in the over-the-counter
market, although options on foreign currencies have recently been listed on
several exchanges. Such options will be purchased or written only when a
Portfolio's Sub-Adviser believes that a liquid secondary market exists for
such options. There can be no assurance that a liquid secondary market will
exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence exchange rates
and investments generally.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors
may be disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller transactions (less than $1 million) where rates may be less favorable.
The interbank market in foreign currencies is a global, around-the-clock
market. To the extent that the U.S. options markets are closed while the
markets for the underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be reflected in
the U.S. options markets.
FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a deal may offer to sell a foreign currency to the Trust at
one rate, while offering a lesser rate of exchange should the Trust desire to
resell that currency to the dealer.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which certain Portfolios may enter are interest rate, currency and index swaps
and other types of available swap agreements, such as caps, floors and
collars. A Portfolio will enter into these transactions primarily to preserve
a return or spread on a particular investment or portion of its portfolio, to
protect against currency fluctuations, as a duration management technique or
to protect against any increase in the price of securities a Portfolio
anticipates purchasing at a later date. A Portfolio will use these
transactions as hedges and not as speculative investments and will not sell
interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Portfolio may be obligated to pay.
Interest rate swaps involve the exchange by the Portfolio with another party
of their respective commitments to pay or receive interest, e.g., an exchange
of floating rate payments for fixed rate payments with respect to a notional
amount of principal. A currency swap is an agreement to exchange cash flows on
a notional amount of two or more currencies based on the relative value
differential among them. An index swap is an agreement to swap cash flows on a
notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase
of a floor entitles the purchaser to receive payments on a notional principal
amount from the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is a combination
of a cap and a floor that preserves a certain return within a predetermined
range of interest rates or values.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors and collars are entered into for good faith hedging
purposes, the Sub-Advisers and the Portfolios believe such obligations do not
constitute senior securities under the Investment Company Act of 1940, as
amended, and, accordingly, will not treat them as being subject to its
borrowing restrictions. If there is a default by the counterparty, the
Portfolio may have contractual remedies pursuant to the agreements related to
the transaction. The swap market has grown substantially in recent years with
a large number of banks and investment banking firms acting both as principals
and agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
With respect to swaps, the Portfolio will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on
a daily basis and will segregate with its custodian an amount of cash or
liquid high-grade securities having a value equal to the accrued excess. Caps,
floors and collars require segregation of assets with a value equal to a
Portfolio's net obligation, if any.
COMMERCIAL MORTGAGE-BACKED SECURITIES
The BlackRock Managed Bond Portfolio may invest in Commercial Mortgage-Backed
Securities. Commercial Mortgage-Backed Securities are generally multi-class
debt or pass-through securities backed by a mortgage loan or pool of mortgage
loans secured by commercial property, such as industrial and warehouse
properties, office buildings, retail space and shopping malls, multifamily
properties and cooperative apartments, hotels and motels, nursing homes,
hospitals, senior living centers and agricultural property. The commercial
mortgage loans that underlie Commercial Mortgage-Backed Securities have
certain distinct characteristics. Commercial mortgage loans are generally not
amortizing or not fully amortizing. At their maturity date, repayment of the
remaining principal balance or "balloon" is due and is repaid through the
attainment of an additional loan or sale of the property. Unlike most single
family residential mortgages, commercial real property loans often contain
provisions which substantially reduce the likelihood that such securities will
be prepaid. The provisions generally impose significant prepayment penalties
on loans and, in some cases there may be prohibitions on principal prepayments
for several years following origination. This difference in prepayment
exposure is significant due to extraordinarily high levels of refinancing of
traditional residential mortgages experienced over the past year as mortgage
rates have reached a 25-year low. Assets underlying Commercial Mortgage-Backed
Securities may relate to only a few properties or to a single property.
Commercial Mortgage-Backed Securities have been issued in public and private
transactions by a variety of public and private issuers. Non-governmental
entities that have issued or sponsored Commercial Mortgage-Backed Securities
offerings include owners of commercial properties, originators of and
investors in mortgage loans, savings and loan associations, mortgage banks,
commercial banks, insurance companies, investment banks and special purpose
subsidiaries of the foregoing. The BlackRock Managed Bond Portfolio may from
time to time purchase Commercial Mortgage-Backed Securities directly from
issuers in negotiated transactions or from a holder of such Commercial
Mortgage-Backed Securities in the secondary market.
Commercial Mortgage-Backed Securities generally are structured to protect the
senior class investors against potential losses on the underlying mortgage
loans. This is generally provided by the subordinated class investors, which
may be included in the Portfolio, by taking the first loss if there are
defaults on the underlying commercial mortgage loans. Other protection, which
may benefit all of the classes, including the subordinated classes in which
the Portfolio intends to invest, may include issuer guarantees, reserve funds,
additional subordinated securities, cross-collateralization,
over-collateralization and the equity investors in the underlying properties.
By adjusting the priority of interest and principal payments on each class of
a given Commercial Mortgage-Backed Security, issuers are able to issue senior
investment-grade securities and lower-rated or non-rated subordinated
securities tailored to meet the needs of sophisticated institutional
investors. In general, subordinated classes of Commercial Mortgage-Backed
Securities are entitled to receive repayment of principal only after all
required principal payments have been made to more senior classes and have
subordinate rights as to receipt of interest distributions. Such subordinated
classes are subject to a substantially greater risk of nonpayment than are
senior classes of Commercial Mortgage-Backed Securities. Even within a class
of subordinate securities, most Commercial Mortgage-Backed Securities are
structured with a hierarchy of levels (or "loss positions"). Loss positions
are the order in which nonrecoverable losses of principal are applied to the
securities within a given structure. For instance, a first-loss subordinate
security will absorb any principal losses before any higher-loss position
subordinate security. This type of structure allows a number of classes of
securities to be created with varying degrees of credit exposure, prepayment
exposure and potential total return.
Subordinated classes of Commercial Mortgage-Backed Securities have more
recently been structured to meet specific investor preferences and issuer
constraints and have different priorities for cash flow and loss absorption.
As previously discussed, from a credit perspective, they are structured to
absorb any credit-related losses prior to the senior class. The principal cash
flow characteristics of subordinated classes are designed to be among the most
stable in the Mortgage-Backed Securities market, the probability of prepayment
being much lower than with traditional Residential Mortgage-Backed Securities.
This characteristic is primarily due to the structural feature that directs
the application of principal payments first to the senior classes until they
are retired before the subordinated classes receive any prepayments. While
this serves to enhance the credit protection of the senior classes, it
produces subordinated classes with more stable average lives. Subject to the
applicable provisions of the 1940 Act, there are no limitations on the classes
of Commercial Mortgage-Backed Securities in which the Portfolio may invest.
Accordingly, in certain circumstances, the Portfolio may recover
proportionally less of its investment in a Commercial Mortgage-Backed Security
than the holders of more senior classes of the same Commercial Mortgage-Backed
Security.
The rating assigned to a given issue and class of Commercial Mortgage-Backed
Securities is a product of many factors, including, the structure of the
security, the level of subordination, the quality and adequacy of the
collateral, and the past performance of the originators and servicing
companies. The rating of any Commercial Mortgage-Backed Security is determined
to a substantial degree by the debt service coverage ratio (i.e., the ratio of
current net operating income from the commercial properties, in the aggregate,
to the current debt service obligations on the properties) and the LTV ratio
of the pooled properties. The amount of the securities issued in any one
rating category is determined by the rating agencies after a rigorous credit
rating process which includes analysis of the issuer, servicer and property
manager, as well as verification of the LTV and debt service coverage ratios.
LTV ratios may be particularly important in the case of commercial mortgages
because most commercial mortgage loans provide that the lender's sole remedy
in the event of a default is against the mortgaged property, and the lender is
not permitted to pursue remedies with respect to other assets of the borrower.
Accordingly, loan-to-value ratios may, in certain circumstances, determine the
amount realized by the holder of the Commercial Mortgage-Backed Security.
ZERO-COUPON SECURITIES
Zero-coupon securities in which a Portfolio may invest are debt obligations
which are generally issued at a discount and payable in full at maturity, and
which do not provide for current payments of interest prior to maturity.
Zero-coupon securities usually trade at a deep discount from their face or par
value and are subject to greater market value fluctuations from changing
interest rates than debt obligations of comparable maturities which make
current distributions of interest. As a result, the net asset value of shares
of a Portfolio investing in zero-coupon securities may fluctuate over a
greater range than shares of other Portfolios of the Trust and other mutual
funds investing in securities making current distributions of interest and
having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly by the
U.S. Treasury or other short-term debt obligations, and longer-term bonds or
notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment brokerage firm. A number of
securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and resold
them in custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves
are held in book-entry form at the Federal Reserve Bank or, in the case of
bearer securities (i.e., unregistered securities which are owned ostensibly by
the bearer or holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of
zero-coupon securities by accounting separately for the beneficial ownership
of particular interest coupons and corpus payments on Treasury securities
through the Federal Reserve book-entry record-keeping system. The Federal
Reserve program as established by the Treasury Department is known as "STRIPS"
or "Separate Trading of Registered Interest and Principal of Securities."
Under the STRIPS program, a Portfolio will be able to have its beneficial
ownership of U.S. Treasury zero-coupon securities recorded directly in the
book-entry record-keeping system in lieu of having to hold certificates or
other evidences of ownership of the underlying U.S. Treasury securities.
When debt obligations have been stripped of their unmatured interest coupons
by the holder, the stripped coupons are sold separately. The principal or
corpus is sold at a deep discount because the buyer receives only the right to
receive a future fixed payment on the security and does not receive any rights
to periodic cash interest payments. Once stripped or separated, the corpus and
coupons may be sold separately. Typically, the coupons are sold separately or
grouped with other coupons with like maturity dates and sold in such bundled
form. Purchasers of stripped obligations acquire, in effect, discount
obligations that are economically identical to the zero-coupon securities
issued directly by the obligor.
VARIABLE- OR FLOATING-RATE SECURITIES
Certain Portfolios may invest in securities which offer a variable or floating
rate of interest. Variable-rate securities provide for automatic establishment
of a new interest rate at fixed intervals (e.g., daily, monthly,
semi-annually, etc.). Floating-rate securities provide for automatic
adjustment of the interest rate whenever some specified interest rate index
changes. The interest rate on variable- or floating-rate securities is
ordinarily determined by reference to, or is a percentage of, a bank's prime
rate, the 90-day U.S. Treasury bill rate, the rate of return on commercial
paper or bank certificates of deposit, an index of short-term interest rates,
or some other objective measure.
