<PAGE>
THE HIRTLE CALLAGHAN TRUST
November 10, 1998
VIA EDGAR TRANSMISSION
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Re: The Hirtle Callaghan Trust (the "Trust")
Securities Act of 1933 Registration File No. 33-87762 and
Investment Company Act of 1940 File No. 811-8918
Rule 497(c) Filing
Dear Sir or Madam:
On behalf of the Trust, attached hereto for filing pursuant to Rule 497(c) under
the Securities Act of 1933, as amended, by electronic submission are copies of
the Trust's Prospectus and Statement of Additional Information, both dated
November 1, 1998. The attached copies of the Prospectus and Statement of
Additional Information have been marked to show changes made thereto from the
form of said Prospectus and Statement of Additional Information contained in the
most recent Post-Effective Amendment on Form N-1A, filed pursuant to EDGAR on
October 28, 1998.
If you have any questions concerning this filing, please do not hesitate to
contact the undersigned at (614) 470-8619.
Sincerely,
Ellen F. Stoutamire
Assistant Secretary
The Hirtle Callaghan Trust
cc: Laura Anne Corsell, Esq.
<PAGE>
THE HIRTLE CALLAGHAN TRUST Prospectus
November 1, 1998
The Hirtle Callaghan Trust ("Trust"), a diversified, open-end management
investment company, was organized in 1994 by Hirtle, Callaghan & Co., Inc.
("Hirtle Callaghan") to enhance Hirtle Callaghan's ability to acquire the
services of independent specialist money management organizations for the
clients Hirtle Callaghan serves. The Trust currently consists of seven separate
investment portfolios (each a "Portfolio"). Day-to-day portfolio management
services are provided to each of the Trust's Portfolios by one or more
independent investment advisory organizations ("Investment Managers"), selected
by, and under the general supervision of, the Trust's Board of Trustees
("Board"). Shares of the Trust are available exclusively to investors ("Eligible
Investors") who are clients of Hirtle Callaghan or clients of financial
intermediaries, such as investment advisers, acting in a fiduciary capacity with
investment discretion, that have established relationships with Hirtle
Callaghan.
The Trust currently consists of seven separate Portfolios, as listed below:
- --------------------------------------------------------------------------------
The Portfolios
The Value Equity Portfolio seeks total return by investing in equity securities.
The Growth Equity Portfolio seeks capital appreciation by investing in equity
securities.
The Small Capitalization Equity Portfolio seeks long term capital appreciation
by investing primarily in equity securities of smaller companies.
The International Equity Portfolio seeks total return by investing in a
diversified portfolio of equity securities of non-U.S. issuers.
The Limited Duration Municipal Bond Portfolio seeks a high level of current
income exempt from Federal income tax, consistent with the preservation of
capital by investing primarily in a diversified portfolio of securities issued
by municipalities and related entities. The Portfolio expects to maintain an
overall duration of less than 4 years.
The Fixed Income Portfolio seeks a high level of current income by investing
primarily in a diversified portfolio of debt securities, including U.S. and
non-U.S. government securities, corporate debt securities and asset-backed
issues. The Portfolio expects to maintain a dollar weighted effective average
portfolio maturity of between five and ten years.
The Intermediate Term Municipal Bond Portfolio seeks a high level of current
income exempt from Federal income tax, consistent with the preservation of
capital by investing primarily in securities issued by municipalities and
related entities. The Portfolio expects to maintain a dollar weighted effective
average portfolio maturity of between five and ten years.
- --------------------------------------------------------------------------------
This prospectus contains concise information about the Trust that a prospective
investor needs to know before investing in any of the Portfolios. Please read it
carefully and keep it for future reference. A Statement of Additional
Information, dated November 1, 1998, has been filed with the Securities and
Exchange Commission and is available for reference along with other materials on
the SEC Internet website (http://www.sec.gov) and is incorporated by reference
in this prospectus. It may be obtained upon request free of charge by
contacting the Trust at 575 E. Swedesford Road, Suite 205, Wayne, PA 19087,
(610) 254-9596.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
EXPENSE INFORMATION
Table 1: Shareholder Transaction Expenses: NONE
Table 2: Annual Operating Expenses (as a percentage of average net assets)
The following table of annual operating expenses is designed to assist investors
in understanding expenses borne by investors as shareholders of the Trust,
either directly or indirectly. Except as noted, figures shown reflect actual
expenses incurred during the fiscal year ended June 30, 1998.
<TABLE>
<CAPTION>
Portfolio
Management Other Total Portfolio
Portfolio Fees Expenses (1) Operating Expenses
- --------- ---------- ------------ ------------------
<S> <C> <C> <C>
Value Equity (2) 0.38% 0.16% 0.54%
Growth Equity 0.35% 0.18% 0.53%
Small Cap Equity (3) 0.42% 0.21% 0.63%
International Equity (4) 0.44% 0.26% 0.70%
Limited Duration
Municipal Bond 0.25% 0.26% 0.51%
Fixed Income (5) 0.33% 0.19% 0.52%
Intermediate Term
Municipal Bond (5) 0.33% 0.24% 0.57%
</TABLE>
__________
(1) The caption "Other Expenses" does not include extraordinary expenses as
determined by the use of generally accepted accounting principles. Figures
shown have been restated to reflect the impact of the implementation of a
revised fee schedule for certain of the Trust's service providers, had such
new schedule been in effect during the fiscal year ended June 30, 1998.
(2) Effective February 2, 1998, the fee payable to Institutional Capital
Corporation by The Value Equity Portfolio was increased from .30% of that
Portfolio's average net assets to .35% of such assets. Figures shown have
been restated to reflect the impact of this increase, had it been in effect
during the fiscal year ended June 30, 1998.
(3) Effective April 1, 1998, a new investment manager assumed responsibility for
managing a portion of the assets of The Small Capitalization Equity
Portfolio. The fee payable to the new manager is .30% of that Portfolio's
average net assets and represents a reduction in the amount of the fee
payable to the replaced manager. Figures shown have been restated to
reflect the impact of this reduction, had it been in effect during the
fiscal year ended June 30, 1998.
(4) Effective May 6, 1998, the fee payable to the investment manager for The
International Equity Portfolio was reduced for assets over $200 million.
Figures shown have been restated to reflect the impact of this reduction,
had it been in effect during the fiscal year ended June 30, 1998.
(5) The expense figures for "Management Fees" and "Other Expenses" shown for
these Portfolios are based upon estimated costs and estimated fees to be
charged to the Portfolios during the current fiscal year, taking into
account the projected size of the Portfolios. Actual expenses may be
greater or less than such estimates.
2
<PAGE>
Example: An investor in each of the Portfolios listed would pay the following
- --------
expenses on a $1,000 investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
<TABLE>
<CAPTION>
Portfolio 1 Year 3 Years 5 Years 10 Years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Value Equity $6 $17 $30 $68
Growth Equity $5 $17 $30 $66
Small Cap Equity $6 $20 $35 $79
International Equity $7 $22 $39 $87
Limited Duration
Municipal Bond $5 $16 $29 $64
Fixed Income $5 $17 N/A N/A
Intermediate Term
Municipal Bond $6 $18 N/A N/A
</TABLE>
__________
The preceding example assumes that all dividends and distributions are
reinvested and that the percentage totals shown in Table 2: "Annual Operating
Expenses" remain the same in the years shown. The example should not be
considered a representation of future expenses and actual expenses may be
greater or less than those shown. Moreover, while the example assumes a 5%
annual return, each Portfolio's actual performance will vary and may result in
an actual return greater or less than 5%.
As shown above in Table 1, none of the Trust's Portfolios impose any shareholder
transaction fees in connection with either the purchase or redemption of shares.
Investors who acquire shares of the Trust through a program of services offered
by a financial intermediary, such as an investment adviser or bank, may be
subject to charges for services. All such charges are in addition to those
expenses borne by the Trust and described in the foregoing tables, or reflected
in the Example shown. Investors should contact any such financial intermediary
for information concerning what, if any, additional fees may be charged. For
more complete descriptions of the various costs and expenses, see "Management of
the Trust," in this prospectus.
FINANCIAL HIGHLIGHTS
(Selected per share data and ratios for a share
outstanding throughout each period)
The following information has been audited with respect to the periods ended
June 30, 1996, June 30, 1997 and June 30, 1998 by PricewaterhouseCoopers LLP,
the Trust's independent accountants, whose report thereon appears in the Trust's
Annual Report to Shareholders for the period ended June 30, 1998. The Annual
Report to Shareholders is incorporated by reference in the Trust's Statement of
Additional Information, which is available, without charge, upon request. No
information is presented for the Fixed Income or Intermediate Bond Portfolios.
These portfolios had not commenced operations as of the time periods presented.
3
<PAGE>
THE HIRTLE CALLAGHAN TRUST
Financial Highlights
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Value Equity Portfolio
--------------------------------------------------------
Year Year Period
Ended Ended Ended
June 30, June 30, June 30,
1998 1997 1996 (a)
-------------- ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 14.41 $ 11.48 $ 10.00
-------------- ------------ ------------
Income from Investment Operations:
Net investment income 0.24 0.23 0.22
Net realized and unrealized gain on investments, futures
and foreign currency transactions 2.87 3.65 1.51
-------------- ------------ ------------
Total from investment operations 3.11 3.88 1.73
-------------- ------------ ------------
Distributions to Shareholders from:
Net investment income (0.25) (0.21) (0.22)
In excess of net investment income - - -
Net realized gain on investments, futures and foreign
currency transactions (1.78) (0.74) (0.03)
-------------- ------------ ------------
Total distribution to shareholders (2.03) (0.95) (0.25)
-------------- ------------ ------------
Net Asset Value, End of Period $ 15.49 $ 14.41 $ 11.48
============= =========== ===========
Total Return 23.42% 35.28% 17.28%(e)
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in thousands) $ 176,587 $ 117,092 $ 71,503
Ratio of expenses to average net assets 0.52% 0.63% 0.63%(d)
Ratio of net investment income to average net assets 1.69% 1.89% 2.55%(d)
Ratio of expenses to average net assets* 0.52% 0.65% 0.68%(d)
Portfolio turnover rate 86.45% 97.39% 92.00%(e)
</TABLE>
____________
* During the period, certain fees were voluntarily reduced and/or waived. If
such voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) For the period August 25, 1995 (commencement of operations) through
June 30, 1996.
(b) For the period August 8, 1995 (commencement of operations) through
June 30, 1996.
(c) For the period September 5, 1995 (commencement of operations) through
June 30, 1996.
(d) Annualized.
(e) Not Annualized.
Financial Highlights
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Growth Equity Portfolio
-------------------------------------------------------
Year Year Period
Ended Ended Ended
June 30, June 30, June 30,
1998 1997 1996 (b)
------------- ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 13.67 $ 11.13 $ 10.00
------------- ------------ ------------
Income from Investment Operations:
Net investment income 0.04 0.06 0.04
Net realized and unrealized gain on investments, futures
and foreign currency transactions 4.37 2.58 1.13
------------- ------------ ------------
Total from investment operations 4.41 2.64 1.17
------------- ------------ ------------
Distributions to Shareholders from:
Net investment income (0.04) (0.05) (0.04)
In excess of net investment income (0.02) - -
Net realized gain on investments, futures and foreign
currency transactions (2.77) (0.05) -
------------- ------------ ------------
Total distribution to shareholders (2.83) (0.10) (0.04)
------------- ------------ ------------
Net Asset Value, End of Period $ 15.25 $ 13.67 $ 11.13
============ =========== ===========
Total Return 37.00% 23.83% 11.69%(e)
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in thousands) $ 216,129 $ 160,961 $ 110,537
Ratio of expenses to average net assets 0.53% 0.55% 0.63%(d)
Ratio of net investment income to average net assets 0.33% 0.49% 0.46%(d)
Ratio of expenses to average net assets* 0.53% 0.55% 0.68%(d)
Portfolio turnover rate 95.07% 80.47% 80.00%(e)
</TABLE>
____________
* During the period, certain fees were voluntarily reduced and/or waived. If
such voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) For the period August 25, 1995 (commencement of operations) through
June 30, 1996.
(b) For the period August 8, 1995 (commencement of operations) through
June 30, 1996.
(c) For the period September 5, 1995 (commencement of operations) through
June 30, 1996.
(d) Annualized.
(e) Not Annualized.
Financial Highlights
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Small Capitalization Equity Portfolio
--------------------------------------------------------
Year Year Period
Ended Ended Ended
June 30, June 30, June 30,
1998 1997 1996 (c)
-------------- ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 12.95 $ 11.07 $ 10.00
-------------- ------------ ------------
Income from Investment Operations:
Net investment income 0.06 0.07 0.10
Net realized and unrealized gain on investments, futures
and foreign currency transactions 1.54 2.11 1.07
-------------- ------------ ------------
Total from investment operations 1.60 2.18 1.17
-------------- ------------ ------------
Distributions to Shareholders from:
Net investment income (0.06) (0.07) (0.10)
In excess of net investment income - - -
Net realized gain on investments, futures and foreign
currency transactions (1.36) (0.23) -
-------------- ------------ ------------
Total distribution to shareholders (1.42) (0.30) (0.10)
-------------- ------------ ------------
Net Asset Value, End of Period $ 13.13 $ 12.95 $ 11.07
============= =========== ===========
Total Return 12.66% 19.88% 11.82%(e)
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in thousands) $ 150,527 $ 113,480 $ 61,503
Ratio of expenses to average net assets 0.70% 0.78% 0.78%(d)
Ratio of net investment income to average net assets 0.41% 0.68% 1.33%(d)
Ratio of expenses to average net assets* 0.70% 0.78% 0.90%(d)
Portfolio turnover rate 103.41% 54.16% 38.00%(e)
</TABLE>
____________
* During the period, certain fees were voluntarily reduced and/or waived. If
such voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) For the period August 25, 1995 (commencement of operations) through
June 30, 1996.
(b) For the period August 8, 1995 (commencement of operations) through
June 30, 1996.
(c) For the period September 5, 1995 (commencement of operations) through
June 30, 1996.
(d) Annualized.
(e) Not Annualized.
4
<PAGE>
THE HIRTLE CALLAGHAN TRUST
Financial Highlights
For a share outstanding throughout each period
<TABLE>
<CAPTION>
International Equity Portfolio
----------------------------------------------------------
Year Year Period
Ended Ended Ended
June 30, June 30, June 30,
1998 1997 1996 (a)
-------------- ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 12.84 $ 11.26 $ 10.00
-------------- ------------ ------------
Income from Investment Operations:
Net investment income 0.16 0.22 0.16
Net realized and unrealized gain on investments, futures
and foreign currency transactions 0.49 1.92 1.35
-------------- ------------ ------------
Total from investment operations 0.65 2.14 1.51
-------------- ------------ ------------
Distributions to Shareholders from:
Net investment income (0.47) (0.22) (0.24)
In excess of net investment income - (0.04) -
Net realized gain on investments, futures and foreign
currency transactions (0.32) (0.30) (0.01)
-------------- ------------ ------------
Total distribution to shareholders (0.79) (0.56) (0.25)
-------------- ------------ ------------
Net Asset Value, End of Period $ 12.70 $ 12.84 $ 11.26
============= =========== ===========
Total Return 5.91% 19.61% 15.15%(d)
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in thousands) $ 229,875 $ 146,122 $ 77,732
Ratio of expenses to average net assets 0.70% 0.78% 0.81%(c)
Ratio of net investment income to average net assets 2.00% 1.97% 1.75%(c)
Ratio of expenses to average net assets* 0.71% 0.78% 0.92%(c)
Portfolio turnover rate 36.80% 29.85% 15.00%(d)
</TABLE>
____________
* During the period, certain fees were voluntarily reduced and/or waived. If
such voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) For the period August 17, 1995 (commencement of operations) through
June 30, 1996.
(b) For the period October 10, 1995 (commencement of operations) through
June 30, 1996.
(c) Annualized.
(d) Not annualized.
THE HIRTLE CALLAGHAN TRUST
Financial Highlights
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Limited Duration
Municipal Bond Portfolio
------------------------------------------------------
Year Year Period
Ended Ended Ended
June 30, June 30, June 30,
1998 1997 1996 (b)
------------- ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.04 $ 10.00 $ 10.00
------------- ------------ ------------
Income from Investment Operations:
Net investment income 0.47 0.48 0.35
Net realized and unrealized gain on investments, futures
and foreign currency transactions 0.07 0.04 0.01
------------- ------------ ------------
Total from investment operations 0.54 0.52 0.36
------------- ------------ ------------
Distributions to Shareholders from:
Net investment income (0.47) (0.48) (0.36)
In excess of net investment income - - -
Net realized gain on investments, futures and foreign
currency transactions - - -
------------- ------------ ------------
Total distribution to shareholders (0.47) (0.48) (0.36)
------------- ------------ ------------
Net Asset Value, End of Period $ 10.11 $ 10.04 $ 10.00
============ =========== ===========
Total Return 5.48% 5.34% 3.60%(d)
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in thousands) $ 46,677 $ 40,963 $ 29,485
Ratio of expenses to average net assets 0.47% 0.52% 0.53%(c)
Ratio of net investment income to average net assets 4.65% 4.78% 4.78%(c)
Ratio of expenses to average net assets* 0.51% 0.68% 0.81%(c)
Portfolio turnover rate 42.50% 44.57% 116.00%(d)
</TABLE>
____________
* During the period, certain fees were voluntarily reduced and/or waived. If
such voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) For the period August 17, 1995 (commencement of operations) through
June 30, 1996.
(b) For the period October 10, 1995 (commencement of operations) through
June 30, 1996.
(c) Annualized.
(d) Not annualized.
5
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Set forth below is a brief description of the investment objective and policies
of each of the Trust's Portfolios, as well as the identity of the Investment
Manager(s) responsible for making day-to-day investment decisions for each
Portfolio. More detailed information about the Investment Managers appears in
this prospectus under the heading "Management of the Trust." Further
information about the types of instruments in which each Portfolio may invest,
and the risks associated with such investments, appears in this prospectus under
the heading "Investment Practices and Risk Considerations" and in the related
Statement of Additional Information. The Statement of Additional Information
also lists those investment restrictions to which the various Portfolios are
subject under the Investment Company Act of 1940 ("Investment Company Act").
Unless otherwise noted, the investment objectives and policies of the respective
Portfolios as set forth below are not fundamental and may be changed or modified
by the Trust's Board without a shareholder vote.
As further described in this prospectus under the heading "Management of the
Trust," investment discretion with respect to the assets of each Portfolio is
vested with one or more Investment Managers retained by the Trust. While the
Trust's Board is ultimately responsible for all matters relating to the Trust,
day-to-day decisions with respect to the purchase and sale of securities in
accordance with a Portfolio's investment objectives and policies are the
responsibility of the Investment Managers retained from time to time by the
Trust on behalf of the respective Portfolios. As is the case with any
investment in securities, an investment in any of the Portfolios involves
certain risks and there can be no assurance that any Portfolio will achieve its
objective.
The Equity Portfolios. Each of the Portfolios described below ("Equity
- ----------------------
Portfolios") seeks to achieve its investment objective by investing primarily in
equity securities. In general, the prices of equity securities fluctuate over
time and, accordingly, an investment in any of the Equity Portfolios may be more
suitable for long-term investors who can bear the risk of short-term principal
fluctuation. Further information about equity related securities appears in
this prospectus under the heading "Investment Practices and Risk Considerations:
About Equity Securities."
The Value Equity Portfolio. The investment objective of this Portfolio is to
- ---------------------------
provide total return consisting of capital appreciation and current income. The
Portfolio seeks to achieve this objective primarily through investment in a
diversified portfolio of equity securities. In selecting securities for the
Portfolio, the Investment Managers will generally emphasize equity securities
with a relatively lower price-earnings ratio but higher dividend income than the
average range for stocks included in the Standard & Poor's 500 Stock Index;
dividends paid by The Value Equity Portfolio can generally be expected to be
higher than those paid by The Growth Equity Portfolio. Up to 15% of the
Portfolio's total assets may be invested in convertible securities; up to 15% of
the Portfolio's total assets may be invested in American Depository Receipts.
Hotchkis and Wiley and Institutional Capital Corporation currently serve as
Investment Managers for The Value Equity Portfolio.