Variable- or floating-rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par. In many
cases, the demand feature can be exercised at any time on seven days' notice;
in other cases, the demand feature is exercisable at any time on 30 days'
notice or on similar notice at intervals of not more than one year. Some
securities which do not have variable or floating interest rates may be
accompanied by puts producing similar results and price characteristics.
Variable-rate demand notes include master demand notes which are obligations
that permit a Portfolio to invest fluctuating amounts, which may change daily
without penalty, pursuant to direct arrangements between the Portfolio as
lender, and the borrower. The interest rates on these notes fluctuate from
time to time. The issuer of such obligations normally has a corresponding
right, after a given period, to prepay in its discretion the outstanding
principal amount of the obligations plus accrued interest upon a specified
number of days' notice to the holders of such obligations. The interest rate
on a floating-rate demand obligation is based on a known lending rate, such as
a bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable-rate demand obligation is adjusted
automatically at specified intervals. Frequently, such obligations are secured
by letters of credit or other credit support arrangements provided by banks.
Because these obligations are direct lending arrangements between the lender
and borrower, it is not contemplated that such instruments will generally be
traded, and there generally is not an established secondary market for these
obligations, although they are redeemable at face value. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, the Portfolio's right to redeem is dependent on the ability of
the borrower to pay principal and interest on demand. Such obligations
frequently are not rated by credit rating agencies. If not so rated, a
Portfolio may invest in them only if the Portfolio's Sub-Adviser determines
that, at the time of investment, the obligations are of comparable quality to
the other obligations in which the Portfolio may invest. The Sub-Adviser, on
behalf of a Portfolio, will consider on an ongoing basis the creditworthiness
of the issuers of the floating- and variable-rate demand obligations in the
Portfolio's portfolio.
LOWER-GRADE SECURITIES
Certain Portfolios may invest in lower-grade income securities. Such
lower-grade securities are commonly referred to as "junk bonds." Investment in
such securities involves special risks, as described herein. Liquidity relates
to the ability of a Portfolio to sell a security in a timely manner at a price
which reflects the value of that security. As discussed below, the market for
lower-grade securities is considered generally to be less liquid than the
market for investment-grade securities. The relative illiquidity of some of a
Portfolio's portfolio securities may adversely affect the ability of the
Portfolio to dispose of such securities in a timely manner and at a price
which reflects the value of such security in the Sub-Adviser's judgment. The
market for less liquid securities tends to be more volatile than the market
for more liquid securities and market values of relatively illiquid securities
may be more susceptible to change as a result of adverse publicity and
investor perceptions than are the market values of higher-grade, more liquid
securities.
A Portfolio's net asset value will change with changes in the value of its
portfolio securities. If a Portfolio invests in fixed-income securities, the
Portfolio's net asset value can be expected to change as general levels of
interest rates fluctuate. When interest rates decline, the value of a
portfolio invested in fixed-income securities can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in
fixed-income securities can be expected to decline. Net asset value and market
value may be volatile due to a Portfolio's investment in lower-grade and less
liquid securities. Volatility may be greater during periods of general
economic uncertainty.
A Portfolio's investments are valued pursuant to guidelines adopted and
periodically reviewed by the Board of Trustees. To the extent that there is no
established retail market for some of the securities in which a Portfolio may
invest, there may be relatively inactive trading in such securities and the
ability of the Sub-Adviser to accurately value such securities may be
adversely affected. During periods of reduced market liquidity and in the
absence of readily available market quotations for securities held in a
Portfolio's portfolio, the responsibility of the Sub-Adviser to value the
Portfolio's securities becomes more difficult and the Sub-Adviser's judgment
may play a greater role in the valuation of the Portfolio's securities due to
the reduced availability of reliable objective data. To the extent that a
Portfolio invests in illiquid securities and securities which are restricted
as to resale, the Portfolio may incur additional risks and costs.
Lower-grade securities generally involve greater credit risk than higher-grade
securities. A general economic downturn or a significant increase in interest
rates could severely disrupt the market for lower-grade securities and
adversely affect the market value of such securities. In addition, in such
circumstances, the ability of issuers of lower-grade securities to repay
principal and to pay interest, to meet projected financial goals and to obtain
additional financing may be adversely affected. Such consequences could lead
to an increased incidence of default for such securities and adversely affect
the value of the lower-grade securities in a Portfolio's portfolio and thus a
Portfolio's net asset value. The secondary market prices of lower-grade
securities are less sensitive to changes in interest rates than are those for
higher-rated securities, but are more sensitive to adverse economic changes
or individual issuer developments. Adverse publicity and investor perceptions,
whether or not based on rational analysis, may also affect the value and
liquidity of lower-grade securities.
Yields on a Portfolio's portfolio securities can be expected to fluctuate over
time. In addition, periods of economic uncertainty and changes in interest
rates can be expected to result in increased volatility of the market prices
of the lower-grade securities in a Portfolio's portfolio and thus in the net
asset value of a Portfolio. Net asset value and market value may be volatile
due to a Portfolio's investment in lower-grade and less liquid securities.
Volatility may be greater during periods of general economic uncertainty. The
Portfolios may incur additional expenses to the extent they are required to
seek recovery upon a default in the payment of interest or a repayment of
principal on their portfolio holdings, and the Portfolios may be unable to
obtain full recovery thereof. In the event that an issuer of securities held
by a Portfolio experiences difficulties in the timely payment of principal or
interest and such issuer seeks to restructure the terms of its borrowings,
such Portfolio may incur additional expenses and may determine to invest
additional capital with respect to such issuer or the project or projects to
which the Portfolio's portfolio securities relate.
The Portfolios will rely on each Sub-Adviser's judgment, analysis and
experience in evaluating the creditworthiness of an issuer. In this
evaluation, the Sub-Adviser will take into consideration, among other things,
the issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters. The Sub-Adviser also may consider, although it does not
rely primarily on, the credit ratings of S&P and Moody's in evaluating
fixed-income securities. Such ratings evaluate only the safety of principal
and interest payments, not market value risk. Additionally, because the
creditworthiness of an issuer may change more rapidly than is able to be
timely reflected in changes in credit ratings, the Sub-Adviser continuously
monitors the issuers of such securities held in the Portfolio's portfolio. A
Portfolio may, if deemed appropriate by the Sub-Adviser, retain a security
whose rating has been downgraded below B by S&P or below B by Moody's, or
whose rating has been withdrawn.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions are fundamental and may not be changed
with respect to any Portfolio without the approval of a majority of the
outstanding voting securities of that Portfolio. Under the Investment Company
Act of 1940 and the rules thereunder, "majority of the outstanding voting
securities" of a Portfolio means the lesser of (1) 67% of the shares of that
Portfolio present at a meeting if the holders of more than 50% of the
outstanding shares of that Portfolio are present in person or by proxy, and
(2) more than 50% of the outstanding shares of that Portfolio. Any investment
restrictions which involve a maximum percentage of securities or assets shall
not be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by or on behalf of, a Portfolio, as the
case may be.
The Trust may not, on behalf of a Portfolio:
(1) With respect to 75% of its total assets, purchase the securities of
any issuer if such purchase would cause more than 5% of the value of a
Portfolio's total assets to be invested in securities of any one issuer
(except securities issued or guaranteed by the U.S. Government or any agency
or instrumentality thereof), or purchase more than 10% of the outstanding
voting securities of any one issuer;
(2) invest more than 25% of the value of its net assets in the
securities (other than U.S. Government Securities), of issuers in a single
industry, except that this policy shall not limit investment by the Global
Advisors Money Market Portfolio in obligations of U.S. banks (excluding their
foreign branches);
(3) borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or, with respect to
the Global Advisors Money Market Portfolio, to facilitate redemptions, (and
not for leveraging or investment, except with respect to reverse repurchase
agreements and dollar roll transactions, to the extent such investments are
permitted under a Portfolio's investment objectives and policies), provided
that borrowings do not exceed an amount equal to 33-1/3% of the current value
of the Portfolio's assets taken at market value, less liabilities other than
borrowings. If at any time a Portfolio's borrowings exceed this limitation due
to a decline in net assets, such borrowings will within three days be reduced
to the extent necessary to comply with this limitation. A Portfolio will not
purchase investments once borrowed funds (including reverse repurchase
agreements) exceed 5% of its total assets;
(4) make loans to other persons, except loans of portfolio securities
and except to the extent that the purchase of debt obligations in accordance
with its investment objectives and policies or entry into repurchase
agreements may be deemed to be loans;
(5) purchase or sell any commodity contract, except that each Portfolio
(other than the Global Advisors Money Market Portfolio), to the extent
permitted by its investment objectives and policies, may purchase and sell
futures contracts based on debt securities, indexes of securities, and foreign
currencies and purchase and write options on securities, futures contracts
which it may purchase, securities indexes, and foreign currencies and purchase
forward contracts. (Securities denominated in gold or other precious metals or
whose value is determined by the value of gold or other precious metals are
not considered to be commodity contracts.)
(6) underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may
be deemed to be an underwriter under federal securities laws;
(7) purchase or sell real estate, although (with respect to Portfolios
other than the Global Advisors Money Market Portfolio) it may purchase and
sell securities which are secured by or represent interests in real estate,
mortgage-related securities, securities of companies principally engaged in
the real estate industry and participation interests in pools of real estate
mortgage loans, and it may liquidate real estate acquired as a result of
default on a mortgage;
(8) issue any class of securities which is senior to a Portfolio's
shares of beneficial interest except as permitted under the Investment Company
Act of 1940 or by order of the SEC.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions are non-fundamental and may be changed
by the Trustees of the Trust without shareholder approval. Although
shareholder approval is not necessary, the Trust intends to notify its
shareholders before implementing any material change in any non-fundamental
investment restriction.
The Trust may not, on behalf of a Portfolio:
(1) invest more than 15% (except 10% with respect to the Credit Suisse
International Equity Portfolio and the Global Advisors Money Market Portfolio)
of the net assets of a Portfolio (taken at market value) in illiquid
securities, including repurchase agreements maturing in more than seven days;
(2) purchase securities on margin, except (with respect to all
Portfolios other than the Global Advisors Money Market Portfolio) such
short-term credits as may be necessary for the clearance of purchases and
sales of securities, and except (with respect to all Portfolios other than the
Global Advisors Money Market Portfolio) that it may make margin payments in
connection with options, futures contracts, options on futures contracts and
forward foreign currency contracts and in connection with swap agreements;
(3) make short sales of securities unless such Portfolio (other than the
Global Advisors Money Market Portfolio) owns an equal amount of such
securities or owns securities which, without payment of any further
consideration, are convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short;
(4) make investments for the purpose of gaining control of a company's
management.
MANAGEMENT OF THE TRUST
Principal Occupation
Name, Address and Age Position Held with the Trust During Past Five
- - ------------------------ ---------------------------- ----------------
Years
- - -----
Richard W. Scott* President (Principal Executive President, Principal
Executive
5555 San Felipe, Suite 900 Officer)and Trustee Officer and Trustee of
the
Houston, Texas 77056 Trust; Vice Chairman since
Age: 43 July 1996, General Counsel
since February 1994, Chief
Investment Officer since May
1995, and Executive Vice
President from February 1994
until July 1996, of Western
National Corporation; Vice
Chairman since July 1996,
of Western National Corporation;
Vice Chairman since July 1996,
Chief Investment Officer since
May 1995, General Counsel from
February 1994 until February
1997, and Executive Vice
President from February 1994
until July 1996, of Western
National Life; prior thereto,
a partner with Vinson & Elkins
L.L.P.
John A. Graf* Trustee Trustee; Vice
Chairman since
5555 San Felipe, Suite 900 July 1996 and
Chief Marketing
Houston, Texas 77056 Officer since
October 1993 of
Age: 37 of Western
National Corporation
and of Western National Life
Insurance Company; prior thereto
Executive, Senior, Second or
Assistant Vice President or Vice
President, Marketing of Conseco,
Inc. and Western National Life
Insurance Company.
Alden W. Brosseau* Trustee Owner, Sonoma
Group, Consulting
16670 Arnold Drive to Management,
since March
Sonoma, CA 95476 1993; prior
thereto, Vice
Age: 69 President
Investment
Administration &
Planning,
American General
Corporation.
S. Tevis Grinstead Trustee Retired since
1993; prior
c/o Vinson & Elkins L.L.P. thereto, a partner
with
2300 First City Tower Vinson & Elkins
L.L.P.
1001 Fannin
Houston, Texas 77002-6760
Age: 58
Hugh L. Hyde Trustee Owner, HLH
Consulting Inc. since
952 Echo Lane, Suite 322 November, 1994;
from March 1,
Houston, Texas 77046-1201 1993-September 15,
1994,
Age: 54 President and
Director of
Texas Capital
Bancshares,
Inc. and its
subsidiary bank,
Texas Capital
Bank, N.A.; prior
thereto, a partner
with KPMG
Peat Marwick.
Melvin C. Payne Trustee President and
Chief Executive
Three Riverway, Suite 1375 Officer of
Carriage Services
Houston, Texas 77045 since 1991; prior
thereto, an
Age: 54 an independent
consultant to
various companies.
Patrick F. Grady Vice President, Treasurer, Vice President,
Treasurer
5555 San Felipe, Suite 900 Principal Financial Officer of Western
National Life
Houston, Texas 77056 and Principal Accounting Insurance Company
since
Age: 39 Officer February 1994; prior thereto,
Vice President,
Second Vice
President,
Assistant Vice
President -
Financial
Reporting,
Conseco, Inc.,
Carmel, Indiana.
Dwight L. Cramer Vice President and Secretary Vice President and
Secretary
5555 San Felipe, Suite 900 of the Trust; Vice
President
Houston, Texas 77056 and Corporate
Secretary since
Age: 44 February 1996 of
Western
National Corporation. Senior
Vice President since February
1996, and General Counsel since
February 1997 of Western
National Life Insurance Company;
prior thereto, Vice President
and from December 1993 until
February 1996, Associate General
Counsel from February 1995 until
February 1997, and Corporate
Secretary from December 1993
until February 1997 of Western
National Life Insurance Company.
Kurt R. Fredland Vice President and Assistant Assistant Vice
President-
5555 San Felipe, Suite 900 Treasurer Annuity
Administration, Western
Houston, Texas 77056 National Life,
since April
Age: 48 1994; prior
thereto, from
February 1993 to
April 1994, a
financial
consultant; prior
thereto, from
April 1977 to
February 1993,
Senior Vice
President (and a
number of
other positions at
the same
employer preceding
that
position), First
City
Bancorporation of
Texas, Inc.,
Houston, Texas.
Evelyn M. Curran Assistant Secretary Staff Attorney,
Western National
5555 San Felipe, Suite 900 Life since March
1994; prior
Houston, Texas 77056 thereto from
January 1991 to
Age: 31 March 1994, law
student, South
Texas College of
Law, Houston,
Texas; prior
thereto, from
August 1990 to
August 1992,
Underwriter and
Claims
Representative,
Farmers
Insurance Company,
Santa Ana,
California.
* Interested person of the Trust within the meaning of the 1940 Act.
Each Trustee of the Trust who is not an employee, officer or director of
the Life Company, the Adviser or a Sub-Adviser receives an annual fee of
$7,500 and an additional fee of $750 for each Trustees' meeting attended.
In addition, disinterested Trustees who are members of any Board committees
will receive a separate $750 fee for attendance of any committee meeting
that is held on a day on which no Board meeting is held. None of the Trustees
or officers of the Trust own any of the outstanding shares of the Trust as of
May 1, 1997. With respect to the period ended December 31, 1996, the Trust
paid Trustees' fees aggregating $41,250. The following table shows the
1996 compensation by Trustee.
COMPENSATION TABLE
(1) (2) (3) (4)
(5)
Pension or Total
Aggregate Retirement Estimated
Compensation
Compensation Benefits Accrued Annual From
Registrant
Name of Person, From As Part of Fund Benefits Upon and
Fund Complex
Position Registrant(1) Expenses Retirement Paid to
Trustees
- - ---------------- ------------- ----------------- --------------
- - -----------------
Richard W. Scott None None None None
President and
Trustee
John A. Graf None None None None
Trustee
Alden W. Brosseau $10,500.00 None None
$10,500.00
Trustee
Hugh L. Hyde $10,500.00 None None
$10,500.00
Trustee
Melvin C. Payne $ 9,750.00 None None $
9,750.00
Trustee
S. Tevis Grinstead $10,500.00 None None
$10,500.00
Trustee
SUBSTANTIAL SHAREHOLDERS
Shares of the Portfolios are issued and redeemed in connection with
investments in and payments under certain variable annuity contracts issued
through a separate account of the Life Company. As of May 1, 1997, the
separate account of the Life Company was known to the Board of Trustees
and the management of the Trust to own of record 100% of the shares of each
Portfolio of the Trust.
The Declaration of Trust provides that the Trust will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, except if it is determined in the manner specified in the Declaration
of Trust that they have not acted in good faith in the reasonable belief that
their actions were in the best interests of the Trust or that such
indemnification would relieve any officer or Trustee of any liability to the
Trust or its shareholders by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of his or her duties. The Trust, at its
expense, may provide liability insurance for the benefit of its Trustees and
officers.
INVESTMENT ADVISER
Under the Investment Advisory Agreement between the Trust and the Adviser (the
"Investment Advisory Agreement"), the Adviser, at its expense, provides the
Portfolios with investment advisory services and advises and assists the
officers of the Trust in taking such steps as are necessary or appropriate to
carry out the decisions of its Trustees regarding the conduct of business of
the Trust and each Portfolio. The fees to be paid under the Investment
Advisory Agreement are set forth in the Trust's prospectus.
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 implement those decisions,
subject always to the provisions of the Trust's Declaration of Trust and
By-laws, and of the Investment Company Act of 1940, and subject further to
such policies and instructions as the Trustees may from time to time
establish.
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.
Under the Investment Advisory Agreement, the Trust is responsible for all its
other expenses including, but not limited to, the following expenses: legal,
auditing or accounting expenses, Trustees' fees and expenses, insurance
premiums, brokers' commissions, taxes and governmental fees, expenses of issue
or redemption of shares, expenses of registering or qualifying shares for
sale, reports and notices to shareholders, and fees and disbursements of
custodians, transfer agents, registrars, shareholder servicing agents and
dividend disbursing agents, and certain expenses with respect to membership
fees of industry associations.
Investment Advisory Agreement provides that the Adviser may retain
sub-advisers, at Adviser's own cost and expense, for the purpose of managing
the investment of the assets of one or more Portfolios.
The Investment Advisory Agreement provides that neither the Adviser nor any
director, officer or employee of Adviser will be liable for any loss suffered
by the Trust in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations and duties. In addition, the
Agreement provides for indemnification of the Adviser by the Trust.
The Investment Advisory Agreement may be terminated without penalty by vote of
the Trustees, as to any Portfolio by the shareholders of that Portfolio, or by
Adviser on 60 days written notice. The Agreement also terminates without
payment of any penalty in the event of its assignment. In addition, the
Investment Advisory Agreement may be amended only by a vote of the
shareholders of the affected Portfolio(s), and provides that it will continue
in effect from year to year only so long as such continuance is approved at
least annually with respect to each Portfolio by vote of either the Trustees
or the shareholders of the Portfolio, and, in either case, by a majority of
the Trustees who are not "interested persons" of the Adviser. In each of the
foregoing cases, the vote of the shareholders is the affirmative vote of a
"majority of the outstanding voting securities" as defined in the Investment
Company Act of 1940.
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,
1998. In addition, the Adviser has undertaken to bear all operating
expenses
of each Portfolio, excluding the compensation of the Adviser, that exceed
.12%
of each Portfolio's average daily net assets until May 1, 1998. Information
concerning the advisory fees waived and expenses reimbursed for the period
ended
December 31, 1996 is contained in the Prospectus.
For the years ended December 31, 1996 and 1995, respectively, the Adviser was
paid advisory fees as follows:
1996 1995
----- ------
BEA Growth and Income Portfolio $4,727 -
BlackRock Managed Bond Portfolio 1,588 N/A
Credit Suisse International Equity Portfolio 5,824 -
EliteValue Asset Allocation Portfolio 986 N/A
Global Advisors Growth Equity Portfolio 3,353 -
Global Advisors Money Market Portfolio 569 -
Salomon Brothers U.S. Government Securities Portfolio 355 N/A
Van Kampen American Capital Emerging Growth Portfolio 970 N/A
For the years ended December 31, 1996 and 1995, respectively, the Adviser
waived
advisory fees as follows:
1996 1995
----- ------
BEA Growth and Income Portfolio $ 6,812 3,106
BlackRock Managed Bond Portfolio 12,335 N/A
Credit Suisse International Equity Portfolio 6,699 3,643
EliteValue Asset Allocation Portfolio 6,128 N/A
Global Advisors Growth Equity Portfolio 6,520 2,490
Global Advisors Money Market Portfolio 1,878 106
Salomon Brothers U.S. Government Securities Portfolio 7,227 N/A
Van Kampen American Capital Emerging Growth Portfolio 5,171 N/A
TRUST ADMINISTRATION
State Street Bank and Trust Company provides certain accounting, transfer
agency, and other services to the Trust.