The Growth Equity Portfolio. The investment objective of this Portfolio is to
- ----------------------------
provide capital appreciation, with income as a secondary consideration. The
Portfolio will seek to achieve this objective by investing primarily in a
diversified portfolio of equity securities traded on registered exchanges or in
the over-the-counter market in the U.S. In selecting securities for the
Portfolio, the Investment Managers will generally emphasize equity securities
with long-term earnings growth potential and relatively higher price-earnings
ratios than the average range for stocks included in the Standard & Poor's 500
Stock Index. Although dividend-paying securities will be considered for
inclusion in the Portfolio, dividends paid by The Growth Equity Portfolio can
generally be expected to be lower than those paid by The Value Equity Portfolio.
Up to 10% of the Portfolio's total assets may be invested in convertible
securities. In addition, a maximum of 20% of the Portfolio's total assets may
be invested in securities of non-U.S. issuers. Further information about the
special considerations applicable to international investments appears in this
prospectus under the heading "Investment Practices and Risk Considerations:
About Foreign Securities." Jennison Associates LLC and Goldman Sachs Asset
Management Company, Inc. currently serve as Investment Managers for The Growth
Equity Portfolio.
6
<PAGE>
The Small Capitalization Equity Portfolio. The investment objective of this
- ------------------------------------------
Portfolio is to provide long term capital appreciation by investing primarily in
equity securities of smaller companies. Companies in which the Portfolio may
invest are those which, in the view of one or more of the Portfolio's Investment
Managers, have demonstrated, or have the potential for, strong capital
appreciation potential due to their relative market position, anticipated
earnings, changes in management or other factors. Under normal market
conditions, at least 65% of the Portfolio's total assets will be invested in
equity securities of companies with capitalizations of less than $1.0 billion at
the time of purchase; up to 35% of the Portfolio's total assets may be invested
in the equity securities of companies with larger capitalizations. Geewax,
Terker and Co. and Frontier Capital Management Company currently serve as
Investment Managers for The Small Capitalization Equity Portfolio.
The International Equity Portfolio. The investment objective of this Portfolio
- -------------------------------------
is to maximize total return, consisting of capital appreciation and current
income, by investing primarily in a diversified portfolio of equity securities
of non-U.S. issuers. Under normal market conditions, at least 65% of the
Portfolio's total assets will be invested in equity securities of issuers
located in at least three countries other than the United States. Further
information about the special considerations applicable to international
investments appears in this prospectus under the heading "Investment Practices
and Risk Considerations: About Foreign Securities." Brinson Partners, Inc.
currently serves as Investment Manager for The International Equity Portfolio.
The International Equity Portfolio is designed to invest in the equity
securities of non-U.S. issuers that are believed to be undervalued in relation
to the issuer's assets, cash flow, earnings and revenues based upon the
Investment Manager's research and proprietary valuation systems. Although the
Portfolio may invest anywhere in the world, the Portfolio is expected to invest
primarily in the equity markets included in the Morgan Stanley Capital
International Europe, Australia, Far East Index ("EAFE"). Currently, these
markets are Japan, the United Kingdom, Germany, France, Canada, Italy, the
Netherlands, Australia, Switzerland, Spain, Hong Kong, Belgium, Singapore,
Sweden, Denmark, Norway, New Zealand, Austria, Finland and Ireland. Securities
of non-U.S. issuers purchased by the Portfolio may be purchased on U.S.
registered exchanges, the over-the-counter markets or in the form of sponsored
or unsponsored American Depositary Receipts traded on registered exchanges or
NASDAQ or sponsored or unsponsored European Depositary Receipts.
Securities may also be purchased on recognized foreign exchanges or on over-the-
counter markets overseas. In addition, the Portfolio may enter into forward
foreign currency exchange contracts, buy or sell options, futures or options on
futures relating to foreign currencies and may purchase securities indexed to
currency baskets in order to hedge against fluctuations in the relative value of
the currencies in which securities held by the Portfolio are denominated.
Further information about the Portfolio's use of these instruments appears in
this prospectus under the heading "Investment Practices and Risk Considerations:
About Hedging Strategies." The International Equity Portfolio may also invest
in high-quality short-term debt instruments (including repurchase agreements)
denominated in U.S. or foreign currencies for temporary purposes. Further
information about the Portfolio's temporary investment practices appears in this
prospectus under the heading "Investment Practices and Risk Considerations:
About Temporary Investment Practices."
The Fixed-Income Portfolios. Each of the Portfolios described below ("Fixed
- ----------------------------
Income Portfolios") seeks to achieve its investment objective by investing
primarily in fixed income securities. Morgan Grenfell Capital Management
Incorporated currently serves as Investment Manager for each of these
Portfolios. In selecting fixed income investments, the Investment Manager seeks
to identify fixed income securities and sectors which it believes to be
undervalued relative to the market and alternative sectors rather than
forecasting changes in the interest rate environment. Fixed income securities
may be undervalued for a variety of reasons, such as market inefficiencies
relating to lack of market information about particular securities and sectors,
supply and demand shifts and lack of market penetration by some issuers.
Further information about investing in fixed income securities, including the
impact of maturity policies on investment risk, appears in this prospectus in
the section entitled "Investment Practices and Risk Considerations." Relevant
subheadings include "About Fixed Income Securities" and "About Temporary
Investment Practices." Information relating to the municipal securities in
which The Limited Duration Municipal Bond and the Intermediate Term Municipal
Bond Portfolios ("Municipal Portfolios")
7
<PAGE>
invest appears under the heading "Investment Practices and Risk Considerations:
About Municipal Securities."
The Limited Duration Municipal Bond Portfolio. The investment objective of this
- ----------------------------------------------
Portfolio is to provide a high level of current income exempt from Federal
income tax, consistent with the preservation of capital. The Portfolio seeks to
achieve this objective by investing primarily in a diversified portfolio of debt
securities issued by municipalities and related entities, the interest on which
is exempt from regular Federal income tax). It is a fundamental policy of the
Portfolio that, under normal circumstances, at least 80% of its net assets will
be invested in such securities (collectively, Municipal Securities"). Municipal
Securities may include general obligation bonds and notes, revenue bonds and
notes (including industrial revenue bonds and municipal lease obligations), as
well as participation interests relating to such securities. Although exempt
from regular Federal income tax, interest paid by the securities in which this
Portfolio invests may be tax preference items for purposes of computing Federal
alternative minimum tax. In order to maintain liquidity or in the event that
the Investment Manager determines that securities meeting the Portfolio's
investment objective and policies are not otherwise readily available for
purchase, the Portfolio is authorized to invest up to 20% of its total assets in
taxable instruments.
It is anticipated that the average credit quality of all Municipal Securities
purchased for the Portfolio will be comparable to securities rated "Aa" by
Moody's Investors Service ("Moody's"), or "AA" by Standard & Poor's Corporation
("S&P"), respectively (or, in the case of municipal notes and commercial paper,
corresponding ratings assigned to such instruments). The Portfolio is also,
however, authorized to invest in Municipal Securities that, at the time of
investment, are rated at least investment grade (e.g. "Baa" or better by
Moody's, "BBB" by S&P or, if unrated, are determined by the Portfolio's
Investment Manager to be of comparable quality to securities that have received
such ratings). Securities rated "Baa" or "BBB" may be said to have speculative
characteristics in that changes in economic conditions or other circumstances
may be more likely to weaken the issuer's capacity to make principal and
interest payments than is the case with respect to securities that have received
higher ratings. The municipal notes in which the Portfolio may invest will be
limited to those obligations which are rated, at the time of purchase, at least
MIG-1 or VMIG-1 by Moody's or SP-1 by S&P or, if unrated, are determined by the
Investment Manager to be of comparable quality to securities that have received
such ratings. Tax-exempt commercial paper must be rated at least A-1 by S&P or
Prime-1 by Moody's at the time of investment or, if not rated, determined by the
Portfolio's Investment Manager to be of comparable quality to issues that have
received such ratings. Taxable investments, if any, will be limited to those
rated "Aa" or "AA" by Moody's or S&P, respectively (or, in the case of
securities not rated by these services or unrated, of comparable quality).
Municipal Securities purchased for the Portfolio will have varying maturities,
but under normal circumstances the Portfolio will have an overall duration of
less than 4 years. Duration is a concept that incorporates a bond's yield,
coupon interest payments, final maturity and call features into one measure that
is used by investment professionals as a more precise alternative to the concept
of term-to-maturity. As a point of reference, the maturity of a current coupon
bond with a 3 year duration is approximately 3.5 years and the maturity of a
current coupon bond with a 6 year duration is approximately 9 years. Changes in
interest rates can adversely affect the value of an investment in the Portfolio.
As an example, a one percent increase in interest rates could result in a four
percent decrease in the value of a portfolio with a duration of four years.
When interest rates are falling, a fixed income portfolio with a shorter
duration generally will not generate as high a level of total return as one with
a longer duration. When interest rates are flat, shorter duration portfolios
generally will not generate as high a level of total return as longer duration
portfolios. Because of its shorter portfolio maturity, The Limited Duration
Municipal Bond Portfolio can be expected to be less volatile in response to
changes in interest rates than The Intermediate Term Municipal Bond Portfolio.
Its yield, however, can also be expected to be lower than its longer term
counterpart.
The Intermediate Term Municipal Bond Portfolio. The investment objective of The
- -----------------------------------------------
Intermediate Term Municipal Bond Portfolio is to provide a high level of current
income exempt from Federal income tax consistent with the preservation of
capital. The Portfolio seeks to achieve its objective by investing primarily in
a diversified portfolio of Municipal Securities with characteristics
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similar to those in which The Limited Duration Municipal Bond Portfolio invests,
except that the Intermediate Term Municipal Bond Portfolio expects to maintain a
dollar weighted effective average remaining portfolio maturity of 5 to 10 years.
It is a fundamental policy of the Portfolio that, under normal circumstances, at
least 80% of its net assets will be invested in Municipal Securities. Although
exempt from regular Federal income tax, interest paid by the securities in which
this Portfolio invests may be tax preference items for purposes of computing
Federal alternative minimum tax. The Portfolio is, however, authorized to invest
up to 20% of its total assets in taxable instruments to maintain liquidity or in
the event that the Investment Manager determines that securities meeting the
Portfolio's investment objective and policies are not otherwise readily
available for purchase. Because of its longer portfolio maturity, The
Intermediate Term Municipal Bond Portfolio can be expected to be more volatile
in response to changes in interest rates than The Limited Duration Municipal
Bond Portfolio. Its yield, however, can also be expected to be higher than its
shorter-term counterpart.
The Fixed Income Portfolio. The investment objective of the Fixed Income
- ---------------------------
Portfolio is to seek a high level of income consistent with the preservation of
capital. The Fixed Income Portfolio expects to maintain a dollar weighted
effective average remaining portfolio maturity of 5 to 10 years, but may
purchase securities with any stated remaining maturity. The Fixed Income
Portfolio will normally invest at least 80% of its net assets in fixed income
securities of all types, including U.S. Government securities; custodial
receipts evidencing interests in such securities; corporate bonds and
debentures; mortgage-backed securities and asset-backed securities; U.S. dollar
denominated securities of foreign governments, their political subdivisions,
agencies or instrumentalities, as U.S. dollar denominated obligations of supra-
national entities; securities issued by states or municipalities
(includingprivate activity bonds); equipment lease and trust certificates; and
repurchase agreements involving any of the foregoing. Certain of these
securities may have floating or variable rates of interest or include put
features that afford their holders the right to sell the security at face value
prior to maturity. Investments in U.S. dollar denominated securities of non-
U.S. issuers will not exceed 25% of its total assets. Under normal conditions
the Fixed Income Portfolio may hold up to 20% of its total assets in cash or
money market instruments in order to maintain liquidity, or in the event that
the Investment Manager determines that securities meeting the Portfolio's
investment objective and policies are not otherwise readily available for
purchase.
The Fixed Income Portfolio invests primarily in fixed income securities that, at
the time of purchase, are either rated in one of three highest rating categories
assigned by Moody's, S&P or other ratings organizations, or unrated securities
determined by the Investment Manager to be of comparable quality. However, the
Portfolio may also invest up to 15% of its assets in fixed income securities
that are, at the time of purchase, either rated within the fourth highest rating
category assigned by Moody's or S&P, or, if unrated by these, determined by the
Investment Manager to be of comparable quality. See "About Fixed Income
Securities." In the event any security held by the Fixed Income Portfolio is
downgraded below the rating categories set forth above, the Investment Manager
will review the security and determine whether to retain or dispose of that
security. Fixed income securities rated in one of the four highest ratings
categories and unrated securities determined by the Investment Manager to be of
comparable quality are referred to in this prospectus as "investment grade fixed
income securities." Fixed income securities in the lowest investment grade
category are considered medium grade securities. Such securities have
speculative characteristics, involve greater risk of loss than higher quality
securities and are more sensitive to changes in the issuer's capacity to pay.
INVESTMENT PRACTICES AND RISK CONSIDERATIONS
Although each of the Trust's Portfolios have different investment objectives and
policies, certain investment practices may be used by one or more of the
Portfolios. A general description of each such practice is set forth below,
together with the Portfolios to which each practice is available.
About Equity Securities. Each of the Equity Portfolios invests primarily in
- ------------------------
equity securities. For purposes of the investment policies of these Portfolios,
the term "equity securities" includes total common and preferred stock and
rights and warrants to purchase other equity securities. A maximum of 15% of
the assets of The Value Equity Portfolio and up to 10% of the total assets of
The Growth Equity Portfolio may
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be invested in convertible issues. The market value of convertible securities
tends to move together with the market value of the underlying stock. Both The
International Equity Portfolio and The Small Capitalization Equity Portfolio are
also authorized to invest up to 5% of their respective total assets in similar
convertible issues, although these Portfolios have no present intention of doing
so. In general, investments in equity securities and convertible issues are
subject to market risks that may cause their prices to fluctuate over time.
Additionally, the value of securities, such as warrants and convertible issues,
is also affected by prevailing interest rates, the credit quality of the issuer
and any call provisions. Convertible issues purchased for any Portfolio will be
limited to those issues that are either rated (or, unrated securities that, in
the judgment of the relevant Investment Manager, are comparable in quality to
securities rated) investment grade or better by Moody's or S&P or other ratings
organization. Please refer to "About Fixed Income Securities" in this section of
the prospectus for further information about such organizations and their
ratings. Fluctuations in the value of equity securities in which a Portfolio
invests will cause the net asset value of that Portfolio to fluctuate.
The Small Capitalization Equity Portfolio invests primarily in equity securities
issued by smaller companies, generally with capitalizations of less than $1.0
billion. Equity securities of smaller companies involve greater risk than is
customarily associated with investments in larger, more established companies.
This increased risk may be due to the fact that such companies often have
limited markets and financial resources, narrow product lines and lack of depth
in management. The securities of smaller companies are often traded in the
over-the-counter markets and, if listed on national or regional exchanges, may
not be traded in volumes typical for such exchanges. Thus, the securities of
smaller companies are likely to be less liquid and subject to more abrupt or
erratic price movements than larger, more established companies. Further
information about securities that may be illiquid appears below under the
heading "About Illiquid Securities."
Real Estate Investment Trusts. Each of the Equity Portfolios may invest up to
- -----------------------------
10% of its assets in equity interests issued by real estate investment trusts
("REITs"). REITs are pooled investment vehicles that invest the majority of
their assets in real property. Investment in REITs involve risks similar to
those described in this prospectus under the heading "Investment Practices and
Risk Considerations: About Equity Securities," associated with investment in
small capitalization companies. In addition, a Portfolio that invests in a REIT
will bear its proportionate share of the operating expenses of that REIT. These
expenses include fees payable by the REIT to its manager and other
administrative expenses. A REIT may concentrate all or substantially all of its
assets in real property, and the value of a Portfolio's investment in a REIT
will be affected by the value of the real property interests held by it. In
addition, REITs are dependent upon the skill with which its manager selects the
REITs investments, as well as the manager's ability to manage the real estate
held by the REIT. Further information about REITs appears in the Statement of
Additional Information.
About Foreign Securities. The International Equity Portfolio invests primarily
- -------------------------
in equity securities of non-U.S. issuers, which securities may be traded in the
U.S. or abroad and which may be denominated in foreign currencies. The
Portfolio may also invest in short-term debt instruments denominated in foreign
currencies under unusual market conditions. The Growth Equity Portfolio may
also invest in non-U.S. equity issues. The Fixed-Income Portfolio may invest
up to 25% of its assets in debt securities of non-U.S. issuers, which
securities may be denominated in U.S. or foreign currencies. Equity securities
of overseas issuers are subject to the same risks, described above, applicable
to equity securities in general. In addition, both debt and equity securities
of foreign issuers may involve risks which are not ordinarily associated with
investing in domestic securities. Such factors include the unavailability of
financial information or the difficulty of interpreting financial information
prepared under foreign accounting standards; less liquidity and more volatility
in foreign securities markets; the possibility of expropriation or the
imposition of foreign withholding and other taxes; the impact of foreign
political, social or diplomatic developments; limitations on the movement of
funds or other assets between different countries; difficulties in invoking
legal process abroad and enforcing contractual obligations; and the difficulty
of assessing economic trends in foreign countries. In addition, changes in
foreign exchange rates will affect the value of securities denominated or quoted
in foreign currencies relative to the U.S. dollar. Exchange rate movements can
be large and can endure for extended periods of time. Such movements will
affect the value of securities held in the Portfolio and may increase or
decrease the Portfolio's net asset value per share. Securities transactions
effected in markets overseas are generally subject to higher commissions than
may be available on U.S. exchanges. Custody arrangements for the Portfolio's
foreign securities will be more costly than those associated with domestic
securities of equal value. Certain foreign governments levy withholding taxes
against dividend and interest income. Although in some countries a portion of
these taxes is recoverable, the nonrecovered portion of foreign withholding
taxes will reduce the Portfolio's income.
The Value Equity, Growth Equity and International Equity Portfolios may invest
in American Depositary Receipts ("ADRs"). ADRs are dollar-denominated receipts,
generally issued in registered form by domestic banks, that represent the
deposit with the bank of a security of a foreign issuer. ADRs, which are
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publicly traded on U.S. exchanges and in the over-the-counter markets, may be
sponsored by the foreign issuer of the underlying security or may be
unsponsored. The International Equity Portfolio and The Growth Equity Portfolio
are also permitted to invest in European Depositary Receipts ("EDRs"). EDRs are
similar to ADRs but are issued and traded in Europe. EDRs are generally issued
in bearer form and denominated in foreign currencies and, for this reason, are
subject to the currency risks described above. For purposes of the Trust's
investment policies, ADRs and EDRs are deemed to have the same classification as
the underlying securities they represent. Thus, an ADR or EDR representing
ownership of common stock will be treated as common stock. ADR or EDR programs
may be sponsored or unsponsored. Unsponsored programs are subject to certain
risks. In contrast to sponsored programs, where the foreign issuer of the
underlying security works with the depository institution to ensure a
centralized source of information about the underlying company, including any
annual or other similar reports to shareholders, dividends and other corporate
actions, unsponsored programs are based on a service agreement between the
depository institution and holders of ADRs or EDRs issued by the program; thus
investors bear expenses associated with certificate transfer, custody and
dividend payments. In addition, there may be several depository institutions
involved in issuing unsponsored ADRs or EDRs for the same underlying issuer.
Such duplication may lead to market confusion because there would be no central
source of information for buyers, sellers and intermediaries, and delays in the
payment of dividends and information about the underlying issuer or its
securities could result.
The expected introduction of a single currency, the Euro, on January 1, 1999 for
participating nations ("Member States") in the European Economic and Monetary
Union presents unique uncertainties, including whether the payment and
operational systems of banks and other financial institutions will be ready by
the scheduled launch date; the legal treatment of certain outstanding financial
contracts after January 1, 1999 that refer to existing currencies rather than
the Euro; the establishment of exchange rates for existing currencies and the
Euro; and the creation of suitable clearing and settlement payment systems for
the new currency. These or other factors, including political and economic
risks, could cause market disruptions before or after the introduction of the
Euro, and could adversely affect the value of securities held by the Fund. The
Euro transition period extends until July 1, 2002, when the Euro will be the
sole legal tender in participating Member States. In January 1999, the Euro
will become the settlement and income currency for securiites in Europe;
European stock exchanges will quote and trade listed equity securities in Euro.