SUB-ADVISERS
Each of the Sub-Advisers described in the Prospectus serves as Sub-Adviser to
one or more of the Portfolios of the Trust pursuant to separate written
agreements. Certain services provided by, and the fees paid to, the
Sub-Advisers are described in the Prospectus under "Management of the
Trust-Sub-Advisers."
INVESTMENT DECISIONS
Investment decisions for the Trust and for the other investment advisory
clients of the Sub-Advisers are made with a view to achieving their respective
investment objectives and after consideration of such factors as their current
holdings, availability of cash for investment, and the size of their
investments generally. Frequently, a particular security may be bought or sold
for only one client or in different amounts and at different times for more
than one but less than all clients. Likewise, a particular security may be
bought for one or more clients when one or more other clients are selling the
security. In addition, purchases or sales of the same security may be made for
two or more clients of a Sub-Adviser on the same day. In such event, such
transactions will be allocated among the clients in a manner believed by the
Sub-Adviser to be equitable to each. In some cases, this procedure could have
an adverse effect on the price or amount of the securities purchased or sold
by the Trust. Purchase and sale orders for the Trust may be combined with
those of other clients of a Sub-Adviser in the interest of achieving the most
favorable net results for the Trust.
BROKERAGE AND RESEARCH SERVICES
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Trust of negotiated brokerage commissions. Such commissions
vary among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign securities often involve the payment of
fixed brokerage commissions, which are generally higher than those in the
United States. There is generally no stated commission in the case of
securities traded in the over-the-counter markets, but the price paid by the
Trust usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Trust includes a disclosed,
fixed commission or discount retained by the underwriter or dealer.
is currently intended that the Sub-Advisers will place all orders for the
purchase and sale of portfolio securities for the Trust and buy and sell
securities for the Trust through a substantial number of brokers and dealers.
In so doing, the Sub-Advisers will use their best efforts to obtain for the
Trust the best price and execution available. In seeking the best price and
execution, the Sub-Advisers, having in mind the Trust's best interests, will
consider all factors they deem relevant, including, by way of illustration,
price, the size of the transaction, the nature of the market for the security,
the amount of the commission, the timing of the transaction taking into
account market prices and trends, the reputation, experience, and financial
stability of the broker-dealer involved, and the quality of service rendered
by the broker-dealer in other transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional
investors to receive research, statistical, and quotation services from
broker-dealers who execute portfolio transactions for the clients of such
advisers. Consistent with this practice, the Sub-Advisers may receive
research, statistical, and quotation services from any broker-dealers with
whom they place the Trust's portfolio transactions. These services, which in
some cases may also be purchased for cash, include such matters as general
economic and security market reviews, industry and company reviews,
evaluations of securities, and recommendations as to the purchase and sale of
securities. Some of these services may be of value to the Sub-Advisers and/or
their affiliates in advising various other clients (including the Trust),
although not all of these services are necessarily useful and of value in
managing the Trust. The management fees paid by the Trust are not reduced
because the Sub-Advisers and/or their affiliates may receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, a
Sub-Adviser may cause a Portfolio to pay a broker-dealer who provides
brokerage and research services to the Sub-Adviser an amount of disclosed
commission for effecting a securities transaction for the Portfolio in excess
of the commission which another broker- dealer would have charged for
effecting that transaction provided that the Sub-Adviser determines in good
faith that such commission was reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer viewed in terms
of that particular transaction or in terms of all of the accounts over which
investment discretion is so exercised. A Sub-Adviser's authority to cause a
Portfolio to pay any such greater commissions is also subject to such policies
as the Adviser or the Trustees may adopt from time to time.
During the Trust's fiscal year ended December 31, 1996, the Portfolios paid
the
following amounts in brokerage commissions:
1996
-----
BEA Growth and Income Portfolio $13,588
BlackRock Managed Bond Portfolio -
Credit Suisse International Equity Portfolio 14,302
EliteValue Asset Allocation Portfolio 2,448
Global Advisors Growth Equity Portfolio 4,082
Global Advisors Money Market Portfolio -
Salomon Brothers U.S. Government Securities Portfolio -
Van Kampen American Capital Emerging Growth Portfolio 3,423
---------
$37,843
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Portfolio is determined daily as of 4:00
p.m. New York time on each day the New York Stock Exchange is open for
trading. The New York Stock Exchange is normally closed on the following
national holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving, and Christmas.
The value of a foreign security is determined in its national currency as of
the close of trading on the foreign exchange on which it is traded or as of
4:00 p.m. New York time, if that is earlier, and that value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined.
The valuation of the Global Advisors Money Market Portfolio's portfolio
securities is based upon their amortized cost, which does not take into
account unrealized securities gains or losses. This method involves initially
valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact
of fluctuating interest rates on the market value of the instrument. By using
amortized cost valuation, the Trust seeks to maintain a constant net asset
value of $1.00 per share for the Global Advisors Money Market Portfolio,
despite minor shifts in the market value of its portfolio securities. While
this method provides certainty in valuation, it may result in periods during
which value, as determined by amortized cost, is higher or lower than the
price the Global Advisors Money Market Portfolio would receive if it sold the
instrument. During periods of declining interest rates, the quoted yield on
shares of the Global Advisors Money Market Portfolio may tend to be higher
than a like computation made by a fund with identical investments utilizing a
method of valuation based on market prices and estimates of market prices for
all of its portfolio instruments. Thus, if the use of amortized cost by the
Portfolio resulted in a lower aggregate portfolio value on a particular day, a
prospective investor in the Global Advisors Money Market Portfolio would be
able to obtain a somewhat higher yield if he or she purchased shares of the
Global Advisors Money Market Portfolio on that day, than would result from
investment in a fund utilizing solely market values, and existing investors in
the Global Advisors Money Market Portfolio would receive less investment
income. The converse would apply on a day when the use of amortized cost by
the Portfolio resulted in a higher aggregate portfolio value. However, as a
result of certain procedures adopted by the Trust, the Trust believes any
difference will normally be minimal.
The net asset value of the shares of each of the Portfolios other than the
Global Advisors Money Market Portfolio is determined by dividing the total
assets of the Portfolio, less all liabilities, by the total number of shares
outstanding. Securities traded on a national securities exchange or quoted on
the NASDAQ National Market System are valued at their last-reported sale price
on the principal exchange or reported by NASDAQ or, if there is no reported
sale, and in the case of over-the-counter securities not included in the
NASDAQ National Market System, at a bid price estimated by a broker or dealer.
Debt securities, including zero-coupon securities, and certain foreign
securities will be valued by a pricing service. Other foreign securities will
be valued by the Trust's custodian. Securities for which current market
quotations are not readily available and all other assets are valued at fair
value as determined in good faith by the Trustees, although the actual
calculations may be made by persons acting pursuant to the direction of the
Trustees.
If any securities held by a Portfolio are restricted as to resale, their fair
value is generally determined as the amount which the Trust could reasonably
expect to realize from an orderly disposition of such securities over a
reasonable period of time. The valuation procedures applied in any specific
instance are likely to vary from case to case. However, consideration is
generally given to the financial position of the issuer and other fundamental
analytical data relating to the investment and to the nature of the
restrictions on disposition of the securities (including any registration
expenses that might be borne by the Trust in connection with such
disposition). In addition, specific factors are also generally considered,
such as the cost of the investment, the market value of any unrestricted
securities of the same class (both at the time of purchase and at the time of
valuation), the size of the holding, the prices of any recent transactions or
offers with respect to such securities, and any available analysts' reports
regarding the issuer.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the
New York Stock Exchange. The values of these securities used in determining
the net asset value of the Trust's shares are computed as of such times. Also,
because of the amount of time required to collect and process trading
information as to large numbers of securities issues, the values of certain
securities (such as convertible bonds and U.S. Government Securities) are
determined based on market quotations collected earlier in the day at the
latest practicable time prior to the close of the Exchange. Occasionally,
events affecting the value of such securities may occur between such times and
the close of the Exchange which will not be reflected in the computation of
the Trust's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value, in the manner described above.
The proceeds received by each Portfolio for each issue or sale of its shares,
and all income, earnings, profits, and proceeds thereof, subject only to the
rights of creditors, will be specifically allocated to such Portfolio, and
constitute the underlying assets of that Portfolio. The underlying assets of
each Portfolio will be segregated on the Trust's books of account, and will be
charged with the liabilities in respect of such Portfolio and with a share of
the general liabilities of the Trust. Expenses with respect to any two or more
Portfolios may be allocated in proportion to the net asset values of the
respective Portfolios except where allocations of direct expenses can
otherwise be fairly made.
TAXES
Each Portfolio of the Trust intends to qualify each year and elect to be taxed
as a regulated investment company under Subchapter M of the United States
Internal Revenue Code of 1986, as amended (the "Code"). As a regulated
investment company qualifying to have its tax liability determined under
Subchapter M, a Portfolio will not be subject to federal income tax on any of
its net investment income or net realized capital gains that are distributed
to the separate account of the Life Company. As a Massachusetts business
trust, a Portfolio under present law will not be subject to any excise or
income taxes in Massachusetts.
In order to qualify as a "regulated investment company," a Portfolio must,
among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities, or foreign currencies, and
other income (including gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities,
or currencies; (b) derive less than 30% of its gross income from the sale or
other disposition of certain assets (including stock and securities) held less
than three months; (c) diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the value of its total assets
consists of cash, cash items, U.S. Government Securities, and other securities
limited generally with respect to any one issuer to not more than 5% of the
total assets of the Portfolio and not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any issuer (other than U.S. Government
Securities). In order to receive the favorable tax treatment accorded
regulated investment companies and their shareholders, moreover, a Portfolio
must in general distribute at least 90% of its interest, dividends, net
short-term capital gain, and certain other income each year.
With respect to investment income and gains received by a Portfolio from
sources outside the United States, such income and gains may be subject to
foreign taxes which are withheld at the source. The effective rate of foreign
taxes in which a Portfolio will be subject depends on the specific countries
in which its assets will be invested and the extent of the assets invested in
each such country and therefore cannot be determined in advance.
A Portfolio's ability to use options, futures, and forward contracts and other
hedging techniques, and to engage in certain other transactions, may be
limited by tax considerations. A Portfolio's transactions in
foreign-currency-denominated debt instruments and its hedging activities will
likely produce a difference between its book income and its taxable income.
This difference may cause a portion of the Portfolio's distributions of book
income to constitute returns of capital for tax purposes or require the
Portfolio to make distributions exceeding book income in order to permit the
Trust to continue to qualify, and be taxed under Subchapter M of the Code, as
a regulated investment company.
Under federal income tax law, a portion of the difference between the purchase
price of zero-coupon securities in which a Portfolio has invested and their
face value ("original issue discount") is considered to be income to the
Portfolio each year, even though the Portfolio will not receive cash interest
payments from these securities. This original issue discount (imputed income)
will comprise a part of the net investment income of the Portfolio which must
be distributed to shareholders in order to maintain the qualification of the
Portfolio as a regulated investment company and to avoid federal income tax at
the level of the Portfolio.
It is the policy of each of the Portfolios to meet the requirements of the
Code to qualify as a regulated investment company that is taxed pursuant to
Subchapter M of the Code. One of these requirements is that less than 30% of a
Portfolio's gross income must be derived from gains from sale or other
disposition of securities held for less than three months (with special rules
applying to so-called designated hedges). Accordingly, a Portfolio will be
restricted in selling securities held or considered under Code rules to have
been held less than three months, and in engaging in hedging or other
activities (including entering into options, futures, or short-sale
transactions) which may cause the Trust's holding period in certain of its
assets to be less than three months.
This discussion of the federal income tax and state tax treatment of the Trust
and its shareholders is based on the law as of the date of this Statement of
Additional Information. It does not describe in any respect the tax treatment
of any insurance or other product pursuant to which investments in the Trust
may be made. 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.
DIVIDENDS AND DISTRIBUTIONS
GLOBAL ADVISORS MONEY MARKET PORTFOLIO. The net investment income of the
Global Advisors Money Market Portfolio is determined as of the close of
trading on the New York Stock Exchange (generally 4:00 p.m. New York time) on
each day on which the Exchange is open for business. All of the net investment
income so determined normally will be declared as a dividend daily to
shareholders of record as of the close of trading on the Exchange after the
purchase and redemption of shares. Unless the business day before a weekend or
holiday is the last day of an accounting period, the dividend declared on that
day will include an amount in respect of the Portfolio's income for the
subsequent non-business day or days. No daily dividend will include any amount
of net income in respect of a subsequent semi-annual accounting period.
Dividends commence on the next business day after the date of purchase.
Dividends declared during any month will be invested as of the close of
business on the last calendar day of that month (or the next business day
after the last calendar day of the month if the last calendar day of the month
is a non-business day) in additional shares of the Portfolio at the net asset
value per share, normally $1.00, determined as of the close of business on
that day, unless payment of the dividend in cash has been requested.
Net income of the Global Advisors Money Market Portfolio consists of all
interest income accrued on portfolio assets less all expenses of the Portfolio
and amortized market premium. Amortized market discount is included in
interest income. The Portfolio does not anticipate that it will normally
realize any long-term capital gains with respect to its portfolio securities.
Normally the Global Advisors Money Market Portfolio will have a positive net
income at the time of each determination thereof. Net income may be negative
if an unexpected liability must be accrued or a loss realized. If the net
income of the Portfolio determined at any time is a negative amount, the net
asset value per share will be reduced below $1.00 unless one or more of the
following steps, for which the Trustees have authority, are taken: (1) reduce
the number of shares in each shareholder's account, (2) offset each
shareholder's pro rata portion of negative net income against the
shareholder's accrued dividend account or against future dividends, or (3)
combine these methods in order to seek to maintain the net asset value per
share at $1.00. The Trust may endeavor to restore the Portfolio's net asset
value per share to $1.00 by not declaring dividends from net income on
subsequent days until restoration, with the result that the net asset value
per share will increase to the extent of positive net income which is not
declared as a dividend.
Should the Global Advisors Money Market Portfolio incur or anticipate, with
respect to its portfolio, any unusual or unexpected significant expense or
loss which would affect disproportionately the Portfolio's income for a
particular period, the Trustees would at that time consider whether to adhere
to the dividend policy described above or to revise it in light of the then
prevailing circumstances in order to ameliorate to the extent possible the
disproportionate effect of such expense or loss on then existing shareholders.
Such expenses or losses may nevertheless result in a shareholder's receiving
no dividends for the period during which the shares are held and receiving
upon redemption a price per share lower than that which was paid.
OTHER PORTFOLIOS. Each of the Portfolios other than the Global Advisors
Money Market Portfolio will declare and distribute dividends from net
investment income, if any, and will distribute its net realized capital gains,
if any, at least annually. Both dividends and capital gain distributions will
be made in shares of such Portfolios unless an election is made on behalf of a
separate account to receive dividends and capital gain distributions in cash.
PERFORMANCE INFORMATION
GLOBAL ADVISORS MONEY MARKET PORTFOLIO: The Portfolio's yield is computed
by determining the percentage net change, excluding capital changes, in the
value of an investment in one share of the Portfolio over the base period, and
multiplying the net change by 365/7 (or approximately 52 weeks). The
Portfolio's effective yield represents a compounding of the yield by adding 1
to the number representing the percentage change in value of the investment
during the base period, raising that sum to a power equal to 365/7, and
subtracting 1 from the result.
OTHER PORTFOLIOS:
(a) A Portfolio's yield is presented for a specified 30-day period (the
"base period"). Yield is based on the amount determined by (i) calculating the
aggregate of dividends and interest earned by the Portfolio during the base
period less expenses accrued for that period, and (ii) dividing that amount by
the product of (A) the average daily number of shares of the Portfolio
outstanding during the base period and entitled to receive dividends and (B)
the net asset value per share of the Portfolio on the last day of the base
period. The result is annualized on a compounding basis to determine the
Portfolio's yield. For this calculation, interest earned on debt obligations
held by a Portfolio is generally calculated using the yield to maturity (or
first expected call date) of such obligations based on their market values
(or, in the case of receivables-backed securities such as Ginnie Maes, based
on cost). Dividends on equity securities are accrued daily at their stated
dividend rates.
As required by regulations of the Securities and Exchange Commission, the
annualized total return of a Portfolio for a period is computed by assuming a
hypothetical initial payment of $1,000. It is then assumed that all of the
dividends and distributions by the Portfolio over the period are reinvested.
It is then assumed that at the end of the period, the entire amount is
redeemed. The annualized total return is then calculated by determining the
annual rate required for the initial payment to grow to the amount which
would have been received upon redemption.
Investment operations for the Portfolios depicted in the chart below commenced
on October 10, 1995 for the Money Market Portfolio and on October 20, 1995
for the BEA Growth and Income, Credit Suisse International Equity Portfolio
and Global Advisors Growth Equity Portfolio. The performance figures shown
for the Portfolios in the chart below reflect the actual fees and expenses
paid by the Portfolios.
AVERAGE TOTAL RETURN FOR THE PERIODS INDICATED
Twelve Months
Inception to Ended Inception to
Portfolio 12/31/96 12/31/96 12/31/95
- - --------- ------------ ------------ ------------
BEA Growth and Income Portfolio 17.41% 13.82% 6.57%
BlackRock Managed Bond Portfolio 3.76% N/A N/A
Credit Suisse International Equity
Portfolio 17.23% 16.50% 3.93%
EliteValue Asset Allocation
Portfolio 26.70% N/A N/A
Global Advisors Growth Equity
Portfolio 20.94% 21.36% 3.57%
Global Advisors Money Market
Portfolio 5.19% 5.19% 1.17%
Salomon Brothers U.S. Government
Securities Portfolio 3.40% N/A N/A
Van Kampen American Capital Emerging
Growth Portfolio 19.06% N/A N/A
From time to time, Adviser may reduce its compensation or assume expenses in
respect of the operations of a Portfolio in order to reduce the Portfolio's
expenses. Any such waiver or assumption would increase a Portfolio's yield and
total return during the period of the waiver or assumption.
SHAREHOLDER COMMUNICATIONS
Owners of Variable Annuity contracts issued by the Life Company for which
shares of one or more Portfolios are the investment vehicle are entitled to
receive from the Life Company unaudited semi-annual financial statements and
audited year-end financial statements certified by the Trust's independent
public accountants. Each report will show the investments owned by the
Portfolio and the market value thereof and will provide other information
about the Portfolio and its operations.
ORGANIZATION AND CAPITALIZATION
The Trust is an open-end investment company established under the laws of The
Commonwealth of Massachusetts by a Declaration of Trust dated December 12,
1994, as amended April 19, 1995.
Shares entitle their holders to one vote per share, with fractional shares
voting proportionally; however, a separate vote will be taken by each
Portfolio on matters affecting an individual Portfolio. For example, a change
in a fundamental investment policy for the BEA Growth and Income Portfolio
would be voted upon only by shareholders of that Portfolio. Additionally,
approval of the Investment Advisory Agreement is a matter to be determined
separately by each Portfolio. Approval by the shareholders of one Portfolio is
effective as to that Portfolio. Shares have noncumulative voting rights.
Although the Trust is not 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.
Shares have no preemptive or subscription rights, and are transferable. Shares
are entitled to dividends as declared by the Trustees, and if a Portfolio were
liquidated, the shares of that Portfolio would receive the net assets of that
Portfolio. The Trust may suspend the sale of shares at any time and may refuse
any order to purchase shares.
Additional Portfolios may be created from time to time with different
investment objectives or for use as funding vehicles for different variable
life insurance policies or variable annuity contracts. Any additional
Portfolios may be managed by investment advisers or sub-advisers other than
the current Adviser and Sub-Advisers. In addition, the Trustees have the
right, subject to any necessary regulatory approvals, to create more than one
class of shares in a Portfolio, with the classes being subject to different
charges and expenses and having such other different rights as the Trustees
may prescribe and to terminate any Portfolio of the Trust.
PORTFOLIO TURNOVER
The portfolio turnover rate of a Portfolio is defined by the Securities and
Exchange Commission as the ratio of the lesser of annual sales or purchases to
the monthly average value of the portfolio, excluding from both the numerator
and the denominator securities with maturities at the time of acquisition of
one year or less. Under that definition, the Global Advisors Money Market
Portfolio would not calculate portfolio turnover. Portfolio turnover generally
involves some expense to a Portfolio, including brokerage commissions or
dealer mark-ups and other transaction costs on the sale of securities and
reinvestment in other securities. The portfolio turnover rate of each of the
Portfolios for the period ended December 31, 1995 for the applicable
Portfolios and December 31, 1996 for all Portfolios is set forth under
"Financial Highlights" in the Prospectus.
CUSTODIAN
State Street Bank and Trust Company is the custodian of the Trust's assets.
The custodian's responsibilities include safeguarding and controlling the
Trust's cash and securities, handling the receipt and delivery of securities,
and collecting interest and dividends on the Trust's investments. The Trust
may employ foreign sub-custodians that are approved by the Board of Trustees
to hold foreign assets.