Issuers have until July 1, 2002 to redenominate corporate stocks and bonds from
national currencies to the Euro. Until January 2002, the Euro will only exist
as book entries in financial and bank accounts. The lack of policies and laws
or regulations in the participating Member States make it difficult to determine
all processing and systems changes that will be requires as a result of the
conversion to the Euro.
About Fixed Income Securities. Each of the Fixed Income Portfolios invests
- ------------------------------
primarily in fixed income securities (sometimes referred to as "debt
securities") and the performance of these Portfolios is subject to certain risks
associated with investments in such securities.
Interest rate risk is the risk that the value of an investment will fluctuate in
response to changes in interest rates. Generally, the value of debt securities
will tend to decrease when interest rates rise and increase when interest rates
fall, with shorter term securities generally less sensitive to interest rate
changes than longer term securities. In periods of declining interest rates,
the yield of a Portfolio that invests in fixed income securities will tend to be
higher than prevailing market rates, and in periods of rising interest rates,
the yield of the Portfolio will tend to be lower. Also, when interest rates are
falling, the inflow of net new money to such a Portfolio will likely be invested
in portfolio instruments producing lower yields than the balance of the
Portfolio. In periods of rising interest rates, the opposite can be true. The
net asset value of a Portfolio investing in fixed income securities can
generally be expected to change as general levels of interest rates fluctuate.
The value of fixed income securities held by a Portfolio generally varies
inversely with changes in interest rates. The market value of fixed income
securities with longer effective maturities are more sensitive to interest rate
changes than those with shorter effective maturities.
Credit risk is the risk that an issuer (or in the case of certain securities,
the guarantor or counterparty) will be unable to make principal and interest
payments when due. The creditworthiness of an issuer may be affected by a
number of factors including the financial condition of the issuer (or guarantor)
and, in the case
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of foreign issuers, the financial condition of the region. Debt securities
(including convertible issues) may be rated by one or more nationally recognized
rating organization, such as S&P and Moody's (each an "NRSRO"). NRSRO ratings
represent the judgment of the relevant NRSRO with regard to the safety of
principal and interest payments. These ratings are not, however, a guarantee of
quality and may be subject to change even after the Trust has acquired the
security. Also, an NRSRO may fail to make timely changes in credit ratings in
response to subsequent events, so that an issuer's current financial condition
may be better or worse than the rating indicates. If a security's rating is
reduced while it is held by the Trust, the appropriate Investment Manager will
consider whether the Trust should continue to hold the security but is not
required to dispose of it. A summary of the ratings categories of Moody's and
S&P appears in the Appendix to the Statement of Additional Information.
The creditworthiness of the issuers of fixed income securities is monitored by
the Investment Manager of the Fixed Income Portfolios with reference to ratings,
if any, assigned to individual fixed income issues by NRSROs, as well as other
factors deemed relevant to the Investment Manager. The Fixed Income Portfolios
may purchase debt securities that have not been assigned ratings by an NRSRO but
are determined by the relevant Investment Manager to be of a quality comparable
to rated securities that the Portfolio is permitted to purchase.
"When-issued Securities." Fixed-income securities may be purchased on a "when-
- -------------------------
issued" basis. When securities are purchased on a when-issued or delayed
delivery basis, the Portfolio must maintain, in a segregated account until the
settlement date, cash, U.S. Government securities or high-grade, liquid
obligations in an amount sufficient to meet the purchase price (or enter into
offsetting contracts for the forward sale of other securities it owns). The
purchase of securities on a when-issued or delayed delivery basis involves a
risk of loss if the value of the security to be purchased declines prior to the
settlement date. Although purchases of securities on a when-issued or delayed
delivery basis are expected to be made only with the intention of acquiring
those securities for the investment portfolio of the purchasing Portfolio, when-
issued or delayed delivery securities may be sold prior to settlement if the
purchasing Portfolio's Investment Manager deems it appropriate to do so. The
market value of when-issued securities may increase or decrease prior to
settlement as a result of changes in interest rates or other factors and short-
term gains or losses may be realized on any sales of such when-issued
securities.
About Taxable Fixed Income Securities. Those instruments in which the Fixed
- --------------------------------------
Income Portfolio may invest include those described below. Further information
is available in the Statement of Additional Information relating to the Trust.
U.S. Government Securities. U.S. Government securities are obligations issued
- ---------------------------
or guaranteed as to both principal and interest by the U.S. Government, its
agencies, instrumentalities or sponsored enterprises ("U.S. Government
securities"). Some U.S. Government securities, such as U.S. Treasury bills,
notes and bonds, are supported by the full faith and credit of the United
States. Others, such as obligations issued or guaranteed by U.S. Government
agencies or instrumentalities are supported either by (i) the full faith and
credit of the U.S. Government (such as securities of the GNMA), (ii) the right
of the issuer to borrow from the U.S. Treasury (such as securities of the
Federal Home Loan Banks), (iii) the discretionary authority of the U.S.
Government to purchase the agency's obligations (such as securities of the
Federal National Mortgage Association), or (iv) only the credit of the issuer.
Separately traded principal and interest components of securities guaranteed or
issued by the U.S. Government or its agencies, instrumentalities or sponsored
enterprises may also be acquired if such components are traded independently
under the Separate Trading of Registered Interest and Principal of Securities
program ("STRIPS") or any similar program sponsored by the U.S. Government.
STRIPS are sold as zero coupon securities. See "Zero Coupon Securities."
Custodial Receipts. Custodial Receipts are interests in separately traded
- -------------------
interest and principal component parts of U.S. Government securities that are
issued by banks or brokerage firms and are created by depositing U.S. Government
securities into a special account at a custodian bank. The custodian holds the
interest and principal payments for the benefit of the registered owners of the
certificates or receipts. The custodian arranges for the issuance of the
certificates or receipts evidencing ownership and maintains the register.
Custodial receipts include Treasury Receipts ("TRs"), Treasury Investment Growth
Receipts
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("TIGRs"), and Certificates of Accrual on Treasury Securities ("CATS"). TIGRs
and CATS are interests in private proprietary accounts while TRs and STRIPS (see
"U.S. Government Securities" above) are interests in accounts sponsored by the
U.S. Treasury. Receipts are sold as zero coupon securities; for more
information, see "Zero Coupon Securities."
Zero Coupon Securities. STRIPS and custodial receipts (TRs, TIGRs and CATS) are
- -----------------------
sold as zero coupon securities, that is, fixed income securities that have been
stripped of their unmatured interest coupons. Zero Coupon Securities are sold
at a (usually substantial) discount and redeemed at face value at their maturity
date without interim cash payments of interest or principal. The amount of this
discount is accreted over the life of the security, and the accretion
constitutes the income earned on the security for both accounting and tax
purposes. Because a Portfolio must distribute the accreted amounts in order to
qualify for favorable tax treatment, it may have to sell portfolio securities to
generate cash to satisfy the applicable distribution requirements. As a result
of these features, the market prices of zero coupon securities are generally
more volatile than the market prices of securities that have similar maturity
but that pay interest periodically. Zero coupon securities are likely to
respond to a greater degree to interest rate changes than are non-zero coupon
securities with similar maturity and credit qualities.
Mortgage-Backed and Asset-Backed Securities. Mortgage-backed securities
- --------------------------------------------
represent direct or indirect participation in, or are collateralized by and
payable from, mortgage loans secured by real property. Mortgage-backed
securities in which The Fixed Income Portfolio may invest include those issued
or guaranteed by U.S. Government agencies or instrumentalities such as the
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
The Portfolio may also invest in mortgage-backed securities issued by non-
governmental entities, including collateralized mortgage obligations ("CMOs")
and real estate mortgage investment conduits ("REMICS").
Asset-backed securities represent participation in, or are secured by and
payable from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements and other categories or
receivables. Such securities are generally issued by trusts and special purpose
corporations. Asset-backed securities present certain risks that are not
presented by mortgage-backed securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to mortgage assets. In addition, there is the possibility that, in
some cases, recoveries on repossessed collateral may not be available to support
payments on these securities. Many mortgage and asset-backed securities may be
considered derivative instruments.
Mortgage-backed and asset-backed securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. Accordingly,
the market values of such securities will vary with changes in market interest
rates generally and in yield differentials among various kinds of U.S.
Government securities and other mortgage-backed and asset-backed securities.
For example, during periods of declining interest rates, prepayment of loans
underlying mortgage-backed and asset-backed securities can be expected to
accelerate, and thus impair a Portfolio's ability to reinvest the returns of
principal at comparable yields. In periods of rising interest rates, however,
the rate at which the underlying mortgages are pre-paid is likely to be reduced.
As a result, the effective maturity and volatility of the mortgaged-backed
security involved would increase, as would the value of the security itself.
Under unusual circumstances, the ability of a Portfolio to dispose of such
mortgage or asset-backed issues could be impaired.
Mortgage Dollar Rolls. The Fixed Income Portfolio may enter into mortgage
- ----------------------
"dollar roll" Transactions. These transactions involve the sale of securities
by the Portfolio for delivery in the current month and a simultaneous contract
to repurchase substantially similar (same type, coupon and maturity) securities
on a specified future date. During the roll period, the Portfolio forgoes
principal and interest paid on the securities. The Portfolio is compensated,
however, by the difference between the current sales price and the lower forward
price for the future purchase (often referred to as the "drop") or fee income
and 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 a cash equivalent security position that matures on or before the
forward settlement date of the dollar roll transaction. The Portfolio may enter
into both covered and
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uncovered rolls.
Municipal Securities. The Fixed Income Portfolio may, consistent with its
- ---------------------
investment policies, invest in any of the securities described below under the
heading "Municipal Securities." Unlike the Municipal Portfolios, however, The
Fixed Income Portfolio may acquire such securities without regard to whether the
interest paid on any such security is exempt from regular Federal income tax.
Foreign Government Securities. The foreign government securities in which The
- ------------------------------
Fixed Income Portfolio may invest generally consist of debt obligations issued
or guaranteed by national, state or provincial governments or similar political
subdivisions. Foreign government securities also include debt obligations of
supranational or quasi-governmental entities. Quasi-governmental and
supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (often referred to as the "World Bank"), the Japanese Development
Bank, the Asian Development Bank and the InterAmerican Development Bank.
Foreign government securities also include mortgage-related securities issued or
guaranteed by national, state or provincial governmental instrumentalities,
including quasi-governmental agencies. Investment in debt obligations of a
government, its agencies or instrumentalities involve the risks associated with
any investment in debt securities as well as the risks associated with an
investment in foreign securities, as described above. In addition, investments
in foreign government securities involve the risk that the governmental entity
may not be willing or able to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's ability or
willingness to repay principal and interest due in a timely manner may be
affected by, among other factors, its cash flow situation, the availability of
sufficient foreign exchange on the date a payment is due, the extent of its
foreign reserves, the relative size of the debt service burden to the economy as
a whole and the political constraints to which a governmental entity may be
subject.
About Municipal Securities. Each of the Municipal Portfolios intends to invest
- ---------------------------
substantially all of its assets in Municipal Securities, including municipal
bonds, notes and related instruments. As previously noted, interest paid by the
Municipal Securities in which the Municipal Portfolios primarily invest are
exempt from regular Federal income tax but may be tax preference items for
purposes of computing Federal alternative minimum tax. In determining whether
to invest in a particular Tax Exempt Security, the Portfolio's Investment
Manager will rely on the opinion of bond counsel for the issuer as to the
validity of the security and the exemption of interest on such security from
Federal and relevant state income taxes, and will not make an independent
investigation of the basis for any such opinion. Municipal bonds are debt
obligations which are typically issued with maturities of five years or more,
issued by local, state and regional governments or other governmental
authorities. Municipal bonds may be issued for a wide range of purposes,
including construction of public facilities, funding operating expenses, funding
of loans to public institutions; or refunding outstanding municipal debt.
Municipal bonds may be "general obligations" of their issuers, the repayment of
which is secured by the issuer's pledge of full faith, credit and taxing power.
"Revenue" or "special tax" bonds, such as municipal lease obligations and
industrial revenue bonds are obligations that are payable from revenues derived
from a particular facility or a special excise or other tax. Trusts for
repayment of revenue bonds are generally limited to revenues from the underlying
project or facility. As a consequence, the credit quality of such obligations
is ordinarily dependent on the credit quality of the private user or operator of
the project or facility rather than the governmental issuer of the obligation.
Municipal lease obligations likewise may not be backed by the issuing
municipality's credit and may involve risks not normally associated with
investments in Municipal Securities. For example, interest on municipal lease
obligations may become taxable if the lease is assigned. The Portfolio may also
incur losses if the municipal issuer does not appropriate funds for lease
payments on an annual basis, which may result in termination of the lease and
possible default. Municipal leases may also be illiquid. Further information
about securities that may be illiquid is included in this section under the
heading "About Illiquid Securities."
The Municipal Portfolios may also invest in Municipal Securities, the proceeds
of which are directed, at least in part, to private, for-profit organizations.
Although the interest from such bonds is
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exempt from regular Federal income tax, the interest may be treated as a tax
preference item for purposes of the alternative minimum tax if the bond was
issued after August 7, 1986; such bonds are often referred to as "AMT Bonds."
The alternative minimum tax is a special separate tax that applies to a limited
number of taxpayers who have certain adjustments to income or tax preference
items. Municipal notes are obligations issued by local, state and regional
governments to meet their short-term funding requirements. Municipal notes may
be short-term debt obligations which are issued pending receipt of taxes or
other revenues, and retired upon receipt of such revenues. Such securities
include bond anticipation notes, revenue anticipation notes and tax and revenue
anticipation notes. Other types of municipal notes in which the Portfolio may
invest are issued to fund municipal operations on a temporary or revolving basis
and may include construction loan notes, short-term discount notes, tax-exempt
commercial paper, demand notes and similar instruments.
Long term fixed rate municipal bonds that have been coupled with puts granted by
a third party financial institution may also be purchased for the Municipal
Portfolios. Such instruments, which may be represented by custodial receipts or
trust certificates, are designed to enhance the liquidity and shorten the
duration of the underlying bond. Under certain circumstances, however, such as
the downgrading of the underlying bond or a change in its tax-exempt status, the
associated put will terminate automatically and, as a result, the weighted
average maturity of the Portfolios may increase.
A "participation interest" is a floating or variable rate security issued by a
financial institution. These instruments represent interests in municipal bonds
or other municipal obligations held by the issuing financial institution.
Participation interests are generally backed by an irrevocable letter of credit
or guarantee by a bank (which may or may not be the issuing financial
institution). The letter of credit feature is usually designed to enhance the
credit quality of the underlying municipal obligations. In addition,
participation interests generally carry a demand feature. These demand features
permit the Portfolios to tender the participation interest back to the issuing
financial institution and are usually designed to provide liquidity for the
Portfolio in the event of a downgrade in the credit quality of the instrument or
default in the underlying municipal obligation. The Portfolio may acquire
stand-by commitments, also known as "liquidity puts" solely for the purpose of
facilitating portfolio liquidity. These instruments give the Portfolio the
right to sell specified securities back to the seller, at the option of the
Portfolio, at a specified price. It is expected that such stand-by commitments
will be available without the payment of any direct or indirect consideration.
However, if advisable in the judgment of the Investment Manager of the
Portfolios, the Portfolios may pay for such commitments at the time the
underlying security is acquired.
About Temporary Investment Practices. It is the intention of the Trust that
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each of the Portfolios be fully invested in accordance with its respective
investment objectives and policies at all times. To maintain liquidity pending
investment, however, the Portfolios are authorized to invest up to 20% of their
respective assets in short-term money market instruments issued, sponsored or
guaranteed by the U.S. Government, its agencies or instrumentalities. Such
securities are referred to in this prospectus as U.S. Government Securities and
are described above under the heading "About Taxable Fixed-Income Securities:
U.S. Government Securities." The Portfolios may also invest repurchase
agreements secured by U.S Government Securities or repurchase agreements secured
by such securities, or short-term money market instruments of other issuers,
including corporate commercial paper, and variable and floating rate debt
instruments, that have received, or are comparable in quality to securities that
have received, one of the two highest ratings assigned by at least one NRSRO.
The International Equity Portfolio is also permitted to invest in U.S.
Government Securities or the short-term money market instruments of other
issuers noted above; in the case of the International Portfolio, such
investments may be denominated in U.S. dollars or other currencies to maintain
liquidity pending investment. Investments in short-term instruments denominated
in foreign currencies are subject to the same risk considerations as described
above under the heading "About Foreign Securities." All such investments will
be subject to the same quality standards as those applicable to short-term
investments made on behalf of the Trust's domestic portfolios.
Under extraordinary market or economic conditions, all or any portion of a
Portfolio's assets may be invested in short-term money market instruments for
temporary defensive purposes. Further information about those instruments that
each of the Portfolios may use for temporary investment purposes appears in
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the Statement of Additional Information, under the heading "Further
Information on Investment Policies."
About Illiquid Securities. A Portfolio may not purchase illiquid securities if,
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at the time of such purchase, more than 15% of the value of the Portfolio's net
assets will be invested in illiquid securities. Illiquid securities are those
that cannot be disposed of promptly within seven days and in the usual course of
business at the prices at which they are valued. Such securities include, but
are not limited to, time deposits and repurchase agreements with maturities
longer than seven days. Variable rate demand notes with demand periods in
excess of seven days, securities issued with restrictions on their disposition
("restricted issues") and municipal lease obligations, which may be unrated,
will be deemed illiquid unless a Portfolio's Investment Manager determines that
such securities are readily marketable and could be disposed of within seven
days promptly at the prices at which they are valued. In the case of municipal
lease obligations, this determination will be made by the Portfolio's Investment
Manager in accordance with guidelines established by the Trust's Board. The
liquidity of restricted issues and, in particular, the availability of an
adequate dealer or institutional trading market for those restricted issues
("Rule 144A Securities") that are not registered for sale to the general public
but can be resold to institutional investors, will be determined by each
Portfolio's Investment Manager in accordance with guidelines established by the
Trust's Board. The institutional market for Rule 144A Securities is relatively
new and liquidity of the investments in such securities could be impaired if
trading does not further develop or declines. Factors relevant to the liquidity
of a particular instrument include the frequency of trades and availability of
dealer quotes, the number of dealers and market makers active in the issue and
the nature of marketplace trades (e.g. mechanics of transfer and solicitation of
offers).
About Hedging Strategies. Each of the Portfolios may engage in certain
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strategies ("Hedging Strategies") designed to reduce certain risks that would
otherwise be associated with their respective securities investments, and/or in
anticipation of futures purchases and to gain market exposure pending direct
investment in securities. These strategies include the use of options on
securities and securities indices, options on stock index and interest rate
futures contracts and options on such futures contracts. The Growth Equity,
International Equity and Fixed Income Portfolios may also use forward foreign
currency contracts in connection with the purchase and sale of securities
denominated in foreign currencies. In addition, The International Equity
Portfolio and The Fixed Income Portfolio may use foreign currency options and
foreign currency futures to hedge against fluctuations in the relative value of
the currencies in which securities held by these Portfolios are denominated. A
Portfolio may invest in the instruments noted above (collectively, "Hedging
Instruments") only in a manner consistent with its investment objective and
policies. A Portfolio may not invest more than 10% of its total assets in
option purchases and may not commit more than 5% of its net assets to margin
deposits on futures contracts and premiums for options on futures contracts.
The Portfolios may not use Hedging Instruments for speculative purposes.
Further information relating to the use of Hedging Instruments, and the
limitations on their use, appears in the Statement of Additional Information.