LEGAL COUNSEL
Legal matters in connection with the offering are being passed upon by
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut.
INDEPENDENT AUDITORS
The Trust has selected Coopers & Lybrand L.L.P. as the independent auditors
who audit the annual financial statements of the Trust.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations
of the Trust and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the Trust or
the Trustees. The Declaration of Trust provides for indemnification out of a
Portfolio's property for all loss and expense of any shareholder held
personally liable for the obligations of a Portfolio. Thus the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the Portfolio would be unable to meet its
obligations.
DESCRIPTION OF NRSRO RATINGS
DESCRIPTION OF MOODY'S CORPORATE RATINGS
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well-safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are the lowest-rated class of bonds. Issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
DESCRIPTION OF S&P'S CORPORATE RATINGS
AAA -- Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest-rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher-rated
categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in higher-rated
categories.
BB, B, CCC, CC and C-- Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the least degree of speculation and C the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions. A C rating is typically applied to
debt subordinated to senior debt which is assigned an actual or implied CCC
rating. It may also be used to cover a situation where a bankruptcy petition
has been filed, but debt service payments are continued.
DESCRIPTION OF DUFF CORPORATE RATINGS
AAA -- Highest credit quality. The risk factors are negligible being only
slightly more than for risk-free U.S. Treasury debt.
AA -- Risk is modest but may vary slightly from time to time because of
economic conditions.
A -- Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB -- Investment-grade. Considerable variability in risk during economic
cycles.
BB -- Below investment-grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according
to industry conditions or company fortunes. Overall quality may move up or
down frequently within this category.
B -- Below investment-grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according
to economic cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in quality rating within this category or into a
higher- or lower-quality rating grade.
Substantial Risk -- Well below investment-grade securities. May be in
default or have considerable uncertainty as to timely payment of interest,
preferred dividends and/or principal. Protection factors are narrow and risk
can be substantial with unfavorable economic/industry conditions, and/or with
favorable company developments.
DESCRIPTION OF FITCH CORPORATE RATINGS
AAA -- Bonds considered to be investment-grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA-- Bonds considered to be investment-grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Because bonds rated
in the AAA and AA categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issues is generally rated
"[-]+."
A -- Bonds considered to be investment-grade and of high credit quality.
The obligor's ability to pay interest and to repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment-grade and of satisfactory credit
quality. The obligor's ability to pay interest and to repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment-grade is higher than for bonds with
higher ratings.
BB -- Bonds considered speculative and of low investment grade. The
obligor's ability to pay interest and repay principal is not strong and is
considered likely to be affected over time by adverse economic changes.
B -- Bonds considered highly speculative. Bonds in this class are lightly
protected as to the obligor's ability to pay interest over the life of the
issue and repay principal when due.
CCC -- Bonds which may have certain identifiable characteristics which,
if not remedied, could lead to the possibility of default in either principal
or interest payments.
CC -- Bonds which are minimally protected. Default in payment of interest
and/or principal seems probable.
C -- Bonds which are in imminent default in payment of interest or
principal.
DESCRIPTION OF THOMSON BANKWATCH, INC. CORPORATE RATINGS
AAA -- Long-term fixed-income securities that are rated AAA indicate that
the ability to repay principal and interest on a timely basis is very high.
AA -- Long-term fixed-income securities that are rated AA indicate a
superior ability to repay principal and interest on a timely basis with
limited incremental risk vs. issues rated in the highest category.
TBW may apply plus ("+") and minus ("-") modifiers in the AAA and AA
categories to indicate where within the respective category the issued is
placed.
DESCRIPTION OF IBCA LIMITED AND IBCA INC. CORPORATE RATINGS
AAA -- Obligations which are rated AAA are considered to be of the lowest
expectation of investment risk. Capacity for timely repayment of principal and
interest is substantial such that adverse changes in business, economic, or
financial conditions are unlikely to increase investment risk significantly.
AA -- Obligations which are rated AA are considered to be of a very low
expectation of investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or financial
conditions may increase investment risk albeit not very significantly.
DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payments is either over-whelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted A-1+.
Capacity for timely payment on commercial paper rated A-2 is strong, but the
relative degree of safety is not as high as for issues designated A-1. An A-3
designation indicates an adequate capacity for timely payment. Issues with
this designation, however, are more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations. B
issues are regarded as having only speculative capacity for timely payment. C
issues have a doubtful capacity for payment. D issues are in payment default.
The D rating category is used when interest payments or principal payments are
not made on the due date, even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made during such
grace period.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics of
issuers rated Prime-1 but to a lesser degree. Earnings trend and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained. P-3 issuers have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained. Not Prime
issuers do not fall within any of the Prime rating categories.
DESCRIPTION OF DUFF COMMERCIAL PAPER RATINGS
The rating Duff-1 is the highest commercial paper rating assigned by Duff
& Phelps. Paper rated Duff-1 is regarded as having very high certainty of
timely payment with excellent liquidity factors which are supported by ample
asset protection. Risk factors are minor. Paper rated Duff-2 is regarded as
having good certainty of timely payment, good access to capital markets and
sound liquidity factors and company fundamentals. Risk factors are small.
DESCRIPTION OF FITCH COMMERCIAL PAPER RATINGS
The rating Fitch-1 (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade)
is the second highest commercial paper rating assigned by Fitch which reflects
an assurance of timely payment only slightly less in degree than the strongest
issues.
DESCRIPTION OF IBCA LIMITED AND IBCA INC. COMMERCIAL PAPER RATINGS
A1 - Short-term obligations rated A1 are supported by a very strong
capacity for timely repayment. A plus ("+") sign is added to those issues
determined to possess the highest capacity for timely payment.
A2 - Short-term obligations rated A2 are supported by a strong capacity
for timely repayment, although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
DESCRIPTION OF THOMSON BANKWATCH, INC. COMMERCIAL PAPER RATINGS
TBW-1 - Short-term obligations rated TBW-1 indicate a very high degree of
likelihood that principal and interest will be paid on a timely basis.
TBW-2 - Short-term obligations rated TBW-2 indicate that while the degree
of safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated TBW-1.
<PAGE>
FINANCIAL STATEMENTS
The Trust's financial statements and notes thereto for the period ended
December 31, 1996, are incorporated by reference to WNL Series Trust 1996
Annual Report filed as of March 14, 1997.
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) Financial Statements are incorporated by reference to WNL Series Trust
1996 Annual Report filed as of March 14, 1997
(B) EXHIBITS
(1) Declaration of Trust.**
(2) By-laws of Trust.**
(3) Not Applicable
(4) Not Applicable
(5) (a) Investment Advisory Agreement dated August 23, 1995, between
the Registrant and the Adviser.**
(b)(i) Sub-Advisory Agreement dated as of August 23, 1995, among
Van Kampen American Capital Asset Management Inc., the
Adviser and the Registrant.**
(b)(ii) Sub-Advisory Agreement dated as of August 23, 1995, among
BEA Associates, the Adviser and the Registrant.**
(b)(iii) Sub-Advisory Agreement dated as of August 23, 1995, among
Credit Suisse Investment Management Limited, the Adviser
and the Registrant.**
(b)(iv) Sub-Advisory Agreement dated as of August 23, 1995, among
BlackRock Financial Management, Inc., the Adviser and the
Registrant.**
(b)(v) Sub-Advisory Agreement dated August 23, 1995, among Quest for
Value Advisors, the Adviser and the Registrant.**
(b)(vi) Sub-Advisory Agreement dated as of August 23, 1995, among
Salomon Brothers Asset Management Inc., the Adviser and the
Registrant.**
(b)(vii) Sub-Advisory Agreement dated as of August 23, 1995, among
State Street Bank and Trust Company, the Adviser and the
Registrant.**
(b)(viii) Sub-Advisory Agreement dated as of October 16, 1996, among
Van Kampen American Capital Asset Management Inc., the
Adviser and the Registrant.**
(6) Not Applicable
(7) Not Applicable
(8) Form of Custodian Agreement between the Registrant and State
Street Bank and Trust Company.*
(9) (a) Form of Transfer Agency and Service Agreement between
the Registrant and State Street Bank and Trust Company.*
(b) Form of Subadministration Agreement for Reporting and
Accounting Services between the Registrant and State
Street Bank and Trust Company.*
(10) Consent of Counsel.**
(11) Consent of Independent Auditors.
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Calculation of Performance Information
(27) Financial Data Schedules
* Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Form N-1A, File Nos. 33-87380 and 811-8912.
**Incorporated by reference to Post-Effective Amendment No. 1 to
Registrant's Form N-1A, File Nos. 33-87380 and 811-8912, as filed
electronically on May 1, 1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The shares of the Trust are currently sold to WNL Separate Account A.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
WNL Separate Account A is the sole shareholder of the Trust.
ITEM 27. INDEMNIFICATION
Each officer, Trustee or agent of the Trust shall be indemnified by the Trust
to the full extent permitted under the General Laws of The Commonwealth of
Massachusetts and the Investment Company Act of 1940 ("1940 Act"), as amended,
except that such indemnity shall not protect any such person against any
liability to the Trust or any shareholder thereof to which such person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office ("disabling conduct"). Indemnification shall be made when (i) a final
decision on the merits, by a court or other body before whom the proceeding
was brought, that the person to be indemnified was not liable by reason of
disabling conduct or, (ii) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the person to be
indemnified was not liable by reason of disabling conduct, by (a) the vote of
a majority of a quorum of Trustees who are neither "interested persons" of the
company as defined in section 2(a)(19) of the 1940 Act, nor parties to the
proceedings or (b) an independent legal counsel in a written opinion. The
Trust may, by vote of a majority of a quorum of Trustees who are not
interested persons, advance attorneys' fees or other expenses incurred by
officers, Trustees, investment advisers or principal underwriters, in
defending a proceeding upon the undertaking by or on behalf of the person to
be indemnified to repay the advance unless it is ultimately determined that he
is entitled to indemnification. Such advance shall be subject to at least one
of the following: (1) the person to be indemnified shall provide a security
for his undertaking, (2) the Trust shall be insured against losses arising by
reason of any lawful advances, or (3) a majority of a quorum of the
disinterested, non-party Trustees of the Trust, or an independent legal
counsel in a written opinion, shall determine, based on a review of readily
available facts, that there is reason to believe that the person to be
indemnified ultimately will be found entitled to indemnification. The law of
Massachusetts is superseded by the 1940 Act insofar as it conflicts with the
1940 Act or rules published thereunder.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a trustee, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such trustee, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER AND
SUB-ADVISERS
There is set forth below information as to any other business, profession,
vocation or employment of a substantial nature in which each director or
officer of the Registrant's Investment Adviser is, or at any time during the
past two years has been, engaged for his own account or in the capacity of
director, officer, employee, partner or trustee.