There are certain overall considerations to be aware of in connection with the
use of Hedging Instruments in any of the Portfolios. The ability to predict the
direction of the securities or currency markets and interest rates involves
skills different from those used in selecting securities. Although the use of
various Hedging Instruments is intended to enable each of the Portfolios to
hedge against certain investment risks, there can be no guarantee that this
objective will be achieved. For example, in the event that an anticipated
change in the price of the securities (or currencies) that are the subject of
the strategy does not occur, it may be that the Portfolio employing the Hedging
Strategy would have been in a better position had it not used such a strategy at
all. Moreover, even if the Investment Manager correctly predicts interest rate
or market price movements, a hedge could be unsuccessful if changes in the value
of the option or futures position do not correspond to changes in the value of
investments that the position was designed to hedge. Liquid markets do not
always exist for certain Hedging Instruments and lack of a liquid market for any
reason may prevent a Portfolio from liquidating an unfavorable position. In the
case of an option, the option could expire before it can be sold, with the
resulting loss of the premium paid by a Portfolio for the option. In the case
of a futures contract, a Portfolio would remain obligated to meet margin
requirements until the position is closed. In addition, options that are traded
over-the-counter differ from exchange traded options in that they are two-party
contracts with price and other terms negotiated between the parties. For this
reason, the liquidity of these instruments may depend on the willingness of the
counter party to enter into a closing transaction. In the case of currency
related instruments, such as foreign currency options, options
16
<PAGE>
on foreign currency futures, and forward foreign currency contracts, it is
generally not possible to structure transactions to match the precise value of
the securities involved since the future value of the securities will change
during the period that the arrangement is outstanding. As a result, such
transactions may preclude or reduce the opportunity for gain if the value of the
hedged currency changes relative to the U.S. dollar. Like over-the-counter
options, such instruments are essentially contracts between the parties and the
liquidity of these instruments may depend on the willingness of the counter
party to enter into a closing transaction.
About Other Permitted Instruments. Each of the Portfolios may borrow money from
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a bank for temporary emergency purposes, and may enter into reverse repurchase
agreements. A reverse repurchase agreement, which is considered a borrowing for
purposes of the Investment Company Act, involves the sale of a security by the
Trust and its agreement to repurchase the instrument at a specified time and
price.Under the Investment Company Act, the Trust is required to maintain a
segregated account consisting of cash, U.S. Government securities or high-grade,
liquid obligations, maturing not later than the expiration of the reverse
repurchase agreement, to cover its obligations under reverse repurchase
agreements. To avoid potential leveraging effects of a Portfolio's borrowings,
additional investments will not be made while aggregate borrowings, including
reverse repurchase agreements, are in excess of 5% of a Portfolio's total
assets. Borrowings outstanding at any time will be limited to no more than one-
third of a Portfolio's total assets. Each of the Portfolios may lend portfolio
securities to brokers, dealers and financial institutions provided that cash, or
equivalent collateral, equal to at least 100% of the market value (plus accrued
interest) of the securities loaned is maintained by the borrower with the
lending Portfolio. During the time securities are on loan, the borrower will
pay to the Portfolio any income that may accrue on the securities. The
Portfolio may invest the cash collateral and earn additional income or may
receive an agreed upon fee from the borrower who has delivered equivalent
collateral. No Portfolio will enter into any securities lending transaction if,
at the time the loan is made, the value of all loaned securities, together with
any other borrowings, equals more than one-third of the value of that
Portfolio's total assets.
As permitted under the Investment Company Act, a Portfolio may invest up to 5%
of its net assets in securities of other investment companies but may not
acquire more than 3% of the voting securities of the investment company.
Generally, the Portfolios do not make such investments. The Growth Equity
Portfolio does, however, invest in certain instruments known as Standard &
Poor's Depositary Receipts or "SPDRs" as part of its overall hedging strategies.
Such strategies are designed to reduce certain risks that would otherwise be
associated with the investments in the types of securities in which the
Portfolio invests and/or in anticipation of future purchases, including to
achieve market exposure pending direct investment in securities, provided that
the use of such strategies are not for speculative purposes and are otherwise
consistent with the investment policies and restrictions adopted by the
Portfolio. SPDRs, which are listed on the American Stock Exchange, are
interests in a unit investment trust ("UIT") that may be obtained from the UIT
or purchased in the secondary market. Further information about these and other
derivative instruments is contained in the Statement of Additional Information.
MANAGEMENT OF THE TRUST
The Board of Trustees. The Trust's Board is responsible for the overall
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supervision and management of the business and affairs of the Trust, including
(i) the selection and general supervision of the Investment Managers that
provide day-to-day portfolio management services to the Trust's several
Portfolios; and (ii) for Portfolios for which more than one Investment Manager
has been retained, allocation of that Portfolio's assets among such Investment
Managers. In particular, the Board may, from time to time, allocate portions of
a Portfolio's assets between or among several Investment Managers, each of whom
may have a different investment style and/or security selection discipline. The
Board also may reallocate a Portfolio's assets among such Investment Managers or
terminate particular Investment Managers, if the Board deems it appropriate to
do so in order to achieve the overall objectives of the Portfolio involved. The
Board may also retain additional Investment Managers on behalf of a Portfolio
subject to the approval of the shareholders of that Portfolio in accordance with
the Investment Company Act.
The Investment Managers. As indicated above, day-to-day investment decisions
- ------------------------
for each of the Portfolios are the responsibility of one or more Investment
Managers retained by the Trust. In accordance
17
<PAGE>
with the terms of individual investment advisory contracts relating to the
respective Portfolios, and subject to the general supervision of the Trust's
Board, each of the Investment Managers is responsible for providing a continuous
program of investment management to, and placing all orders for, the purchase
and sale of securities and other instruments on behalf of the respective
Portfolios they serve.
Brinson Partners, Inc. ("Brinson") serves as Investment Manager for The
International Equity Portfolio. For its services to the Portfolio, Brinson
receives an annual fee, based on the average daily net asset value of that
portion of the Portfolio's assets managed by it, which fee is calculated as
follows: .40% of the Portfolio's average net assets of $200 million or less;
.35% of such assets over $200 million up to $300 million; and .30% of such
assets over $300 million. Brinson, the principal offices of which are located
at 209 South LaSalle Street, Chicago, Illinois 60604-1295, and its predecessor
entities have provided investment management services for international equity
assets since 1974. The day-to-day management of The International Equity
Portfolio is the responsibility of a team of Brinson's investment professionals;
investment decisions are made by committee and no person has primary
responsibility for making recommendations to the committee. Brinson had
discretionary assets of approximately $86.9 billion under management as of
June 30, 1998, of which approximately $2.0 billion represented assets of U.S.
mutual funds. Brinson is a wholly-owned subsidiary of UBS AG, an internationally
diversified organization with operations in many aspects of the financial
services industry.
Geewax, Terker and Co. ("Geewax"), a Pennsylvania partnership and registered
investment adviser, serves as an Investment Manager for The Small Capitalization
Equity Portfolio. For its services to the Portfolio, Geewax receives a fee,
based on the average daily net asset value of that portion of the Portfolio's
assets managed by it, at an annual rate of 0.30%. The principal offices of
Geewax are located at 99 Starr Road, Phoenixville, PA 19160. John Geewax has
been a general partner of the firm since its founding in 1982. Mr. Geewax, who
holds an MBA and JD from the University of Pennsylvania, is primarily
responsible for making day-to-day investment decisions for that portion of the
Portfolio's assets assigned to Geewax. He is supported by Christopher P.
Ouimet. Mr. Ouimet, who holds an MBA from St. Joseph's University, joined
Geewax in 1994. Prior to that, Mr. Ouimet was at The Vanguard Group as a
quantitative analyst from 1992 to 1994, and as a marketing analyst from 1990 to
1992. As of September 30, 1998, Geewax managed assets of approximately $3,176
million, of which approximately $196 million represented assets of mutual funds.
Geewax is controlled by Mr. Geewax and Bruce Terker, the firm's general
partners.
Hotchkis and Wiley ("Hotchkis") serves as an Investment Manager for The Value
Equity Portfolio. For its services to the Portfolio, Hotchkis receives a fee,
based on the average daily net asset value of that portion of the Portfolio's
assets managed by it, at an annual rate of 0.30%. Hotchkis, the principal
offices of which are located at 725 South Figueroa Street, Suite 4000, Los
Angeles, California, 90017, and its predecessor entities have provided
investment management services for equity assets since 1980. Sheldon Lieberman
is responsible for making day-to-day investment decisions for that portion of
The Value Equity Portfolio allocated to Hotchkis and Wiley. Before joining
Hotchkis and Wiley in 1994, Mr. Lieberman was the Chief Investment Officer for
the Los Angeles County Employees Retirement Association. Prior to that, he was
Manager of Trust Investments at Lockheed Corporation. As of September 30, 1998,
Hotchkis and Wiley managed total assets of approximately $12.8 billion, of which
approximately $3.5 billion represented assets of mutual funds. Hotchkis, a
division of Merrill Lynch Asset Management LP, is controlled by Merrill Lynch &
Co., Inc.
Frontier Capital Management Company ("Frontier") serves as an Investment Manager
for The Small Capitalization Equity Portfolio. For its services to the
Portfolio, Frontier receives a fee based on the average daily net asset value of
that portion of the Portfolio's assets managed by it, at an annual rate of
0.45%. Frontier, the principal offices of which are located at 99 Summer
Street, Boston, Massachusetts 02110, was established in 1980. Michael
Cavarretta is responsible for making the day-to-day investment decisions for
that portion of the Portfolio's assets assigned to Frontier. Mr. Cavarretta has
been an investment professional with Frontier since 1988. Before joining
Frontier, Mr. Cavarretta was a financial analyst with General Electric Co. and
attended Harvard Business School (M.B.A. 1988). Frontier had, as of September
30, 1998, approximately $3.1 billion in assets under management, of which
approximately $189 million represented assets of mutual funds.
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<PAGE>
Goldman Sachs Asset Management ("GSAM") serves as an Investment Manager for the
Growth Equity Portfolio. For its services to the Portfolio, GSAM currently
receives a fee based on the average daily net asset value of that portion of the
Portfolio's assets managed by it, at an annual rate of 0.30%. The firm, the
principal offices of which are located at One New York Plaza, New York, New York
10004, is a separate operating division of Goldman Sachs & Co. As of September
30, 1998, GSAM, together with its affiliates, managed total assets of in
excess of $166 billion. Robert C. Jones, Victor Pinter, Kent Clark and Melissa
Brown will be responsible for making day-to-day investment decisions for that
portion of The Growth Equity Portfolio allocated to GSAM. Mr. Jones, a chartered
financial analyst and Managing Director of GSAM has been an officer and
investment professional with GSAM since 1989. Mr. Pinter and Mr. Clark, each of
whom is a Vice President of GSAM, joined GSAM in 1990 and 1992, respectively.
Ms. Brown is a Vice President. She joined GSAM in 1998. From 1994 to 1998, Ms.
Brown was the director of Quantitative Equity Research and served on the
Investment Policy Committee at Prudential Securities. GSAM is a separate
operating division of Goldman Sachs & Co.
The Trust has conditionally approved an amendment to the GSAM Agreement
("Performance Fee Amendment"). Under the Performance Fee Amendment, GSAM would
be compensated based, in part, on the investment results achieved by it.
Implementation of the Performance Fee Amendment, however, is subject to receipt
of certain assurances from the staff of the SEC that such implementation will
not be viewed by the SEC staff as inconsistent with the requirements of the
Investment Advisers Act. There can be no assurance that such relief will be
granted by the SEC. If the Performance Fee Amendment is implemented, it could,
under certain circumstances, increase or decrease the fee paid to GSAM, when
compared to the current fixed fee arrangement and could result in the payment of
incentive compensation during periods of declining markets. Further information
about the Performance Fee Amendment appears in the Statement of Additional
Information.
Institutional Capital Corporation ("ICAP") serves as an Investment Manager for
The Value Equity Portfolio. For its services to the Portfolio, ICAP receives a
fee, based on the average daily net asset value of that portion of the
Portfolio's assets managed by it, at an annual rate of 0.35%. ICAP, the
principal offices of which are located at 225 West Wacker, Chicago, Illinois
60606, has provided investment management services for equity assets since 1970.
Investment decisions for those assets of the Portfolio assigned to ICAP are made
by a team of ICAP investment professionals; investment decisions are made by
committee and no single individual has primary responsibility for making
recommendations to the committee. ICAP had assets of approximately $10.9 billion
under management as of September 30, 1998, of which approximately $2.2 billion
represented assets of mutual funds.
Jennison Associates LLC ("Jennison") serves as an Investment Manager for The
Growth Equity Portfolio. For its services to the Portfolio, Jennison receives a
fee, based on the average daily net asset value of that portion of the
Portfolio's assets managed by it, at an annual rate of 0.30%. Jennison, the
principal offices of which are located at 466 Lexington Avenue, New York, New
York 10017, was established in 1969. Robert B. Corman, Executive Vice-President
and a director of Jennison, is responsible for making day-to-day investment
decisions for the portion of the Portfolio's assets assigned to Jennison. Mr.
Corman, who is a chartered financial analyst, has been an officer and investment
professional with Jennison since 1981. As of September 30, 1998, Jennison had
approximately $39.3 billion under management, of which approximately $8.7
billion represented assets of mutual funds. Jennison is a wholly-owned
subsidiary of The Prudential Insurance Company of America.
Morgan Grenfell Capital Management Incorporated ("Morgan Grenfell") serves as
Investment Manager for The Limited Duration Municipal Bond Portfolio, The
Intermediate Term Municipal Bond Portfolio and The Fixed Income Portfolio. For
its services to each of the Intermediate Term Municipal Bond Portfolio and the
Fixed Income Portfolio, Morgan Grenfell receives, based of the average daily net
assets value of each such portfolio, an annual fee of 0.275%. For its services
to the Limited Duration Municipal Bond Portfolio, Morgan Grenfell receives a fee
of .20% of the average net asset value of that Portfolio. Morgan Grenfell,
whose principal offices are located at 885 Third Avenue, New York, New York
10022, has been active in managing municipal securities since 1989. David
Baldt, an Executive Vice-President of Morgan Grenfell, is primarily responsible
for making the day-to-day investment decisions for each of the Trust's Fixed-
Income Portfolios. Mr. Baldt has managed fixed income investments since 1973,
and has been with Morgan Grenfell since 1989. As of September 30, 1998, Morgan
Grenfell managed assets of approximately $14.0 billion, of which approximately
$2.2 billion represented assets of
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<PAGE>
mutual funds. Morgan Grenfell is an indirect, wholly-owned subsidiary of
Deutschebank, A.G., a German financial services conglomerate.
Consulting Arrangement. Pursuant to an agreement with the Trust, ("HCCI
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Consulting Agreement"), Hirtle Callaghan continuously monitors the performance
of various investment management organizations, including the Investment
Managers. The HCCI Consulting Agreement provides that Hirtle Callaghan will
make its officers available to serve as officers and/or Trustees of the Trust,
and maintain office space sufficient for the Trust's principal office. For its
services under The HCCI Consulting Agreement, Hirtle Callaghan is entitled to
receive an annual fee of .05% of each Portfolio's average net assets. Hirtle
Callaghan's principal offices are located at 575 East Swedesford Road, Wayne,
Pennsylvania 19087. Hirtle Callaghan was organized in 1988 and has no history
of operation prior to that date. Hirtle Callaghan is registered as an
investment adviser under the Investment Advisers Act of 1940 and, as of
September 30, 1998, had approximately $2.2 billion of assets under management.
Hirtle Callaghan is controlled by Jonathan Hirtle and Donald E. Callaghan, each
of whom also serves on the Trust's Board and as an officer of the Trust.
Administration, Distribution, and Related Services. BISYS Fund Services, L.P.
- --------------------------------------------------
and certain of its affiliates ("BISYS") 3435 Stelzer Road, Columbus, Ohio 43219
has been retained, pursuant to separate agreements with the Trust, to provide
certain services to the Trust. Under an Administrative Services Agreement with
the Trust, BISYS serves as the Trust's administrator. Services performed by
BISYS in that capacity include, but are not limited to: (a) general supervision
of the operation of the Trust and coordination of services performed by the
various service organizations retained by the Trust; (b) regulatory compliance,
including the compilation of information for documents and reports furnished to
the Securities and Exchange Commission and corresponding state agencies; (c)
assistance in connection with the preparation and filing of the Trust's
registration statement and amendments thereto; and (d) maintenance of the
Trust's registration in the various states in which shares of the Trust are
offered. Pursuant to separate contracts, BISYS also serves as the Trust's
transfer and dividend disbursing agent, as well as the Trust's accounting agent
and receives fees for such services. For its services, BISYS receives a single
all-inclusive fee ("Omnibus Fee"). The Omnibus Fee is computed daily and paid
monthly in arrears, at an annual rate of .115% of the aggregate average daily
net assets of the Value Equity, Growth Equity, Small Capitalization Equity and
International Equity Portfolios and of any additional portfolios that invest
primarily in equity securities that may be created by the Trust in the future,
and .095% of the aggregate average daily net assets of the Limited Duration
Municipal Bond, Fixed Income and Intermediate Term Municipal Bond Portfolios and
of any additional portfolios that invest primarily in debt securities that may
be created in the future by the Trust. Under its agreements with the Trust,
BISYS is responsible for all out-of-pocket expenses associated with the services
provided.
BISYS performs similar services for mutual funds other than the Trust. BISYS
Fund Services, LP and its affiliated companies are wholly-owned by The BISYS
Group, Inc., a publicly-held company which is a provider of information
processing, loan servicing and 401(k) administration and record keeping services
to and through banking and other financial organizations. Affiliates of BISYS
also serve as the Trust's distributor. Bankers Trust Company has been retained
by the Trust to serve as custodian for the assets of each of the Portfolios.
Expenses. The Trust pays all expenses incurred in its operation, other than
- ---------
those expenses expressly assumed by Hirtle Callaghan, the Investment Managers or
other service organizations. Those Trust expenses that can be readily
identified as belonging to a particular Portfolio will be paid by that
Portfolio. General expenses of the Trust that are not so identified will be
allocated among the Portfolios based on their relative net assets at the time
those expenses are accrued. The Trust's principal expenses are the fees payable
to the Investment Managers; the Omnibus fee payable to BISYS for administration,
transfer agency and portfolio accounting services; fees for domestic and
international custody of the Trust's assets payable to Bankers Trust Company;
fees for independent auditing and for legal services; fees for filing reports
and registering shares with regulatory bodies; and consulting fees payable to
Hirtle Callaghan.
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PURCHASES AND REDEMPTIONS
General Information About Purchases. Shareholder accounts in the Trust may be
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established only by, and shares of each of the Portfolios are available
exclusively to, Eligible Investors. Shares are sold at net asset value and
without sales charge. Payment for purchases of Trust shares may be made by wire
transfer or by check drawn on a U.S. bank. All purchases must be made in U.S.
dollars. Purchase orders may be received by the Trust's transfer agent on any
day the Trust is open for business ("Business Day"). The Trust is open every
day, Monday through Friday, that the New York Stock Exchange is open for
trading, which excludes the following business holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. The Trust reserves the right
to reject any purchase order and will not issue share certificates. Purchases
of shares of the Portfolios will be executed at the net asset value per share
next computed after receipt by the Trust of a purchase order placed on behalf of
an Eligible Investor and after the order has been accepted by the Trust. If
such a purchase order is received prior to 4 p.m. Eastern Time on any
Business Day, the purchase will be executed at the net asset value per share
determined as of the close of trading on the New York Stock Exchange on that
Business Day--normally 4:00 p.m. Eastern Time. Purchase orders received after 4
p.m. Eastern Time will be executed at the net asset value per share as
determined on the following Business Day.
General Information About Redemptions. Shares may be redeemed on any Business
- -------------------------------------
Day. Shares will be redeemed at the net asset value next computed after receipt
of a redemption request in proper form by the transfer agent. The Trust
reserves the right to redeem the account of any shareholder if as a result of
redemptions, the aggregate value of shares held in a Portfolio falls below a
minimum of $5,000 after 30 days notice and provided that, during such 30 day
period, such aggregate value is not increased to at least such minimum level.
Under extraordinary conditions, as provided under the rules of the Securities
and Exchange Commission, payment for shares redeemed may be postponed, or the
right of redemption suspended.
Redemptions may be made in number of shares or a stated dollar amount by sending
a written request to the Trust's transfer agent at the address shown on the
first page of this prospectus. Redemption requests must be signed in the exact
name in which the shares are registered; redemption requests for joint accounts
require the signature of each joint owner. For redemption requests of $25,000
or more, each signature must be guaranteed by a commercial bank or trust company
which is a member of the Federal Deposit Insurance Corporation, a member firm of
a national securities exchange and certain other securities dealers and credit
unions. Guarantees must be signed by an authorized signatory of the guarantor
institution and "Signature Guaranteed" must appear with the signature.
Proceeds of redemption requests transmitted by mail will normally be paid by
check and mailed to the shareholder's address as indicated on the Trust's books.
Redemption proceeds of $2,500 or more may be transferred electronically to the
bank account number, if any, recorded on the Trust's books. Wire redemption
requests received prior to 1:00 p.m. on any Business Day will be effected on
that Business Day and wired to your bank on the following Business Day. The
Trust ordinarily will make payment for all shares redeemed within seven days
after receipt of a redemption request in proper form. Payment of redemption
proceeds for shares purchased by check may be delayed for a period of up to
fifteen days after their purchase, pending a determination that the check has
cleared.
Additional Information About Purchases and Redemptions. The Trust does not
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impose investment minimums or sales charges of any kind. It is expected,
however, that shares of the Trust will be acquired through a program of services
offered by a financial intermediary, such as an investment adviser or bank, and
that shares will be held, of record, in the name of such intermediary or a
related entity. Intermediaries may impose service or advisory fees, which are
in addition to those expenses borne by the Trust and described in this
prospectus under the heading "Expense Information." Investors should contact
such intermediary for information concerning what, if any, additional fees may
be charged.
The Trust may, at its discretion, permit investors to purchase shares of a
Portfolio through an exchange of securities. Any securities exchanged must meet
the investment objectives, policies and limitations of the Portfolio involved,
must have a readily ascertainable market value, must be liquid and must not be
subject to restrictions on resale. The market value of any securities exchanged
plus any cash, must be at least $250,000. Shares acquired through any such
exchange will not be redeemed until the transfer of securities to the Trust has
settled -- usually within 15 days following the purchase by exchange. The Trust
may, at its discretion, pay any portion of the redemption amount by a
distribution "in kind" of securities held in a Portfolio's investment portfolio.
Investors will incur brokerage charges on the sale of these portfolio
21
<PAGE>
securities.
Shareholder Reports and Inquiries. Shareholders will receive semi-annual
- ---------------------------------
reports containing unaudited financial statements as well as annual reports
containing financial statements which have been audited by the Trust's
independent accountants. Each shareholder will be notified annually as to the
Federal tax status of distributions made by the Portfolios in which such
shareholder is invested. Shareholders may contact the Trust by calling the
telephone number, or by writing to the Trust at the address, shown on the first
page of this prospectus.
PORTFOLIO TRANSACTIONS AND VALUATION
Portfolio Transactions. Subject to the general supervision of the Board, each
- ----------------------
of the Investment Managers is responsible for placing orders for securities
transactions for the Portfolio they serve. Purchases and sales of equity
securities will normally be conducted through brokerage firms entitled to
receive commissions for effecting such transactions. In placing orders, it is
the policy of the Trust to ensure that the most favorable execution for its
transactions is obtained. Where such execution may be obtained from more than
one broker or dealer, securities transactions may be directed to those who
provide research, statistical and other information to the Trust or the
Investment Managers. Purchases and sales of debt securities are expected to
occur primarily with issuers, underwriters or major dealers acting as
principals. Such transactions are normally effected on a net basis and do not
involve payment of brokerage commissions. The Trust has no obligation to enter
into securities transactions with any particular dealer, issuer, underwriter or
other entity. In addition, the Board may, to the extent consistent with the
Investment Company Act and other applicable law, authorize Investment Managers
to direct transactions to service organizations retained by the Trust or their
affiliates; under appropriate circumstances, such transactions may be used for
the purpose of offsetting fees otherwise payable by the Trust for custody,
transfer agency or other services.
Valuation. The net asset value per share of the Portfolios is determined once
- ---------
on each Business Day as of the close of the New York Stock Exchange, which is
normally 4 p.m. Eastern Time. Each Portfolio's net asset value per share is
calculated by adding the value of all securities and other assets of the
Portfolio, subtracting its liabilities and dividing the result by the number of
its outstanding shares. Those assets that are traded on an exchange or in the
over-the-counter market are valued based upon market quotations. Short-term
obligations with maturities of 60 days or less are valued at amortized cost,
which constitutes fair value as determined by the Trust's Board. Other assets
for which market quotations are not readily available are valued at their fair
value as determined in good faith by the Trust's Trustees. With the approval of
the Board, any of the Portfolios may use a pricing service, bank or broker-
dealer experienced in such matters to value the Portfolio's securities. A more
detailed discussion of net asset value and security valuation is contained in
the Statement of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividend and Capital Gain Distribution Options. It is anticipated that The
- ----------------------------------------------
Value Equity Portfolio, The Growth Equity Portfolio and The Small Capitalization
Equity Portfolio will declare and distribute dividends from net investment
income on a quarterly basis. The Limited Duration Municipal Bond, Intermediate
Term Municipal Bond and Fixed Income Portfolios will declare and distribute
dividends from net investment income daily, with payments on a monthly basis.
The International Equity Portfolio will declare dividends from net investment
income semi-annually. Net realized capital gains, if any, will be distributed
at least annually for each Portfolio. Unless another distribution option is
elected, dividends and capital gain distributions will be credited to
shareholder accounts in additional shares of the Portfolio with respect to which
they are paid. Elections may be made by writing to the Trust c/o its Transfer
Agent. Elections must be received in writing by the transfer agent at least
five days prior to the payable date of the dividend in order for the election to
be effective for that dividend and on or before the record date of a
distribution in order to be effective for that distribution. In the event that
a shareholder redeems all shares in an account between the record date and the
payable date, the value of dividends or gain distributions declared and payable
will be paid in cash regardless of the existing election.
22
<PAGE>
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in such a month will be deemed for
tax purposes to have been received by the shareholders on December 31 of such
year, provided such dividends are paid during January of the following year.
Investors should also be careful to consider the tax implications of buying
shares just prior to a distribution. The price of shares purchased at that time
may reflect the amount of the forthcoming distribution. Those investors
purchasing just prior to a distribution may nevertheless be taxed on the entire
amount of the distribution received, although the distribution may have the
effect of reducing the market value of shares below the shareholder's cost. The
Trust will provide written notices to shareholders annually regarding the tax
status of distributions made by each Portfolio.
Federal Taxes. The following discussion is only a brief summary of some of the
- -------------
important Federal tax considerations generally affecting the Portfolios and
their shareholders and is not intended as a substitute for careful tax planning.
Dividends and distributions may also be taxable under state and local tax laws.
In addition, shareholders who are nonresident alien individuals, foreign trusts
or estates, foreign corporations or foreign partnerships may be subject to
different tax treatment under U.S. Federal income tax laws than shareholders who
are U.S. residents. Furthermore, future legislative or administrative changes
or court decisions may materially affect the tax consequences of investing in
one or more Portfolios of the Trust. Accordingly, shareholders are urged to
consult their tax advisers with specific reference to his or her particular tax
situation.
Each Portfolio intends to qualify annually to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended ("Code"). In order to do so, each Portfolio must distribute at least
90% of its taxable income annually, and must derive at least 90% of its gross
income from its investment activities. So long as a Portfolio qualifies for
this tax treatment, that Portfolio will be not be subject to Federal income tax
on amounts distributed to shareholders.
Shareholders, however, will be subject to income or capital gains taxes on
distributed amounts (except for dividends that are treated as exempt from
regular Federal income taxes dividends such as those expected to be paid by the
Municipal Portfolios), regardless of whether such dividends and/or distributions
are paid in cash or reinvested in additional shares. Distributions paid by a
Portfolio out of long term capital gains are taxable to those investors subject
to income tax as long-term capital gains, regardless of the length of time an
investor has owned shares in the Portfolio; the rate at which such gains will be
taxed, however will depend on the length of time the Portfolio held the assets
that generated the gain. All other distributions, to the extent they are
taxable, are taxed to shareholders as ordinary income. A redemption of shares
of any Portfolio may also result in a capital gain or loss to the redeeming
shareholder. A loss incurred upon redemption of shares of any Portfolio of the
Trust (other than the Municipal Portfolios) held for six months or less will be
treated as long-term capital loss to the extent of capital gain dividends
received with respect to such shares.
Tax Matters Relating to the Municipal Portfolios. As a matter of fundamental
- ------------------------------------------------
policy, The Limited Duration Municipal Bond and The Intermediate Term Municipal
Bond Portfolios intend to invest a sufficient portion of its assets in municipal
bonds and notes so that it will qualify to pay "exempt-interest dividends."
Exempt-interest dividends distributed to shareholders are excluded from a
shareholder's gross income for the purpose of calculating the shareholder's
regular Federal income taxes. Under certain circumstances, however, receipt of
exempt-interest dividends may be relevant to shareholders in determining their
tax liability. Exempt interest dividends paid by the Municipal Portfolios,
although exempt from regular income tax in the hands of a shareholder of the
Portfolio, are includable in the tax base for determining the extent to which a
shareholder's Social Security Benefits would be subject to Federal income tax.
Shareholders are required to disclose their receipt of tax-exempt interest on
their Federal income tax returns. In addition, a portion of such dividends may
be derived from income on "private activity" municipal bonds and therefore may
be a preference item under Federal tax law and subject to the Federal
alternative minimum tax. A loss incurred upon the redemption of shares of the
Municipal Portfolios held for six months or less will be disallowed to the
extent of exempt-interest dividends paid with respect to such shares; any loss
not so disallowed will be treated as a long-term capital loss to the extent of
capital gain dividends received with respect to such shares. Also, dividends
paid from gains realized by the Portfolio from the disposition of a tax-exempt
bond that was acquired after April 30,
23
<PAGE>
1993 for a price less than the principal amount of the bond is taxable to
shareholders as ordinary income to the extent of the accrued market discount.
Tax Matters Relating to International Investments. Foreign currency gains and
- -------------------------------------------------
losses realized by a Portfolio, including those from forward currency exchange
contracts and certain futures and options on foreign currencies, will increase
or decrease the Portfolio's investment company taxable income available to be
distributed to shareholders as ordinary income. If foreign currency losses
exceed other investment company taxable income during a taxable year, the
Portfolio would not be able to make any ordinary dividend distributions, and any
distributions made before the losses were realized but in the same taxable year
would be recharacterized as a return of capital to shareholders, thereby
reducing each shareholder's basis in shares of that Portfolio. A Portfolio may
be subject to foreign withholding taxes on income from certain foreign
securities, if any, held. If more than 50% of the total assets of this
Portfolio is invested in securities of foreign corporations, the Portfolio may
elect to pass-through to its shareholders their pro rata share of foreign taxes
paid by such Portfolio. If this election is made, shareholders will be (i)
required to include in their gross income their pro rata share of foreign source
income (including any foreign taxes paid by the Portfolio), and (ii) entitled to
either deduct (as an itemized deduction in the case of individuals) their share
of such foreign taxes in computing their taxable income or to claim a credit for
such taxes against their U.S. income tax, subject to certain limitations under
the Code.
Back-up Withholding; Dividends-Received Deduction. The Trust is required to
- -------------------------------------------------
withhold 31% of taxable dividends, capital gains distributions, and redemptions
paid to shareholders who have not provided the Trust with their certified
taxpayer identification number in compliance with regulations adopted by the
Internal Revenue Service. Dividends paid from net investment income by the
Equity Portfolios will generally qualify in part for the corporate dividends-
received deduction available to corporate investors. The portion of the
dividends so qualified, however, depends on the aggregate qualifying dividend
income received by each such Portfolio from domestic (U.S.) sources. Further
information about tax matters relating to the Trust, including its foreign
investments, appears in the Statement of Additional Information under the
heading "Dividends, Distributions and Taxes."
PERFORMANCE INFORMATION
Yield and Effective Yield. From time to time, each of the Portfolios may quote
its "yield" and/or its "total return" in sales literature and in presentations
to prospective investors. These figures are based on historical earnings and
are not intended to indicate future performance. To arrive at a Portfolio's
"yield," the net investment income generated by an investment in the Portfolio
during a 30 day (or one month) period, is determined and the resulting figure is
annualized, (i.e. assumed to be the amount of income generated each week over a
52-week period) and expressed as a percentage of the initial investment. The
"effective yield" of a Portfolio is calculated in a similar manner but, when
annualized, the income earned by an investment in the 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. The yield of
any investment is generally a function of prevailing interest rates, portfolio
quality and maturity, type of investment and operating expenses. The yield on
shares of the Portfolio will fluctuate and is not necessarily representative of
future results. The Municipal Portfolios may also quote its tax-equivalent
yield; this figure is calculated by determining the pre-tax yield which, after
being taxed at a stated rate, would be equivalent to the yield determined as
described above.
Average Annual Total Return. This figure shows the average percentage change in
value of a particular investment from the beginning date of the measuring period
to the end of the measuring period. The calculations required to determine
average total return will reflect changes in net asset value per share and
assume that any income dividends and/or capital gains distributions made during
the period were reinvested. Figures will be given for recent one, five and ten
year periods (if applicable), and may be given for other periods as well (such
as from commencement of operations, or on a year-by-year basis). In addition,
each Portfolio may present its total return over different periods by means of
aggregate, average, year-by-year or other types of total return figures, or
compare the yield or total return of a Portfolio to those of other mutual funds
with similar investment objectives and to other relevant indices. For example,
the performance of any of the Portfolios may be compared to the data prepared by
Lipper Analytical Services,
24
<PAGE>
Inc., a widely-recognized independent service that monitors the performance of
mutual funds. The Portfolios may also compare their individual performance
records to those of relevant indices, such as the Standard & Poor's 500 Stock
Index, the Russell 1000 Growth Stock Index, and the Morgan Stanley Capital
International Europe, Australia, Far East Index ("EAFE").
GENERAL
The Trust was organized as a Delaware business trust on December 15, 1994, and
is registered with the Securities and Exchange Commission as an open-end
diversified, series, management investment company. The Trust currently offers
shares of seven investment portfolios, each with a different objective and
differing investment policies. The Trust may organize additional investment
portfolios in the future. The Trust is authorized to issue an unlimited number
of shares, each with a par value of $.001. Under the Trust's Amended and
Restated Declaration of Trust, the Board has the power to classify or reclassify
any unissued shares from time to time, and to increase the number of authorized
shares. Each share of the respective Portfolios represents an equal
proportionate interest in that Portfolio. Each share is entitled to one vote
for the election of Trustees and any other matter submitted to a shareholder
vote. Voting rights are not cumulative and, accordingly, the holders of more
than 50% of the aggregate shares of the Trust may elect all of the Trustees.
Shares of the Trust do not have preemptive or conversion rights and, when issued
for payment as described in this prospectus, shares of the Trust will be fully
paid and non-assessable.
The Trust is authorized to issue two classes of shares in each of its
portfolios. Class A shares and Class B shares have identical rights and
preferences; the only difference between the two classes is that each has
established a separate CUSIP number, which aids those investment managers whose
clients purchase shares of the Trust in tracking information relating to their
clients' accounts.
As a Delaware business trust, the Trust is not required, and currently does not
intend, to hold annual meetings of shareholders except as required by the
Investment Company Act or other applicable law. The Investment Company Act
requires initial shareholder approval of each of the investment advisory
agreements, election of Trustees and, if the Trust holds an annual meeting,
ratification of the Board's selection of the Trust's independent public
accountants. Under certain circumstances, the law provides shareholders with
the right to call for a meeting of shareholders to consider the removal of one
or more Trustees. To the extent required by law, the Trust will assist in
shareholder communications in such matters.
Like other funds and business organizations around the world, the Trust could be
adversely affected if the computer systems used by the Investment Managers and
the Trust's other service providers do not properly process and calculate date-
related information for the year 2000 and beyond. The Trust has been informed
that the Investment Managers and the Trust's other service providers (i.e.,
Administrator, Transfer Agent, Fund Accounting Agent, Distributor and Custodian)
have developed and are implementing clearly defined and documented plans to
minimize the risk associated with the Year 2000 problem. These plans include
the following activities: inventorying of software systems, determining
inventory items that may not function properly after December 31, 1999,
reprogramming or replacing such systems and retesting for Year 2000 readiness.
In addition, the service providers are obtaining assurances from their vendors
and suppliers in the same manner. Non-compliant Year 2000 systems upon which
the Trust is dependent may result in errors and account maintenance failures.
In addition, the Year 2000 problem may adversely affect the companies in which
the Trust invests. For example, these companies may incur substantial costs to
correct the problem and may suffer losses caused by data processing errors.
Since the ultimate costs or consequences of incomplete or untimely resolution of
the Year 2000 problem by the Trust's service providers are unknown to the Trust
at this time, there may be costs or consequences having a material adverse
impact on the Trust, its service providers and/or your account records. The
Trust and the Investment Managers will continue to monitor developments relating
to this issue, including the development of contingency plans for providing
back-up computer services in the event of a systems failure.
25
<PAGE>
THE HIRTLE CALLAGHAN TRUST
TABLE OF CONTENTS
Page
Expense Information 2
Financial Highlights 3
Investment Objectives and Policies 6
The Equity Portfolios 6
The Value Equity Portfolio 6
The Growth Equity Portfolio 6
The Small Capitalization Equity Portfolio 7
The International Equity Portfolio 7
The Fixed-Income Portfolios 7
The Limited Duration Municipal Bond Portfolio 8
The Intermediate Term Municipal Bond Portfolio 8
The Fixed Income Portfolio 9
Investment Practices and Risk Considerations 9
About Equity Securities 9
About Foreign Securities 10
About Fixed Income Securities 11
About Taxable Fixed Income Securities 12
About Municipal Securities 14
About Temporary Investment Practices 15
About Illiquid Securities 15
About Hedging Strategies 16
About Other Permitted Instruments 17
Management of the Trust 17
Purchases and Redemptions 20
Portfolio Transactions and Valuation 22
Dividends, Distributions and Taxes 22
Performance Information 24
General 24
No person has been authorized to give any information or to make representations
not contained in this prospectus in connection with any offering made by this
prospectus and, if given or made, such information must not be relied upon as
having been authorized by the Trust or its distributor. This prospectus does
not constitute an offering by the Trust or by its distributor in any
jurisdiction in which such offering may not lawfully be made.
26
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The Hirtle Callaghan Trust
575 E. Swedesford Road
Wayne, PA 19087
This statement of additional information is designed to supplement information
contained in the prospectus relating to The Hirtle Callaghan Trust ("Trust").
The Trust is an open-end, diversified, series, management investment company
registered under the Investment Company Act of 1940 ("Investment Company Act").
This document, although not a prospectus, is incorporated by reference in its
entirety in the Trust's prospectus and should be read in conjunction with the
Trust's prospectus dated November 1, 1998. A copy of that prospectus is
available by contacting the Trust at 610-254-9596.
<TABLE>
<CAPTION>
Statement of Additional Corresponding Prospectus
Information Heading Heading
- ----------------------- -------------------------------------
<S> <C>
Management of the Trust Management of the Trust;
General; Expense
Information
Further Information About
the Trust's Investment Investment Objectives
Policies and Policies
Investment Practices and
Risk Considerations
Hedging through the Use of
Options Investment Practices and
Risk Considerations:
About Hedging Strategies
Hedging through the Use of
Futures Contracts and
Related Instruments Investment Practices and
Risk Considerations:
About Hedging Strategies
Hedging through the Use of
Currency-Related
Instruments Investment Practices and
Risk Considerations:
About Hedging Strategies
Investment Restrictions Investment Objectives
and Policies Investment
Practices and Risk
Considerations
Additional Purchases and
Redemption Information Purchases and
Redemptions
Portfolio Transactions and
Valuation Portfolio Transactions
and Valuation
Dividends, Distributions
and Taxes Dividends, Distributions
and Taxes
Performance Information Performance Information
Financial Statements
and Independent
Accountants Financial Highlights
Ratings Appendix
</TABLE>
1
<PAGE>
This Statement of Additional Information does not contain all of the information
set forth in the registration statement filed by the Trust with the Securities
and Exchange Commission ("SEC") under the Securities Act of 1933. Copies of the
registration statement may be obtained at a reasonable charge from the SEC or
may be examined, without charge, at its offices in Washington, D.C.
The Trust's Annual Report to Shareholders dated June 30, 1998 accompanies this
Statement of Additional Information and is incorporated by reference herein.
The date of this Statement of Additional Information is November 1, 1998.