Name Business and Other Connections
- - ---- ---------------------------------
Richard W. Scott President, Principal Executive Officer and
Trustee of the Trust; Vice Chairman since
July 1996, General Counsel and Chief Investment
Officer since February 1993, and Executive Vice
President from February 1993 until July 1996 of
` Western National Corporation; Vice Chairman
since July 1996, Chief Investment Officer since
February 1993, and General Counsel from February
1993 until February 1997 of Western National Life
Insurance Company; prior thereto, a partner with
Vinson & Elkins L.L.P.
Kurt R. Fredland Vice President and Assistant Treasurer of the
Trust; Assistant Vice President - Variable
Annuity Administration, Western National Life
Insurance Company, since April 1994; prior
thereto, from February 1993 to April 1994, a
financial consultant.
Dwight L. Cramer Vice President and Secretary of the Trust; Vice
President and Corporate Secretary of Western
National Corporation since February 1996; Senior
Vice President since February 1996, and
General Counsel since February 1997 of Western
National Life Insurance Company; prior thereto,
from November 1993 until February 1996, Vice
President, Secretary, and Associate General Counsel
of Western National Life Insurance Company.
Evelyn M. Curran Assistant Secretary of the Trust; Assistant
Secretary of Western National Corporation since
February 1996. Assistant Vice President-Law since
February 1996, and Corporate Secretary since February
1997 of Western National Life Insurance Company; prior
thereto, from February 1996 until February 1997,
Assistant Vice President-Law and Assistant Corporate
Secretary; from March 1994 until February 1996,
Staff Attorney of Western National Life Insurance
Company.
Patrick F. Grady Vice President, Treasurer, Principal Financial Officer
and Principal Accounting Officer
The principal address of Registrant's Investment Adviser is 5555 San Felipe
Road, Suite 900, Houston, Texas 77056.
With respect to information regarding the Sub-Advisers, reference is hereby
made to "Management of the Trust" in the Prospectus. For information as to
the business, profession, vocation or employment of a substantial nature of
each of the officers and directors of the Sub-Advisers, reference is made to
the current Form ADVs of the Sub-Advisers filed under the Investment Advisers
Act of 1940, incorporated herein by reference, the file numbers of which are
as follows:
BEA Associates
File No. 801-37170
BlackRock Financial Management
File No. 801-48433
Credit Suisse Investment Management Limited
File No. 801-40177
OpCap Advisors
File No. 801-27180
Salomon Brothers Asset Management Inc.
File No. 801-32046
Van Kampen American Capital Asset Management, Inc.
File No. 801-1669
ITEM 29. PRINCIPAL UNDERWRITER
Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Persons maintaining physical possession of accounts, books, and other
documents required to be maintained by Section 31(a) of the Investment Company
Act of 1940 and the Rules promulgated thereunder include the Registrant's
Secretary; the Registrant's investment adviser, WNL Investment Advisory
Services, Inc.; and the Registrant's custodian, State Street Bank and Trust
Company. The address of the Secretary and WNL Investment Advisory Services,
Inc. is 5555 San Felipe Road, Suite 900, Houston, Texas 77056
ITEM 31. MANAGEMENT SERVICES
Other than as set forth in Parts A and B of this Registration Statement, the
Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets the requirements
of Securities Act Rule 485(b) for effectiveness of this Registration Statement
and has duly caused this Post-Effective Amendment No. 2 to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, and State of Texas on the 30th day of
April, 1997.
WNL SERIES TRUST
By: /S/ RICHARD W. SCOTT
-----------------------
Richard W. Scott
President and Trustee
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 has been signed below by the following persons
in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD W. SCOTT President and Trustee 4-30-97
- - ------------------------- -------
Richard W. Scott (Principal Executive Officer)
/s/ PATRICK F. GRADY Vice President and Treasurer 4-30-97
- - ------------------------- -------
Patrick F. Grady (Principal Financial Officer
and Principal Accounting
Officer)
/s/ JOHN A. GRAF Trustee 4-30-97
- - --------------------- -------
John A. Graf
/s/ ALDEN W. BROSSEAU Trustee 4-30-97
- - -------------------------- -------
Alden W. Brosseau
/s/ HUGH L. HYDE Trustee 4-30-97
- - --------------------- -------
Hugh L. Hyde
/s/ MELVIN C. PAYNE Trustee 4-30-97
- - ------------------------ -------
Melvin C. Payne
/s/ S. TEVIS GRINSTEAD Trustee 4-30-97
- - --------------------------- -------
S. Tevis Grinstead
EXHIBITS
TO
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM N-1A
FOR
WNL SERIES TRUST
INDEX TO EXHIBITS
EXHIBIT PAGE
EX.99.B5(b)(viii)Sub-Advisory Agreement dated as of October 31, 1996,
among Van Kampen American Capital Asset Management Inc.,
the Adviser and the Registrant.
EX-99.B9 Opinion and Consent of Counsel
EX.99.B11 Consent of Independent Auditors.
EX.99.B16 Calculation of Performance Information
WNL SERIES TRUST
SUB-ADVISORY AGREEMENT
AGREEMENT dated as of October 31, 1996, among VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC., a Delaware corporation (the "Sub-Adviser"), WNL
INVESTMENT ADVISORY SERVICES, INC., a Delaware corporation (the "Adviser"),
and WNL SERIES TRUST, a Massachusetts business trust (the "Trust").
WHEREAS, Adviser has entered into an Investment Advisory Agreement
(referred to herein as the "Advisory Agreement"), dated October 31, 1996, with
the Trust, under which Adviser has agreed to act as investment adviser to the
Trust, which is registered as an open-end diversified management investment
company under the Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Advisory Agreement provides that the Adviser may engage a
sub-adviser or sub-advisers for the purpose of managing the investments of the
Portfolios of the Trust; and
WHEREAS, the Adviser desires to retain Sub-Adviser, which is engaged in
the business of rendering investment management services, to provide certain
investment management services for the Van Kampen American Capital Emerging
Growth Portfolio (the "Portfolio") of the Trust as more fully described below;
and
WHEREAS, it is the purpose of this Agreement to express the mutual
agreements of the parties hereto with respect to the services to be provided
by Sub-Adviser to Adviser with respect to the Portfolio and the terms and
conditions under which such services will be rendered.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, the parties hereto agree as follows:
1. SERVICES OF SUB-ADVISER. The Sub-Adviser shall act as investment
counsel to the Adviser with respect to the Portfolio. In this capacity,
Sub-Adviser shall have the following responsibilities:
(a) to furnish continuous investment information, advice and
recommendations to the Adviser as to the acquisition, holding or disposition
of any or all of the securities or other assets which the Portfolio may own or
contemplate acquiring from time to time;
(b) to cause its officers to attend meetings of the Adviser or
the Trust and furnish oral or written reports, as the Adviser may reasonably
require, in order to keep the Adviser and its officers and the Trustees of the
Trust and appropriate officers of the Trust fully informed as to the condition
of the investment securities of the Portfolio, the investment recommendations
of the Sub-Adviser, and the investment considerations which have given rise to
those recommendations;
(c) to furnish such statistical and analytical information and
reports as may reasonably be required by the Adviser from time to time; and
(d) to supervise and place orders for the purchase, sale,
exchange and conversion of securities as directed by the appropriate officers
of the Trust or of the Adviser.
2. OBLIGATIONS OF THE ADVISER. The Adviser shall have the following
obligations under this Agreement:
(a) to keep the Sub-Adviser continuously and fully informed as
to the composition of the Portfolio's investment securities and the nature of
the Portfolio's assets and liabilities;
(b) to keep the Sub-Adviser continually and fully advised of the
Portfolio's investment objectives, and any modifications and changes thereto,
as well as any specific investment restrictions or limitations by sending the
Sub-Adviser copies of each registration statement;
(c) to furnish the Sub-Adviser with a certified copy of any
financial statement or report prepared for the Trust with respect to the
Portfolio by certified or independent public accountants, and with copies of
any financial statements or reports made by the Trust to shareholders or to
any governmental body or securities exchange and to inform the Sub-Adviser of
the results of any audits or examinations by regulatory authorities pertaining
to the Portfolio, if these results affect the services provided by the
Sub-Adviser pursuant to this Agreement;
(d) to furnish the Sub-Adviser with any further materials or
information which the Sub-Adviser may reasonably request to enable it to
perform its functions under this Agreement; and
(e) to compensate the Sub-Adviser for its services under this
Agreement by the payment of fees as set forth in Exhibit A attached hereto.
3. PORTFOLIO TRANSACTIONS. The Sub-Adviser shall place all orders for
the purchase and sale of portfolio securities for the account of the Portfolio
with broker-dealers selected by the Sub-Adviser. In executing portfolio
transactions and selecting broker-dealers, the Sub-Adviser will use its best
efforts to seek best execution on behalf of the Portfolio. In assessing the
best execution available for any transaction, the Sub-Adviser shall consider
all factors it deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker-dealer, and the reasonableness of the commission, if
any (all for the specific transaction and on a continuing basis). In
evaluating the best execution available, and in selecting the broker-dealer to
execute a particular transaction, the Sub-Adviser may also consider the
brokerage and research services (as those terms are used in Section 28(e) of
the Securities Exchange Act of 1934) provided to the Portfolio and/or other
accounts over which the Sub-Adviser, an affiliate of the Sub-Adviser (to the
extent permitted by law) or another investment adviser of the Portfolio
exercises investment discretion. The Sub-Adviser is authorized to cause the
Portfolio to pay a broker-dealer who provides such brokerage and research
services a commission for executing a portfolio transaction for the Portfolio
which is in excess of the amount of commission another broker-dealer would
have charged for effecting that transaction if, but only if, the Sub-Adviser
determines in good faith that such commission was reasonable in relation to
the value of the brokerage and research services provided by such
broker-dealer viewed in terms of that particular transaction or in terms of
all of the accounts over which investment discretion is so exercised.
4. MARKETING SUPPORT. The Sub-Adviser shall provide marketing support
to the Adviser in connection with the sale of Trust shares and/or the sale of
variable annuity and variable life insurance contracts issued by Western
National Life Insurance Company and its affiliates which may invest in the
Trust (collectively, the "Life Company"), as reasonably requested by the
Adviser. Such support shall include, but not necessarily be limited to,
presentations by representatives of the Sub-Adviser at investment seminars,
conferences and other industry meetings. Any materials utilized by the
Adviser which contain any information relating to the Sub-Adviser shall be
submitted to the Sub-Adviser for approval prior to use, not less than five (5)
business days before such approval is needed by the Adviser. Any materials
utilized by the Sub-Adviser which contain any information relating to the
Adviser, the Life Company (including any information relating to its separate
accounts or variable annuity or variable life insurance contracts) or the
Trust shall be submitted to the Adviser for approval prior to use, not less
than five (5) business days before such approval is needed by the Sub-Adviser.