MANAGEMENT OF THE TRUST
Trustees and Officers. The Trust's Board of Trustees ("Board") is responsible
- ----------------------
for the overall supervision and management of the business and affairs of the
Trust, including (i) the selection and general supervision of those investment
advisory organizations ("Investment Managers") retained by the Trust to provide
portfolio management services to each of its separate investment portfolios
(each a "Portfolio"); and (ii) for Portfolios for which more than one Investment
Manager has been retained, allocation of that Portfolio's assets among such
Investment Managers. In particular, the Board may, from time to time, allocate
portions of a Portfolio's assets between or among several Investment Managers,
each of whom may have a different investment style and/or investment selection
discipline. The Board also may reallocate a Portfolio's assets among such
Investment Managers, or terminate particular Investment Managers, if the Board
deems it appropriate to do so in order to achieve the overall objectives of the
Portfolio involved. In addition, the Board may retain additional Investment
Managers on behalf of a Portfolio subject to the approval of the shareholders of
that Portfolio in accordance with the Investment Company Act. Day-to-day
operations of the Trust are the responsibility of the Trust's officers, who are
elected by, and serve at the pleasure of, the Board. The name and principal
occupation for the past five years of each of the Trust's current officers and
trustees are set forth below; unless otherwise indicated, the business address
of each is 575 East Swedesford Road Wayne, PA 19087.
<TABLE>
<CAPTION>
Principal Occupation
Name, Business Address and Age Position with the Trust for the Last Five Years
- -------------------------- --- ----------------------- -------------------------------------
<S> <C> <C> <C>
*Donald E. Callaghan 52 Chairman of the Board of For more than the past five years,
Trustees and President Principal, Hirtle Callaghan & Co.,
Inc.
Ross H. Goodman 50 Trustee For more than the past five years,
Mr. Goodman has been Vice
President of American Industrial
Management & Sales, Inc.
*Jonathan J. Hirtle 45 Trustee For more than the past five years,
Principal, Hirtle Callaghan & Co.,
Inc.
Jarrett Burt Kling 55 Trustee For more than the past five years,
Mr. Kling has been associated
with CRA Real Estate Securities,
L.P. and its affiliate, Radnor
Advisers, Inc. and Mr. Kling is
general partner of TDH II and a
special limited partner of TDH III
(venture capital limited
partnerships) since 1983.
*David M. Spungen 36 Trustee For more than the past five years,
1926 Arch Street Mr. Spungen has been associated
Philadelphia, PA 19103-1484 with The CMS Companies
financial services). Mr. Spungen
currently serves as Director of
CMS Capital Management, (a
division of CMS Investment
Resources, Inc.)
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C> <C>
Richard W. Wortham, III 60 Trustee For more than the past five years,
President, Video Rental
of Pennsylvania, Inc. and its
parent, Houston VMC, Inc. Mr.
Wortham is also a trustee of
the Wortham Foundation and the
Museum of Fine Arts, Houston.
Robert Zion 36 Vice President and Treasurer Mr. Zion is a Principal of Hirtle
Callaghan & Co., and has been employed
by that firm for more than the last
five years.
Laura Anne Corsell, Esq. 49 Secretary Ms. Corsell is an attorney in
7307 Elbow Lane private practice. From 1989
Philadelphia, PA 19119 through 1994, Ms. Corsell was
associated with the law firm of
Ballard Spahr Andrews and
Ingersoll, as counsel.
</TABLE>
* Indicates a Trustee who is an "interested person" of the Trust within the
meaning of the Investment Company Act.
Each of those members of the Board who are not "interested persons" of the Trust
within the meaning of the Investment Company Act ("Independent Trustees")
receive from the Trust a fee of $1,000.00 per meeting of the Board attended and
are reimbursed for expenses incurred in connection with each such meeting.
Those members of the Board who are "interested persons" of the Trust and the
Trust's officers receive no compensation from the Trust for performing the
duties of their respective offices. The table below, which is required to be
included in this Statement of Additional by the SEC, shows the aggregate
compensation received from the Trust by each of the Independent Trustees during
the fiscal year ending June 30, 1998 (excluding reimbursed expenses).
<TABLE>
<CAPTION>
Pension/ Estimated
Aggregate Retirement Benefits Upon
Name and Compensation Benefits Retirement From Total Compensation
Position From Trust From Trust From Trust From Trust
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ross H. Goodman $6000.00 $0.0 $0.0 $6000.00
Jarrett Burt Kling 5000.00 0.0 0.0 5000.00
Richard W. Wortham, III 3000.00 0.0 0.0 3000.00
</TABLE>
As permitted under the Trust's Amended and Restated Declaration and Agreement of
Trust and by-laws, the Board has established an executive committee and has
appointed Messrs. Callaghan, Hirtle and Spungen to serve on that committee.
Under the Trust's by-laws, the executive committee is authorized to act for the
full Board in all matters for which the affirmative vote of a majority of the
Board of the Trust's Independent Trustees is not required under the Investment
Company Act or other applicable law. All of the officers and trustees of the
Trust own, in the aggregate, less than one percent of the outstanding shares of
the shares of the respective Portfolios of the Trust. During the fiscal year
ended June 30, 1998, Ms. Corsell received fees for legal services rendered to
the Trust (including related out-of-pocket expenses) of $50,135.06.
3
<PAGE>
Investment Advisory Arrangements. As described in the prospectus, Hirtle,
- ---------------------------------
Callaghan & Co., Inc. ("Hirtle Callaghan") has entered into a written consulting
agreement with the Trust ("HCCI Consulting Agreement"). The HCCI Consulting
Agreement was approved by the Trust's initial shareholder on July 21, 1995,
following the approval of the Trust's Board (including a majority of the Trust's
Independent Trustees) at a meeting of the Board held on July 20, 1995; that
agreement was last approved by the Trust's Board on May 5, 1998. The HCCI
Consulting Agreement will remain in effect until its second anniversary, unless
sooner terminated and will continue from year to year so long as such
continuation is approved, at a meeting called for the purpose of voting on such
continuance, at least annually (i) by vote of a majority of the Trust's Board or
the vote of the holders of a majority of the outstanding securities of the
Trust; and (ii) by a majority of the Independent Trustees, by vote cast in
person. The HCCI Consulting Agreement may be terminated at any time, without
penalty, either by the Trust or by Hirtle Callaghan, upon sixty days' written
notice and will automatically terminate in the event of its assignment as
defined in the Investment Company Act. The HCCI Consulting Agreement permits
the Trust to use the name "Hirtle Callaghan." In the event, however, the HCCI
Consulting Agreement is terminated, Hirtle Callaghan has the right to require
the Trust to discontinue any references to the name "Hirtle Callaghan" and to
change the name of the Trust as soon as is reasonably practicable. The HCCI
Consulting Agreement further provides that HCCI will not be liable to the
Trust for any error, mistake of judgment or of law, or loss suffered by the
Trust in connection with the matters to which the HCCI Consulting Agreement
relates (including any action of any Hirtle Callaghan officer or employee in
connection with the service of any such officer or employee as an officer of
the Trust), whether or not any such action was taken in reliance upon
information provided to the Trust by Hirtle Callaghan, except losses that may
be sustained as a result of willful misfeasance, reckless disregard of its
duties, bad faith or gross negligence on the part of Hirtle Callaghan.
Portfolio Management Contracts. The Trust has also entered into investment
- ------------------------------
advisory contracts ("Portfolio Management Contracts") on behalf of each of the
Portfolios with one or more of the Investment Managers. Each contract governs
the relationship between the Investment Manager named in the contract and the
specific portfolio served by that manager. Such contracts and the portfolios to
which they are related are:
The Value Equity Portfolio Hotchkis and Wiley ("Hotchkis")
Institutional Capital Corporation ("ICAP")
The Growth Equity Portfolio Jennnison Associates LLC ("Jennison")
Goldman Sachs Asset Management ("GSAM")
The Small Capitalization
Equity Portfolio Geewax, Terker and Co. ("Geewax")
Frontier Capital Management Company ("Frontier")
The International
Equity Portfolio Brinson Partners, Inc. ("Brinson")
The Limited Duration
Municipal Bond Portfolio Morgan Grenfell Capital Management Incorporated
("Morgan Grenfell")
The Intermediate Term
Municipal Bond Portfolio Morgan Grenfell
The Fixed Income Portfolio Morgan Grenfell
The Initial Contracts. Certain of the Trust's Portfolio Management Contracts
- ----------------------
have been in effect and unchanged since the inception of the Trust. These
Portfolio Management Contracts (collectively the "Initial Contracts") are those
between the Trust and Jennison, and the Trust and Frontier, as well as the
contracts between Morgan Grenfell and The Limited Duration Municipal Bond
Portfolio. Each of the Initial Contracts was approved by the Trust's initial
shareholder on July 21, 1995, following that approval of the Trust's Board
(including the Independent Trustees) at a meeting of the Board held on July 20,
1995; each such agreement was last approved by the Trust's Board on May 5, 1998.
Each such contract will remain in effect from year to year so long as such
continuation is approved, at a meeting called to vote on such continuance, at
least annually (i) by vote of a majority of the Trust's Board or the vote of the
holders of a majority of the outstanding securities of the Trust; and (ii) by a
majority of the Independent Trustees, by vote cast in person. Each of the
Initial Contracts may be terminated at any time, without penalty, either by the
Trust or by the respective Investment Managers named in the contract, in each
case upon sixty days' written notice, and each will automatically terminate in
the event of its assignment, as that term is defined in the Investment Company
Act.
Each of the Initial Contracts provides that the named Investment Manager will,
subject to the overall supervision of the Board, provide a continuous investment
program for the assets of the Portfolio to which
4
<PAGE>
such contract relates, or that portion of such assets as may be, from time to
time allocated to such Investment Manager. The Portfolio Managers are
responsible, among other things, for the provision of investment research and
management of all investments and other instruments and the selection of brokers
and dealers through which securities transactions are executed. Each of the
Initial Contracts provides that the named Investment Manager will not be liable
to the Trust for any error of judgment or mistake of law on the part of the
Investment Manager, or for any loss sustained by the Trust in connection with
the purchase or sale of any instrument on behalf of the named Portfolio, except
losses that may be sustained as a result of willful misfeasance, reckless
disregard of its duties, misfeasance, bad faith or gross negligence on the part
of the named Investment Manager.
The Subsequent Agreements and Amendments. The agreement between ICAP and the
- -----------------------------------------
Trust relating to The Value Equity Portfolio ("ICAP Agreement") was first
approved by the Trust's initial shareholder on July 21, 1995, and by the Board
on July 20, 1995. An amendment to the ICAP Agreement was approved by
shareholders of The Value Equity Portfolio on January 12, 1998, and by the
Trust's Board on November 21, 1997. Pursuant to the amendment, the fee payable
to ICAP by The Value Equity Portfolio was increased from .30% of the average net
assets of that portion of the Portfolio managed by ICAP to .35% of such assets.
The amendment first became effective on February 2, 1998. The ICAP Agreement,
as amended, was last approved by the Board of Trustees and by the Board on May
5, 1998. The terms and conditions of the ICAP Agreement are identical to those
of the Initial Contracts.
The agreement between Brinson and the Trust relating to The International Equity
Portfolio ("Brinson Agreement") was first approved by the Trust's initial
shareholder on July 21, 1995, and by the Board on July 20, 1995. An amendment
to the Brinson Agreement was approved by the Trust's Board on May 5, 1998.
Pursuant to the amendment, the fee payable to Brinson by The International
Equity Portfolio was reduced at asset levels over $200 million. The new fee
schedule, which first became effective on May 6, 1998, is as follows: .40% of
the Portfolio's average net assets of $200 million or less; .35% of such assets
over $200 million up to $300 million; and .30% of such assets over $300 million.
The terms and conditions of the Brinson Agreement are identical to those of the
Initial Contracts and were, together with the reduction in Brinson's fee
approved by the Board on May 5, 1998.
The remaining Portfolio Management Contracts, each of which first became
effective after the Trust commenced operations (collectively the "Subsequent
Contracts") are the agreements between the Trust and Hotchkis, Geewax and GSAM,
as well as those between the Trust and Morgan Grenfell relating to The Fixed
Income and Intermediate Term Municipal Bond Portfolios, respectively.
The agreement between Hotchkis and the Trust relating to The Value Equity
Portfolio ("Hotchkis Agreement") was approved by the Board (including the
Independent Trustees) on July 19, 1996, and by the shareholders of The Value
Equity Portfolio on October 23, 1996. The Hotchkis Agreement first became
effective on November 12, 1996. The Hotchkis Agreement will remain in effect
until its second anniversary, and will continue in effect thereafter from year
to year so long as such continuation is approved, at a meeting called for the
purpose of voting on such continuance, at least annually (i) by vote of a
majority of the Trust's Board or the vote of the holders of a majority of the
outstanding securities of the Trust; and (ii) by a majority of the Independent
Trustees, by vote cast in person.
The terms and conditions set forth in the Hotchkis Agreement are identical to
those contained in the Initial Contracts except for the description of the
portfolio manager, the effective and termination dates, and the modification of
certain notice provisions relating to the obligation of Hotchkis to indemnify
the Trust under certain circumstances. Specifically, Section 5 of the Hotchkis
Agreement provides that the indemnification obligation of the portfolio manager
with respect to information provided to the Trust by Hotchkis L.P. in writing
for use in the Trust's registration statement and certain other documents shall
not apply unless the portfolio manager has had an opportunity to review such
documents for a specified period of time prior to the date on which they are
filed with the SEC and unless the portfolio manager is notified in writing of
any claim for indemnification within specified periods. From July 29, 1996,
until November 12, 1996, Hotchkis' predecessor limited partnership served as a
portfolio manager of The Value Equity Portfolio pursuant to an agreement ("15a-4
Agreement") approved by the Board at a meeting held on July 19, 1996. The 15a-4
Agreement became effective on July 29, 1996, the date on which a similar
contract ("Prior Agreement") with a former portfolio manager for the Portfolio
was terminated, and was approved by the shareholders of The Value Equity
Portfolio on October 23, 1996, in the manner contemplated under rule 15a-4 of
the Investment Company Act. The 15a-4 Agreement is identical to the Hotchkis
Agreement except for the name of the advisory organization and the terms
relating to effective dates. The Hotchkis Agreement is identical to the Prior
Agreement except
5
<PAGE>
for the name of the advisory organization, effective dates and the modification
of notice provisions relating to the Trust's right of indemnification, as noted
above. Prior to November 12, 1996, Hotchkis was an independent California
limited partnership. On November 11, 1996, all of the interests in that
partnership were acquired by Merrill Lynch & Co., ("ML") and the limited
partnership became a division of Merrill Lynch Asset Management LP., a company
controlled by ML. In accordance with the Investment Company Act, the
consummation of that acquisition terminated the 15a-4 Agreement; at the same
time, and in accordance with the terms of the 15a-4 Agreement and the Hotchkis
Agreement, the Hotchkis Agreement became effective. ML is a public company whose
shares are traded on the New York Stock Exchange.
The agreement between GSAM and the Trust relating to The Growth Equity Portfolio
("GSAM Agreement") was approved by the Board, (including the Independent
Trustees) on September 12, 1997, and by the shareholders of The Growth Equity
Portfolio on January 12, 1998. The GSAM Agreement first became effective on
October 1, 1997. The GSAM Agreement will remain in effect until its second
anniversary, and will continue in effect thereafter from year to year so long as
such continuation is approved, at a meeting called for the purpose of voting on
such continuance, at least annually (i) by vote of a majority of the Trust's
Board or the vote of the holders of a majority of the outstanding securities of
the Trust; and (ii) by a majority of the Independent Trustees, by vote cast in
person. The terms and conditions set forth in the GSAM Agreement are identical
to those contained in the Portfolio Management Contracts except for the
description of the portfolio manager, the effective and termination dates, and
the modification of certain notice provisions relating to the obligation of GSAM
to indemnify the Trust under certain circumstances. Specifically, Section 5 of
the GSAM Agreement provides that the indemnification obligation of the portfolio
manager with respect to information provided to the Trust by GSAM shall not
apply unless the portfolio manager has had an opportunity to review such
documents for a specified period of time prior to the date on which they are
filed with the SEC and unless the portfolio manager is notified in writing of
any claim for indemnification within specified periods. That section also
provides that the Trust will indemnify the Portfolio Manager with respect to
information included in filings made with the SEC by the Trust, other than
information relating to, and provided in writing by, the Portfolio Manager.
The Board, at its meeting held on November 21, 1997, and the shareholders of The
Growth Equity Portfolio, at a meeting held on January 12, 1998, also
conditionally approved an amendment ("Performance Fee Amendment"). Under the
Performance Fee Amendment, GSAM would be entitled to receive a base fee ("Base
Fee") calculated at the annual rate of .30% (or 30 basis points) of the average
net assets of that portion of the Growth Portfolio's assets assigned to GSAM
("GSAM Account"). After an initial one year period, the Base Fee would be
increased or decreased at an annual rate of 25% of the net value added by GSAM
over the total return of the Russell 1000 Growth Index plus 30 basis points
during the 12 months immediately preceding the calculation date. This 30 basis
point "performance hurdle" is designed to assure that GSAM will earn a
performance adjustment only with respect to the value that its portfolio
management adds to the GSAM Account. GSAM's total compensation under the
Performance Fee Amendment could not exceed 50 basis points with respect to any
12 month period; the minimum annual fee that would be payable to GSAM under the
amended agreement is 10 basis points. In addition, the Performance Fee
Amendment will not take effect unless and until certain relief is obtained from
the SEC from certain rules adopted by the SEC. The relief sought would permit
the proposed performance compensation to be based on the gross performance of
that portion of the Portfolio's assets assigned by the Board to GSAM. There can
be no assurance that the SEC will grant such relief. If the Performance Fee
Amendment is implemented, it could increase or decrease the fee currently
payable to GSAM and GSAM could earn a positive performance adjustment in
declining markets if the decline in the total return of the GSAM Account is less
than the decline in the total return of the Russell 1000 Growth Index.
The Agreement between Geewax and the Trust relating to The Small Capitalization
Portfolio ("Geewax Agreement") was first approved by a majority of the Board,
including a majority of the Independent Trustees at a special meeting of the
Board held on March 18, 1998. The Geewax Agreement became effective as
permitted under Rule 15a-4 of the Investment company Act, on April 1, 1998.
Shareholders of The Small Capitalization Portfolio approved the Geewax Agreement
at a meeting held on June 15, 1998.
The Geewax Agreement will remain in effect until the second anniversary of its
effective date, and will continue in effect thereafter from year to year so long
as such continuation is approved, at a meeting called for the purpose of voting
on such continuance, at least annually (i) by vote of a majority of the Trust's
6
<PAGE>
Board or the vote of the holders of a majority of the outstanding securities of
the Trust; and (ii) by a majority of the Independent Trustees, by vote cast in
person. The terms and conditions set forth in the Geewax Agreement are
identical to those contained in the Initial Contracts except for the description
of the portfolio manager, the effective and termination dates, and the
modification of certain notice provisions relating to the obligation of Geewax
to indemnify the Trust under certain circumstances. Specifically, Section 5 of
the Geewax Agreement provides that the indemnification obligation of the
portfolio manager with respect to information provided to the Trust by Geewax in
writing for use in the Trust's registration statement and certain other
documents shall not apply unless the portfolio manager has had an opportunity to
review such documents for a specified period of time prior to the date on which
they are filed with the SEC and unless the portfolio manager is notified in
writing of any claim for indemnification within specified periods.
The agreements between Morgan Grenfell and the Trust relating to The Fixed
Income and Intermediate Term Municipal Bond Portfolios were first approved by a
majority of the Board, including a majority of the Independent Trustees at a
held on November 4, 1997 and by the initial shareholder of such portfolios on
July 1, 1998. Each such agreement first became effective July 1, 1998. The
Agreements between Morgan Grenfell and the Trust relating to The Fixed Income
and the Intermediate Term Municipal Bond Portfolios will remain in effect until
the second anniversary of each, and will continue in effect thereafter from year
to year so long as such continuation is approved, at a meeting called for the
purpose of voting on such continuance, at least annually (i) by vote of a
majority of the Trust's Board or the vote of the holders of a majority of the
outstanding securities of the Trust; and (ii) by a majority of the Independent
Trustees, by vote cast in person. The terms and conditions set forth in these
agreements are identical to those contained in the Initial Contracts except for
the description of the portfolio manager, the effective and termination dates,
and the modification of certain notice provisions relating to the obligation of
Morgan Grenfell to indemnify the Trust under certain circumstances.
Specifically, Section 5 of the Morgan Grenfell Agreement provides that the
indemnification obligation of the portfolio manager with respect to information
provided to the Trust by Morgan Grenfell in writing for use in the Trust's
registration statement and certain other documents shall not apply unless the
portfolio manager has had an opportunity to review such documents for a
specified period of time prior to the date on which they are filed with the SEC
and unless the portfolio manager is notified in writing of any claim for
indemnification within specified periods.
Investment Advisory Fees. For the periods indicated below, Hirtle Callaghan
- ------------------------
received advisory fees from each of the Portfolios, calculated at an annual rate
of .05%:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
June 30, 1998 June 30, 1997 June 30, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The Value Equity Portfolio $74,299 $44,605 $24,343
- ----------------------------------------------------------------------------------------------------------
The Growth Equity Portfolio $96,094 $65,417 $34,071
- ----------------------------------------------------------------------------------------------------------
The Small Capitalization Portfolio $69,076 $41,020 $16,940
- ----------------------------------------------------------------------------------------------------------
The International Equity Portfolio $87,636 $52,703 $24,436
- ----------------------------------------------------------------------------------------------------------
The Limited Duration Municipal Bond Portfolio $23,541 $16,428 $7,628
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The foregoing figures reflect voluntary expense reimbursements by Hirtle
Callaghan to the Small Capitalization and Limited Duration Portfolios of $24,082
and $36,701, respectively for the year ended June 30, 1996.
The following table sets forth the investment advisory fee received from the
specified Portfolio by each of its respective Investment Managers during the
fiscal years ended June 30, 1998, June 30, 1997 and June 30, 1996, respectively:
7
<PAGE>
<TABLE>
<CAPTION>
Actual Fee Paid for fiscal year ended
---------------------------------------------------------------------------
Investment Manager Portfolio Advisory Fee Rate (1) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Institutional Value Equity .30% of average $174,556 $150,281 $ 94,103
Capital Corporation net assets (2)
Hotchkis and Wiley (3) Value Equity .30% of average $292,181 $118,592 -0-
net assets
Jennison Associates LLC Growth Equity .30% of average $379,252 $210,125 $102,397
net assets
Westfield Capital Growth Equity .30% of average $ 46,774 $179,941 $102,030
Management Co. (4) net assets
Goldman Sachs Asset Growth Equity .30% of average $150,526 -0- -0-
net assets
Management
Clover Capital Small Cap .45% of average $203,946 $185,827 $ 86,448
Management, Inc.(5) net assets
Frontier Capital Small Cap .45% of average $346,569 $187,263 $ 66,017
Management Co. net assets
Geewax, Terker & Co. Small Cap .30% of average $ 47,439
net assets
Brinson Partners (6) International .40% of average $698,930 $424,428 $195,488
net assets up to
$200 million;
.35% over $200
million up to $300;
.30% over $300
million
Morgan Grenfell Limited .20% of average $ 94,162 $ 64,927 $ 30,513
Capital Management Duration net assets
Incorporated (7)
</TABLE>
________
(1) Rate shown applies to that portion of the indicated portfolio's assets
allocated to the specified Investment Manager.
(2) The fee payable to ICAP by The Value Equity Portfolio was increased .35% of
that portion of the average daily net assets of The Value Equity Portfolio
managed by ICAP. Such increase first became effective on February 2, 1998.
(3) Effective July 29, 1996, Hotchkis and Wiley replaced Cowen Asset Management.
For the fiscal year ended June 30, 1996, The Growth Equity Portfolio paid
advisory fees to Cowen Asset Management in the amount of $51,954 of that
portfolio's average net assets.
(4) Effective October 1, 1997, Goldman Sachs Asset Management replaced Westfield
Capital Management, Inc. GSAM received compensation from the Trust with
respect to the period from October 1, 1997 and ended December 31, 1997 of
$45,563.65.
(5) Effective April 1, 1998, Geewax, Terker & Co. replaced Clover Capital
Management, Inc. Geewax received no compensation from the Trust during the
periods reflected in the table above.
(6) The fee payable to Brinson by The International Equity Portfolio was
decreased at asset levels over $200 million effective May 6, 1998.
(7) No information is provided for The Fixed Income Portfolio or The
Intermediate Term Municipal Bond Portfolio, neither of which had commenced
operations during the periods reflected in the table above.
8
<PAGE>
Other Matters. BISYS Fund Services LP ("BISYS") serves as the Trust's principal
- -------------
underwriter pursuant to an agreement approved by the Board on July 19, 1996.
BISYS does not receive any underwriting fees or other compensation for serving
as the distributor of the Trust's shares. Pursuant to separate agreements,
BISYS has also, since January 1, 1997, provided administrative and other
services for the Trust; these services and relevant agreements are described in
the Trust's prospectus. For the fiscal year ended June 30, 1997, BISYS received
for such services, fees from each of the Portfolios, as follows: The Value
Equity Portfolio, $89,565; The Growth Equity Portfolio, $130,138; The Small
Capitalization Portfolio, $41,020; The International Equity Portfolio, $52,703;
and The Limited Duration Municipal Bond Portfolio, $31,952 (all of which was
voluntarily waived by BISYS). For the fiscal year ended June 30, 1998, BISYS
received for such services, fees from each of the Portfolios, as follows: The
Value Equity Portfolio, $148,594; The Growth Equity Portfolio, $192,182; The
Small Capitalization Portfolio, $138,149; The International Equity Portfolio,
$175,266; and The Limited Duration Municipal Bond Portfolio, $39,787.
FURTHER INFORMATION ABOUT THE TRUST'S INVESTMENT POLICIES
As stated in the prospectus, the Trust currently consists of seven portfolios,
each with its own investment objectives and policies. These portfolios are The
Value Equity, Growth Equity, Small Capitalization Equity and International
Equity Portfolios (collectively, the "Equity Portfolios") and The Fixed Income,
Limited Duration Municipal Bond and Intermediate Municipal Bond Portfolios
(collectively, the "Fixed-Income Portfolios"). The following discussion
supplements the discussion of the investment policies of each of the Portfolios
as set forth in the prospectus and the types of securities and other instruments
in which the respective Portfolios may invest.
Repurchase Agreements. As noted in the prospectus, among the instruments that
- ---------------------
each of the Portfolios may use for temporary investment purposes are repurchase
agreements. Under the terms of a typical repurchase Agreement, a Portfolio
would acquire an underlying debt security for a relatively short period (usually
not more than one week), subject to an obligation of the seller to repurchase
that security and the obligation of the Portfolio to resell that security at an
agreed-upon price and time. Repurchase agreements could involve certain risks
in the event of default or insolvency of the other party, including possible
delays or restrictions upon the Portfolio's ability to dispose of the underlying
securities. The Investment Manager for each Portfolio, in accordance with
guidelines adopted by the Board, monitors the creditworthiness of those banks
and non-bank dealers with which the respective Portfolios may enter into
repurchase agreements. The Trust also monitors the market value of the
securities underlying any repurchase agreement to ensure that the repurchase
obligation of the seller is adequately collateralized.
Repurchase agreements may be entered into with primary dealers in U.S.
Government Securities who meet credit guidelines established by the Board (each
a "repo counterparty"). Under each repurchase Agreement, the repo counterparty
will be required to maintain, in an account with the Trust's custodian bank,
securities that equal or exceed the repurchase price of the securities subject
to the repurchase Agreement. A Portfolio will generally enter into repurchase
agreements with short durations, from overnight to one week, although securities
subject to repurchase agreements generally have longer maturities. A Portfolio
may not enter into a repurchase agreement with more than seven days to maturity
if, as a result, more than 15% of the value of its net assets would be invested
in illiquid securities including such repurchase agreements. For purposes of
the Investment Company Act, a repurchase agreement may be deemed a loan to the
repo counterparty. It is not clear whether, in the context of a bankruptcy
proceeding involving a repo counterparty, a court would consider a security
acquired by a Portfolio subject to a repurchase Agreement as being owned by that
Portfolio or as being collateral for such a "loan." If a court were to
characterize the transaction as a loan, and a Portfolio has not perfected a
security interest in the security acquired, that Portfolio could be required to
turn the security acquired over to the bankruptcy trustee and be treated as an
unsecured creditor of the repo counterparty. As an unsecured creditor, the
Portfolio would be at the risk of losing some or all of the principal and income
involved in the transaction. In the event of any such bankruptcy or insolvency
proceeding involving a repo counterparty with whom a Portfolio has outstanding
repurchase agreements a Portfolio may encounter delays and incur costs before
being able to sell securities acquired subject to such repurchase agreements.
Any such delays may involve loss of interest or a decline in price of the
security so acquired.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the repo
9
<PAGE>
counterparty may fail to repurchase the security. However, a Portfolio will
always receive as collateral for any repurchase agreement to which it is a party
securities acceptable to it, the market value of which is equal to at least 100%
of the repurchase price, and the Portfolio will make payment against such
securities only upon physical delivery or evidence of book entry transfer of
such collateral to the account of its custodian bank. If the market value of the
security subject to the repurchase agreement falls below the repurchase price
the Trust will direct the repo counterparty to deliver to the Trust's custodian
additional securities so that the market value of all securities subject to the
repurchase agreement will equal or exceed the repurchase price.
Variable and Floating Rate Instruments. As noted in the prospectus, among the
- --------------------------------------
instruments that each of the Portfolios may use for temporary investment
purposes are short-term variable rate instruments (including floating rate
instruments) from banks and other issuers. In addition, each of the Income
Portfolios may purchase longer-term variable and floating rate instruments in
furtherance of the investment objectives of the respective Income Portfolios. A
"variable rate instrument" is one whose terms provide for the adjustment of its
interest rate on set dates and which, upon such adjustment, can reasonably be
expected to have a market value that approximates its par value. A "floating
rate instrument" is one whose terms provide for the adjustment of its interest
rate whenever a specified interest rate changes and which, at any time, can
reasonably be expected to have a market value that approximates its par value.
These instruments may include variable amount master demand notes that permit
the indebtedness to vary in addition to providing for periodic adjustments in
the interest rates.
Variable rate instruments are generally not rated by nationally recognized
ratings organizations (each, an "NRSRO"). The appropriate Investment Manager
will consider the earning power, cash flows and other liquidity ratios of the
issuers and guarantors of such instruments and, if the instrument is subject to
a demand feature, will continuously monitor their financial ability to meet
payment on demand. Where necessary to ensure that a variable or floating rate
instrument is equivalent to the quality standards applicable to a Portfolio's
fixed income investments, the issuer's obligation to pay the principal of the
instrument will be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend. Any bank providing such a bank letter, line of
credit, guarantee or loan commitment will meet the Portfolio's investment
quality standards relating to investments in bank obligations. A Portfolio will
invest in variable and floating rate instruments only when the appropriate
Investment Manager deems the investment to involve minimal credit risk. The
Investment Manager will also continuously monitor the creditworthiness of
issuers of such instruments to determine whether a Portfolio should continue to
hold the investments.
The absence of an active secondary market for certain variable and floating rate
notes could make it difficult to dispose of the instruments, and a Portfolio
could suffer a loss if the issuer defaults or during periods in which a
Portfolio is not entitled to exercise its demand rights. Variable and floating
rate instruments held by a Portfolio will be subject to the Portfolio's
limitation on investments in illiquid securities when a reliable trading market
for the instruments does not exist and the Portfolio may not demand payment of
the principal amount of such instruments within seven days. If an issuer of a
variable rate demand note defaulted on its payment obligation, a Portfolio might
be unable to dispose of the note and a loss would be incurred to the extent of
the default.
Custodial Receipts. The Fixed Income Portfolio may acquire U.S. Government
- -------------------
Securities and their unmatured interest coupons that have been separated
("stripped") by their holder, typically a custodian bank or investment brokerage
firm. Having separated the interest coupons from the underlying principal of
the U.S. Government Securities, the holder will resell the stripped securities
in custodial receipt programs with a number of different names, including
"Treasury Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on
Treasury Securities" ("CATS"). The stripped coupons are sold separately from
the underlying principal, which is usually 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 interest (cash) payments. The
underlying U.S. Treasury bonds and notes themselves are generally held in book-
entry form at a Federal Reserve Bank. Counsel to the underwriters of these
certificates or other evidences of ownership of U.S. Treasury securities have
stated that, in their opinion, purchasers of the stripped securities most likely
will be deemed the beneficial holders of the underlying U.S. Government
Securities for federal tax and securities purposes. In the case of CATS and
TIGRs, the Internal Revenue Service ( the "IRS") has reached this conclusion for
the purpose of applying the tax diversification requirements applicable to
regulated investment companies such as the Portfolios. CATS and TIGRs are not
considered U.S.
10
<PAGE>
Government Securities by the staff of the Commission. Further, the IRS
conclusion noted above is contained only in a general counsel memorandum, which
is an internal document of no precedential value or binding effect, and a
private letter ruling, which also may not be relied upon by the Portfolios. The
Trust is not aware of any binding legislative, judicial or administrative
authority on this issue.
When-Issued Securities. As noted in the prospectus, Fixed Income Securities may
- ----------------------
be purchased on a "when-issued" basis. The price of securities purchased on a
when-issued basis, which may be expressed in yield terms, is fixed at the time
the commitment to purchase is made, but delivery and payment for the when issued
securities takes place at a later date. Normally, the settlement date occurs
within one month of the purchase. During the period between purchase and
settlement, no payment is made by the purchaser to the issuer and no interest
accrues to the purchaser. Thus, to the extent that assets are held in cash
pending the settlement of a purchase of securities, the purchaser would earn no
income. At the time a commitment to purchase a security on a when-issued basis
is made, the transaction is recorded and the value of the security will be
reflected in determining net asset value. The market value of the when-issued
securities may be more or less than the purchase price. The Trust does not
believe that net asset value or income will be adversely affected by the
purchase of securities on a when-issued basis.
Municipal Securities. As stated in the prospectus, The Limited Duration
- ---------------------
Municipal Bond Portfolio and The Intermediate Term Municipal Bond Portfolio
(collective, the "Municipal Portfolios"), and to a lesser extent, The Fixed
Income Portfolio, may invest in municipal securities. Municipal securities
consist of bonds, notes and other instruments issued by or on behalf of states,
territories and possessions of the United States (including the district of
Columbia) and their political subdivisions, agencies or instrumentalities, the
interest on which is exempt from regular federal tax. Municipal securities may
also be issued on a taxable basis.
The two principal classifications of municipal securities are "general
obligations" and "revenue obligations." General obligations are secured by the
issuer's pledge of its full faith and credit for the payment of principal and
interest although the characteristics and enforcement of general obligations may
vary according to law applicable to the particular issuer. Revenue obligations,
which include, but are not limited to, private activity bonds, resource recovery
bonds, certificates of participation and certain municipal notes, are not backed
by the credit and taxing authority of the issuer and are payable solely from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise or other specific revenue source.
Nevertheless, the obligations of the issuers with respect to "general
obligations" and/or "revenue obligations" may be backed by a letter of credit,
guarantee or insurance. General obligations and revenue obligations may be
issued in a variety of forms, including commercial paper, fixed, variable and
floating rate securities, tender option bonds, auction rate bonds and capital
appreciation bonds. In addition to general obligations and revenue obligations,
there is a variety of hybrid and special types of municipal securities. There
are also numerous differences in the credit backing of municipal securities both
within and between these two principal classifications. For the purpose of
applying a Portfolio's investment restrictions, the identification of the issuer
of a municipal security which is not a general obligation is made by the
appropriate Investment Manager based on the characteristics of the municipal
security, the most important of which is the source of funds for the payment of
principal and interest on such securities.
An entire issue of municipal securities may be purchased by one or a small
number of institutional investors such as a Portfolio. Thus, the issue may not
be said to be publicly offered. Unlike some securities that are not publicly
offered, a secondary market exists for many municipal securities that were not
publicly offered initially and such securities can be readily marketable. The
obligations of an issuer to pay the principal of and interest on a municipal
security are subject to the provisions of bankruptcy, insolvency and other laws
affecting the rights and remedies of creditors, such as the Federal Bankruptcy
Act, and laws, if any, that may be enacted by Congress or state legislatures
extending the time for payment of principal or interest or imposing other
constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a municipal
security may be materially affected.
Municipal Leases, Certificates of Participation and Other Participation
- -----------------------------------------------------------------------
Interests. Municipal leases frequently involve special risks not normally
- ---------
associated with general obligation or revenue bonds, some of which are
summarized in the prospectus. In addition, leases and installment purchase or
conditional sale contracts (which normally provide for title to the leased asset
to pass eventually to the governmental issuer)
11
<PAGE>
have evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for the
issuance of debt. The debt issuance limitations are deemed to be inapplicable
because of the inclusion in many leases or contracts of "non-appropriation"
clauses that relieve the governmental issuer of any obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis.
Thus, a Portfolio's investment in municipal leases will be subject to the
special risk that the governmental issuer may not appropriate funds for lease
payments. In addition, such leases or contracts may be subject to the temporary
abatement of payments in the event the issuer is prevented from maintaining
occupancy of the leased premises or utilizing the leased equipment. Although the
obligations may be secured by the leased equipment or facilities, the
disposition of the property in the event of nonappropriation or foreclosure
might prove difficult, time consuming and costly, and result in an
unsatisfactory or delayed recoupment of a Portfolio's original investment.
Certificates of participation represent undivided interests in municipal leases,
installment purchase contracts or other instruments. The certificates are
typically issued by a trust or other entity which has received an assignment of
the payments to be made by the state or political subdivision under such leases
or installment purchase contracts.
Certain municipal lease obligations and certificates of participation may be
deemed illiquid for the purpose of the Portfolios' respective limitations on
investments in illiquid securities. Other municipal lease obligations and
certificates of participation acquired by a Portfolio may be determined by the
appropriate Investment Manager, pursuant to guidelines adopted by the Trustees
of the Trust, to be liquid securities for the purpose of such Portfolio's
limitation on investments in illiquid securities. In determining the liquidity
of municipal lease obligations and certificates of participation, the
appropriate Investment Manager will consider a variety of factors including: (1)
the willingness of dealers to bid for the security; (2) the number of dealers
willing to purchase or sell the obligation and the number of other potential
buyers; (3) the frequency of trades or quotes for the obligation; and (4) the
nature of the marketplace trades. In addition, the appropriate Investment
Manager will consider factors unique to particular lease obligations and
certificates of participation affecting the marketability thereof. These
include the general creditworthiness of the issuer, the importance to the issuer
of the property covered by the lease and the likelihood that the marketability
of the obligation will be maintained throughout the time the obligation is held
by a Portfolio. No Portfolio may invest more than 5% of its net assets in
municipal leases. Each of the Income Portfolios may purchase participations in
municipal securities held by a commercial bank or other financial institution.
Such participations provide a Portfolio with the right to a pro rata undivided
interest in the underlying municipal securities. In addition, such
participations generally provide a Portfolio with the right to demand payment,
on not more than seven days notice, of all or any part of the Portfolio's
participation interest in the underlying municipal security, plus accrued
interest.
Municipal Notes. Municipal securities in the form of notes generally are used
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to provide for short-term capital needs, in anticipation of an issuer's receipt
of other revenues or financing, and typically have maturities of up to three
years. Such instruments may include Tax Anticipation Notes, Revenue
Anticipation Notes, Bond Anticipation Notes, Tax and Revenue Anticipation Notes
and Construction Loan Notes. Tax Anticipation Notes are issued to finance the
working capital needs of governments. Generally, they are issued in
anticipation of various tax revenues, such as income, sales, property, use and
business taxes, and are payable from these specific future taxes. Revenue
Anticipation Notes are issued in expectation of receipt of other kinds of
revenue, such as federal revenues available under federal revenue sharing
programs. Bond Anticipation Notes are issued to provide interim financing until
long-term bond financing can be arranged. In most cases, the long-term bonds
then provide the funds needed for repayment of the notes. Tax and Revenue
Anticipation Notes combine the funding sources of both Tax Anticipation Notes
and Revenue Anticipation Notes. Construction Loan Notes are sold to provide
construction financing. These notes are secured by mortgage notes insured by
the Federal Housing Authority; however, the proceeds from the insurance may be
less than the economic equivalent of the payment of principal and interest on
the mortgage note if there has been a default. The obligations of an issuer of
municipal notes are generally secured by the anticipated revenues from taxes,
grants or bond financing. An investment in such instruments, however, presents
a risk that the anticipated revenues will not be received or that such revenues
will be insufficient to satisfy the issuer's payment obligations under the notes
or that refinancing will be otherwise unavailable.