5. GOVERNING LAW. This Agreement shall be construed in accordance with
and governed by the laws of the Commonwealth of Massachusetts.
6. EXECUTION OF AGREEMENT. This Agreement will become binding on the
parties hereto upon their execution of the attached Exhibit A to this
Agreement.
7. COMPLIANCE WITH LAWS. The Sub-Adviser represents that it is, and
will continue to be throughout the term of this Agreement, an investment
adviser registered under all applicable federal and state laws. In all
matters relating to the performance of this Agreement, the Sub-Adviser will
act in conformity with the Trust's Declaration of Trust, Bylaws, and current
registration statement applicable to the Portfolio and with the instructions
and direction of the Adviser and the Trust's Trustees, and will conform to and
comply with the 1940 Act and all other applicable federal or state laws and
regulations.
8. TERMINATION. This Agreement shall terminate automatically upon the
termination of the Advisory Agreement. This Agreement may be terminated at
any time, without penalty, by the Adviser or by the Trust by giving sixty (60)
days' written notice of such termination to the Sub-Adviser at its principal
place of business, provided that such termination is approved by the Board of
Trustees of the Trust or by vote of a majority of the outstanding voting
securities (as that phrase is defined in Section 2(a)(42) of the 1940 Act) of
the Portfolio. This Agreement may be terminated at any time by the
Sub-Adviser by giving 60 days' written notice of such termination to the Trust
and the Adviser at their respective principal places of business.
9. ASSIGNMENT. This Agreement shall terminate automatically in the
event of any assignment (as that term is defined in Section 2(a)(4) of the
1940 Act) of this Agreement.
10. TERM. This Agreement shall begin on the date of its execution and
unless sooner terminated in accordance with its terms shall continue in effect
until April 30, 1997 and from year to year thereafter provided continuance is
specifically approved at least annually by the vote of a majority of the
Trustees of the Trust who are not parties hereto or interested persons (as the
term is defined in Section 2(a)(19) of the 1940 Act) of any such party, cast
in person at a meeting called for the purpose of voting on the approval of the
terms of such renewal, and by either the Trustees of the Trust or the
affirmative vote of a majority of the outstanding voting securities of the
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act).
11. AMENDMENTS. This Agreement may be amended only with the approval by
the affirmative vote of a majority of the outstanding voting securities of the
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act) and
the approval by the vote of a majority of the Trustees of the Trust who are
not parties hereto or interested persons (as that term is defined in Section
2(a)(19) of the 1940 Act) of any such party, cast in person at a meeting
called for the purpose of voting on the approval of such amendment, unless
otherwise permitted in accordance with the 1940 Act.
12. INDEMNIFICATION. The Adviser shall indemnify and hold harmless the
Sub-Adviser, its officers and directors and each person, if any, who controls
the Sub-Adviser within the meaning of Section 15 of the Securities Act of 1933
("1933 Act") (any and all such persons shall be referred to as "Indemnified
Party"), against any loss, liability, claim, damage or expense (including the
reasonable cost of investigating or defending any alleged loss, liability,
claim, damages or expense and reasonable counsel fees incurred in connection
therewith), arising by reason of any matter to which this Sub-Advisory
Agreement relates. However, in no case (i) is this indemnity to be deemed to
protect any particular Indemnified Party against any liability to which such
Indemnified Party would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence in the performance of its duties or by reason of
reckless disregard of its obligations and duties under this Sub-Advisory
Agreement or (ii) is the Adviser to be liable under this indemnity with
respect to any claim made against any particular Indemnified Party unless such
Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon the
Sub-Adviser or such controlling persons.
The Sub-Adviser shall indemnify and hold harmless the Adviser and each of
its directors and officers and each person if any who controls the Adviser
within the meaning of Section 15 of the 1933 Act, against any loss, liability,
claim, damage or expense described in the foregoing indemnity, but only with
respect to the Sub-Adviser's willful misfeasance, bad faith or gross
negligence in the performance of its duties under this Sub-Advisory Agreement.
In case any action shall be brought against the Adviser or any person so
indemnified, in respect of which indemnity may be sought against the
Sub-Adviser, the Sub-Adviser shall have the rights and duties given to the
Adviser, and the Adviser and each person so indemnified shall have the rights
and duties given to the Sub-Adviser by the provisions of subsections (i) and
(ii) of this section.
EXHIBIT A
WNL SERIES TRUST
SUB-ADVISORY COMPENSATION
For all services rendered by Sub-Adviser hereunder, Adviser shall pay to
Sub-Adviser and Sub-Adviser agrees to accept as full compensation for all
services rendered hereunder, monthly a fee of:
VAN KAMPEN AMERICAN CAPITAL EMERGING GROWTH PORTFOLIO
.50 of 1% on an annualized basis of net assets under management.
WNL SERIES TRUST
By: /s/ Dwight L. Cramer
---------------------
Dwight L. Cramer
General Counsel and
Senior Vice President-Law
WNL INVESTMENT ADVISORY SERVICES, INC.
By: /s/ Dwight L. Cramer
---------------------
Dwight L. Cramer
General Counsel and
Senior Vice President-Law
VAN KAMPEN AMERICAN CAPITAL ASSET
MANAGEMENT, INC.
By: /s/ D_____ J. McD______
------------------------
President and Chief
Operating Officer
A copy of the document establishing the Trust is filed with the Secretary of
the common wealth of Massachusetts. This Agreement is executed by officers
not as individuals and is not binding upon any of the Trustees, officers or
shareholders of the Trust individually but only upon the assets of each
Portfolio.
[Letterhead of Blazzard, Grodd Hasenauer, P.C.]
April 30, 1997
VIA EDGAR
- - ----------
Securities and Exchange Commission
Division of Investment Management
Office of Insurance Products
450 Fifth Street, N.W.
Washington, DC 20549
Re: Post-Effective Amendment No. 2 to Form N-1A
WNL Series Trust
File Nos. 33-87380 and 811-8912
- - -----------------------------------
Dear Sir/Madam:
We have reviewed Post-Effective Amendment No. 2 for the above-named
Registrant. After review of such Post-Effective Amendment, we have concluded
that the changes made to the Prospectus and Statement of Additional
Information are non-material.
Therefore, we hereby represent that the amendment does not contain
disclosure which would render it ineligible to become effective pursuant to
paragraph (b) of Rule 485.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: /s/ Raymond A. O'Hara III
---------------------------------
Raymond A. O'Hara III
[Letterhead of Coopers &Lybrand]
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
WNL Series Trust:
We consent to the incorporation by reference in Amendment No. 3 to the
Registration Statement of WNL Series Trust on Form N-1A of our reports dated
February 10, 1997, on our audits of the financial statements and the financial
highlights of BEA Growth Income Portfolio, BlackRock Managed Bond Portfolio,
Credit Suisse International Equity Portfolio, EliteValue Asset Allocation
Portfolio, Global Advisors Growth Equity Portfolio, Global Advisors Money
Market Portfolio, Salomon Brothers U. S. Government Securities Portfolio and
Van Kampen American Capital Emerging Growth Portfolio, which reports are
included in the Annual Reports to Shareholders for the period or year ended
December 31, 1996, respectively, which are incorporated by reference in the
Amendment to the Registration Statement. We also consent to the references to
our Firm under the caption "Independent Accountants" in the Statement of
Additional Information.
/s/ Coopers & Lybrand L.L.P.
--------------------------------
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
April 30, 1997
<PAGE>
EXHIBIT 16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
AVERAGE ANNUAL TOTAL RETURNS
n
ENDING REDEEMABLE VALUE (ERV) = P(1+T)
Where: P = A hypothetical initial payment of $1,000
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of $1,000 at beginning of period
INCEPTION TO 12/31/96
-----------------------
Inception Return for
Portfolio Date n Period T ERV
- - --------- ---------- ----- --------- ---- -----
BEA Growth and Income Portfolio 10/20/95 1.200 21.30% 17.41%
$1,212.43
BlackRock Managed Bond Portfolio 01/02/96 0.997 3.76 3.76
1,037.51
Credit Suisse International
Equity Portfolio 10/20/95 1.200 21.07 17.23 1,210.21
EliteValue Asset Allocation
Portfolio 01/02/96 0.997 26.70 26.70 1,266.16
Global Advisors Growth Equity
Portfolio 10/20/95 1.200 25.69 20.94 1,256.27
Global Advisors Money Market
Portfolio 10/10/95 1.227 6.42 5.19 1,064.08
Salomon Brothers U.S. Government
Securities Portfolio 02/06/96 0.901 3.40 3.76 1,033.84
Van Kampen American Capital
Emerging Growth Portfolio 01/02/96 0.997 19.06 19.06
1,190.06
TWELVE MONTHS ENDED 12/31/96
-------------------------------
Inception Return for
Portfolio Date n Period T ERV
- - --------- ---------- ----- --------- ---- -----
BEA Growth and Income Portfolio 10/20/95 1.000 13.82% 13.82%
$1,138.17
BlackRock Managed Bond Portfolio 01/02/95 N/A N/A N/A N/A
Credit Suisse International
Equity Portfolio 10/20/95 1.000 16.50 16.50 1,164.97
EliteValue Asset Allocation
Portfolio 01/02/96 N/A N/A N/A N/A
Global Advisors Growth Equity
Portfolio 10/20/95 1.000 21.36 21.36 1,213.62
Global Advisors Money Market
Portfolio 10/10/95 1.000 5.19 5.19 1,051.89
Salomon Brothers U.S. Government
Securities Portfolio 02/06/96 N/A N/A N/A N/A
Van Kampen American Capital
Emerging Growth Portfolio 01/02/96 N/A N/A N/A N/A
EXHIBIT 16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
YIELD
7 Day Yield = [a-b] * 365/7
-----
c
7 Day Effective Yield = [(a-b+1) * 365/7] -1
------------------
c
Where: a = interest earned during the period
b = expense accrued for the period (net of reimbursement)
c = the average number of shares outstanding during the period
that were entitled to receive dividends
Global Advisors Money Market Portfolio
As of December 31, 1996:
a = $ 1,416.94
b = 83.95
c = 1,337,471.73
7 Day Yield = 5.196%
7 Day Effective Yield = 5.331%