Tax-Exempt Commercial Paper. Issues of tax-exempt commercial paper typically
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represent short-term,
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unsecured, negotiable promissory notes. These obligations are issued by state
and local governments and their agencies to finance working capital needs of
municipalities or to provide interim construction financing and are paid from
general revenues of municipalities or are refinanced with long-term debt. In
most cases, tax-exempt commercial paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions.
Pre-Refunded Municipal Securities. The principal of and interest on municipal
- ---------------------------------
securities that have been pre-refunded are no longer paid from the original
revenue source for the securities. Instead, after pre-refunding the source of
such payments is typically an escrow fund consisting of obligations issued or
guaranteed by the U.S. Government. The assets in the escrow fund are derived
from the proceeds of refunding bonds issued by the same issuer as the pre-
refunded municipal securities. Issuers of municipal securities use this advance
refunding technique to obtain more favorable terms with respect to securities
that are not yet subject to call or redemption by the issuer. For example,
advance refunding enables an issuer to refinance debt at lower market interest
rates, restructure debt to improve cash flow or eliminate restrictive covenants
in the indenture or other governing instrument for the pre-refunded municipal
securities. However, except for a change in the revenue source from which
principal and interest payments are made, the pre-refunded municipal securities
remain outstanding on their original terms until they mature or are redeemed by
the issuer. Pre-refunded municipal securities are usually purchased at a price
which represents a premium over their face value.
Tender Option Bonds. A tender option bond is a municipal security (generally
- -------------------
held pursuant to a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates. The bond is typically issued in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, pursuant to which such institution grants the security holders the
option, at periodic intervals, to tender their securities to the institution and
receive the face value thereof.
As consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the bond's fixed coupon rate and
the rate, as determined by a remarketing or similar agent at or near the
commencement of such period, that would cause the securities, coupled with the
tender option, to trade at par on the date of such determination. Thus, after
payment of this fee, the security holder effectively holds a demand obligation
that bears interest at the prevailing short-term tax-exempt rate. However, an
institution will not be obligated to accept tendered bonds in the event of
certain defaults or a significant downgrade in the credit rating assigned to the
issuer of the bond. The liquidity of a tender option bond is a function of the
credit quality of both the bond issuer and the financial institution providing
liquidity. Tender option bonds are deemed to be liquid unless, in the opinion
of the appropriate Investment Manager, the credit quality of the bond issuer and
the financial institution is deemed, in light of the Portfolio's credit quality
requirements, to be inadequate. Each Municipal Portfolio intends to invest only
in tender option bonds the interest on which will, in the opinion of bond
counsel, counsel for the issuer of interests therein or counsel selected by the
appropriate Investment Manager, be exempt from regular federal income tax.
However, because there can be no assurance that the IRS will agree with such
counsel's opinion in any particular case, there is a risk that a Municipal
Portfolio will not be considered the owner of such tender option bonds and thus
will not be entitled to treat such interest as exempt from such tax.
Additionally, the federal income tax treatment of certain other aspects of these
investments, including the proper tax treatment of tender option bonds and the
associated fees, in relation to various regulated investment company tax
provisions is unclear. Each Municipal Portfolio intends to manage its portfolio
in a manner designed to eliminate or minimize any adverse impact from the tax
rules applicable to these investments.
Auction Rate Securities. Auction rate securities consist of auction rate
- -----------------------
municipal securities and auction rate preferred securities issued by closed-end
investment companies that invest primarily in municipal securities. Provided
that the auction mechanism is successful, auction rate securities usually permit
the holder to sell the securities in an auction at par value at specified
intervals. The dividend is reset by "Dutch" auction in which bids are made by
broker-dealers and other institutions for a certain amount of securities at a
specified minimum yield. The dividend rate set by the auction is the lowest
interest or dividend rate that covers all securities offered for sale. While
this process is designed to permit auction rate securities to be traded at par
value, there is the risk that an auction will fail due to insufficient demand
for the securities.
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Dividends on auction rate preferred securities issued by a closed-end fund may
be designated as exempt from federal income tax to the extent they are
attributable to tax-exempt interest income earned by the fund on the securities
in its portfolio and distributed to holders of the preferred securities,
provided that the preferred securities are treated as equity securities for
federal income tax purposes and the closed-end fund complies with certain
requirements under the Internal Revenue Code of 1986, as amended (the "Code").
For purposes of complying with the 20% limitation on each Municipal Portfolio's
investments in taxable investments, auction rate preferred securities will be
treated as taxable investments unless substantially all of the dividends on such
securities are expected to be exempt from regular federal income taxes.
A Portfolio's investments in auction rate preferred securities of closed-end
funds are subject to limitations on investments in other U.S. registered
investment companies, which limitations are prescribed by the 1940 Act. These
limitations include prohibitions against acquiring more than 3% of the voting
securities of any other such investment company, and investing more than 5% of
the Portfolio's assets in securities of any one such investment company or more
than 10% of its assets in securities of all such investment companies. A
Portfolio will indirectly bear its proportionate share of any management fees
paid by such closed-end funds in addition to the advisory fee payable directly
by the Portfolio.
Private Activity Bonds. Certain types of municipal securities, generally
- ----------------------
referred to as industrial development bonds (and referred to under current tax
law as private activity bonds), are issued by or on behalf of public authorities
to obtain funds for privately-operated housing facilities, airport, mass transit
or port facilities, sewage disposal, solid waste disposal or hazardous waste
treatment or disposal facilities and certain local facilities for water supply,
gas or electricity. Other types of industrial development bonds, the proceeds
of which are used for the construction, equipment, repair or improvement of
privately operated industrial or commercial facilities, may constitute municipal
securities, although the current federal tax laws place substantial limitations
on the size of such issues. The interest from certain private activity bonds
owned by a Portfolio (including a Municipal Portfolio's distributions
attributable to such interest) may be a preference item for purposes of the
alternative minimum tax.
Mortgage-Backed Securities. As stated in the Prospectus, The Fixed Income
- --------------------------
Portfolio may invest in mortgage-backed securities, including derivative
instruments. Mortgage-backed securities represent direct or indirect
participations in or obligations collateralized by and payable from mortgage
loans secured by real property. A Portfolio may invest in mortgage-backed
securities issued or guaranteed by U.S. Government agencies or instrumentalities
such as the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"). Obligations of GNMA are backed by the full faith and
credit of the U.S. Government. Obligations of FNMA and FHLMC are not backed by
the full faith and credit of the U.S. Government but are considered to be of
high quality since they are considered to be instrumentalities of the United
States. The market value and yield of these mortgage-backed securities can vary
due to market interest rate fluctuations and early prepayments of underlying
mortgages. These securities represent ownership in a pool of Federally insured
mortgage loans with a maximum maturity of 30 years. The scheduled monthly
interest and principal payments relating to mortgages in the pool will be
"passed through" to investors. Government mortgage-backed securities differ
from conventional bonds in that principal is paid back to the certificate
holders over the life of the loan rather than at maturity. As a result, there
will be monthly scheduled payments of principal and interest.
Only The Fixed Income Portfolio may invest in mortgage-backed securities issued
by non-governmental entities including collateralized mortgage obligations
("CMOs") and real estate mortgage investment conduits ("REMICs"). CMOs are
securities collateralized by mortgages, mortgage pass-throughs, mortgage pay-
through bonds (bonds representing an interest in a pool of mortgages where the
cash flow generated from the mortgage collateral pool is dedicated to bond
repayment), and mortgage-backed bonds (general obligations of the issuers
payable out of the issuers' general funds and additionally secured by a first
lien on a pool of single family detached properties). Many CMOs are issued with
a number of classes or series which have different maturities and are retired in
sequence. Investors purchasing such CMOs in the shortest maturities receive or
are credited with their pro rata portion of the unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligation is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-throughs to be prepaid prior to their
stated maturity. Although some of the mortgages underlying CMOs may be
supported by various types of insurance, and some CMOs may be backed by GNMA
certificates or other mortgage pass-throughs issued
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<PAGE>
or guaranteed by U.S. Government agencies or instrumentalities, the CMOs
themselves are not generally guaranteed.
REMICs are private entities formed for the purpose of holding a fixed pool of
mortgages secured by an interest in real property. REMICs are similar to CMOs
in that they issue multiple classes of securities, including "regular" interests
and "residual" interests. The Portfolios do not intend to acquire residual
interests in REMICs under current tax law, due to certain disadvantages for
regulated investment companies that acquire such interests.
Mortgage-backed securities are subject to unscheduled principal payments
representing prepayments on the underlying mortgages. Although these securities
may offer yields higher than those available from other types of securities,
mortgage-backed securities may be less effective than other types of securities
as a means of "locking in" attractive long-term rates because of the prepayment
feature. For instance, when interest rates decline, the value of these
securities likely will not rise as much as comparable debt securities due to the
prepayment feature. In addition, these prepayments can cause the price of a
mortgage-backed security originally purchased at a premium to decline in price
to its par value, which may result in a loss.
Due to prepayments of the underlying mortgage instruments, mortgage-backed
securities do not have a known actual maturity. In the absence of a known
maturity, market participants generally refer to an estimated average life. The
appropriate Investment Manager believes that the estimated average life is the
most appropriate measure of the maturity of a mortgage-backed security.
Accordingly, in order to determine whether such security is a permissible
investment, it will be deemed to have a remaining maturity of three years or
less if the average life, as estimated by the appropriate Investment Manager, is
three years or less at the time of purchase of the security by a Portfolio. An
average life estimate is a function of an assumption regarding anticipated
prepayment patterns. The assumption is based upon current interest rates,
current conditions in the appropriate housing markets and other factors. The
assumption is necessarily subjective, and thus different market participants
could produce somewhat different average life estimates with regard to the same
security. Although the appropriate Investment Manager will monitor the average
life of the portfolio securities of each Portfolio with a portfolio maturity
policy and make needed adjustments to comply with such Portfolios' policy as to
average dollar weighted portfolio maturity, there can be no assurance that the
average life of portfolio securities as estimated by the appropriate Investment
Manager will be the actual average life of such securities.
Asset-Backed Securities. As stated in the Prospectus, the Fixed Income
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Portfolio may invest in asset-backed securities, which represent participations
in, or are secured by and payable from, pools of assets including company
receivables, truck and auto loans, leases and credit card receivables. The
asset pools that back asset-backed securities are securitized through the use of
privately-formed trusts or special purpose corporations. Payments or
distributions of principal and interest may be guaranteed up to certain amounts
and for a certain time period by a letter of credit or a pool insurance policy
issued by a financial institution unaffiliated with the trust or corporation, or
other credit enhancements may be present. Certain asset backed securities may
be considered derivative instruments. As stated in the Prospectus, no Portfolio
will invest 25% or more of its total assets in asset-backed securities.
Real Estate Investment Trusts. Each of the Equity Portfolios may invest up to
- -----------------------------
10% of its assets in equity interests issued by real estate investment trusts
("REITs"). REITs are pooled investment vehicles that invest the majority of
their assets directly in real property and derive income primarily from the
collection of rents. Equity REITs can also realize capital gains by selling
property that has appreciated in value. Similar to investment companies, REITs
are not taxed on income distributed to shareholders provided they comply with
several requirements of the Code. A Portfolio will indirectly bear its
proportionate share of expenses incurred by REITs in which a Portfolio invests
in addition to the expenses incurred directly by a Portfolio.
Investing in REITs involves certain unique risks in addition to those risks
associated with investing in the real estate industry in general. First, the
value of a REIT may be affected by changes in the value of the underlying
property owned by the REITs. In addition, REITs are dependent upon management
skills, are not diversified, are subject to heavy cash flow dependency, default
by borrowers and self-liquidation. REITs are also subject to the possibilities
of failing to qualify for tax free pass-through of income under the Code and
failing to maintain their exemption from registration under the Act.
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<PAGE>
Investment in REITs involves risks similar to those associated with investing in
small capitalization companies. REITs may have limited financial resources, may
trade less frequently and in a limited volume and may be subject to more abrupt
or erratic price movements than larger company securities. Historically, small
capitalization stocks, such as REITs, have been more volatile in price than the
larger capitalization stocks included in the S&P Index of 500 Common Stocks.
Foreign Government Securities. The foreign government securities in which The
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Fixed Income Portfolio may invest generally consist of debt obligations issued
or guaranteed by national, state or provincial governments or similar political
subdivisions. The Portfolio may invest in foreign government securities in the
form of American Depositary Receipts. Foreign government securities also
include debt securities of supranational entities. Currently, the Fixed Income
Portfolio intends to invest only in obligations issued or guaranteed by the
Asian Development Bank, the Inter-American Development Bank, the International
Bank for Reconstruction and Development (the "World Bank"), the African
Development Bank, the European Coal and Steel Community, the European Economic
Community, the European Investment Bank and the Nordic Investment Bank. Foreign
government securities also include mortgage-related securities issued or
guaranteed by national, state or provincial governmental instrumentalities,
including quasi-governmental agencies.
Commercial Paper. Commercial paper is a short-term, unsecured negotiable
- ----------------
promissory note of a U.S. or non-U.S. issuer. Each of the Portfolios may
purchase commercial paper for temporary purposes; the Fixed-Income Portfolios
may acquire these instruments as described in the Prospectus. Each Portfolio
may similarly invest in variable rate master demand notes which typically are
issued by large corporate borrowers and which provide for variable amounts of
principal indebtedness and periodic adjustments in the interest rate. Demand
notes are direct lending arrangements between a Portfolio and an issuer, and are
not normally traded in a secondary market. A Portfolio, however, may demand
payment of principal and accrued interest at any time. In addition, while
demand notes generally are not rated, their issuers must satisfy the same
criteria as those that apply to issuers of commercial paper. The appropriate
Investment Manager will consider the earning power, cash flow and other
liquidity ratios of issuers of demand notes and continually will monitor their
financial ability to meet payment on demand. See also "Variable and Floating
Rate Instruments," above.
Bank Obligations. Each of the Portfolios may purchase certain bank obligations
- ----------------
for temporary purposes; the Fixed-Income Portfolios may acquire these
instruments as described in the Prospectus. Such instruments may include
certificates of deposit, time deposits and bankers' acceptances. Certificates
of Deposit ("CDs") are short-term negotiable obligations of commercial banks.
Time Deposits ("TDs") are non-negotiable deposits maintained in banking
institutions for specified periods of time at stated interest rates. Bankers'
acceptances are time drafts drawn on commercial banks by borrowers usually in
connection with international transactions. U.S. commercial banks organized
under federal law are supervised and examined by the Comptroller of the Currency
and are required to be members of the Federal Reserve System and to be insured
by the Federal Deposit Insurance Corporation (the "FDIC"). U.S. banks organized
under state law are supervised and examined by state banking authorities but are
members of the Federal Reserve System only if they elect to join. Most state
banks are insured by the FDIC (although such insurance may not be of material
benefit to a Portfolio, depending upon the principal amount of CDs of each bank
held by the Portfolio) and are subject to federal examination and to a
substantial body of federal law and regulation. As a result of governmental
regulations, U.S. branches of U.S. banks, among other things, generally are
required to maintain specified levels of reserves, and are subject to other
supervision and regulation designed to promote financial soundness. U.S.
savings and loan associations, the CDs of which may be purchased by the
Portfolios, are supervised and subject to examination by the Office of Thrift
Supervision. U.S. savings and loan associations are insured by the Savings
Association Insurance Portfolio which is administered by the FDIC and backed by
the full faith and credit of the U.S. Government.
HEDGING THROUGH THE USE OF OPTIONS
As indicated in the prospectus, each of the Portfolios may, consistent with its
investment objectives and policies, use options on securities and securities
indexes to reduce the risks associated with the types of securities in which
each is authorized to invest and/or in anticipation of future purchases,
including to achieve market exposure, pending direct investment in securities.
A Portfolio may use options only in a manner consistent with its investment
objective and policies and may not invest more than 10% of its total
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<PAGE>
assets in option purchases. Options may be used only for the purpose of reducing
investment risk and not for speculative purposes. The following discussion sets
forth certain information relating to the types of options that the Portfolios
may use, together with the risks that may be associated with their use.
About Options on Securities. A call option is a short-term contract pursuant to
- ---------------------------
which the purchaser of the option, in return for a premium, has the right to buy
the security underlying the option at a specified price at any time during the
term of the option. The writer of the call option, who receives the premium,
has the obligation, upon exercise of the option during the option period, to
deliver the underlying security against payment of the exercise price. A put
option is a similar contract that gives its purchaser, in return for a premium,
the right to sell the underlying security at a specified price during the term
of the option. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option during the option period, to buy the
underlying security at the exercise price. Options may be based on a security,
a securities index or a currency. Options on securities are generally settled
by delivery of the underlying security whereas options on a securities index or
currency are settled in cash. Options may be traded on an exchange or in the
over-the-counter markets.
Option Purchases. Call options on securities may be purchased in order to fix
- ----------------
the cost of a future purchase. In addition, call options may be used as a means
of participating in an anticipated advance of a security on a more limited risk
basis than would be possible if the security itself were purchased. In the
event of a decline in the price of the underlying security, use of this strategy
would serve to limit the amount of loss, if any, to the amount of the option
premium paid. Conversely, if the market price of the underlying security rises
and the call is exercised or sold at a profit, that profit will be reduced by
the amount initially paid for the call.
Put options may be purchased in order to hedge against a decline in market value
of a security held by the purchasing portfolio. The put effectively guarantees
that the underlying security can be sold at the predetermined exercise price,
even if that price is greater than the market value at the time of exercise. If
the market price of the underlying security increases, the profit realized on
the eventual sale of the security will be reduced by the premium paid for the
put option. Put options may also be purchased on a security that is not held by
the purchasing portfolio in anticipation of a price decline in the underlying
security. In the event the market value of such security declines below the
designated exercise price of the put, the purchasing portfolio would then be
able to acquire the underlying security at the market price and exercise its put
option, thus realizing a profit. In order for this strategy to be successful,
however, the market price of the underlying security must decline so that the
difference between the exercise price and the market price is greater than the
option premium paid.
Option Writing. Call options may be written (sold) by the Portfolios.
- --------------
Generally, calls will be written only when, in the opinion of a Portfolio's
Investment Manager, the call premium received, plus anticipated appreciation in
the market price of the underlying security up to the exercise price of the
call, will be greater than the appreciation in the price of the underlying
security.
Put options may also be written. This strategy will generally be used when it
is anticipated that the market value of the underlying security will remain
higher than the exercise price of the put option or when a temporary decrease in
the market value of the underlying security is anticipated and, in the view of a
Portfolio's Investment Manager, it would not be appropriate to acquire the
underlying security. If the market price of the underlying security rises or
stays above the exercise price, it can be expected that the purchaser of the put
will not exercise the option and a profit, in the amount of the premium received
for the put, will be realized by the writer of the put. However, if the market
price of the underlying security declines or stays below the exercise price, the
put option may be exercised and the portfolio that sold the put will be
obligated to purchase the underlying security at a price that may be higher than
its current market value. All option writing strategies will be employed only
if the option is "covered." For this purpose, "covered" means that, so long as
the Portfolio that has written (sold) the option is obligated as the writer of a
call option, it will (1) own the security underlying the option; or (2) hold on
a share-for-share basis a call on the same security, the exercise price of which
is equal to or less than the exercise price of the call written. In the case of
a put option, the Portfolio that has written (sold) the put option will (1)
maintain cash or cash equivalents in an amount equal to or greater than the
exercise price; or (2) hold on a share-for share basis, a put on the same
security as the put written provided that the exercise price of the put held is
equal to or greater than the exercise price of the put written.
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Options on Securities Indices. Options on securities indices may by used in
- -----------------------------
much the same manner as options on securities. Index options may serve as a
hedge against overall fluctuations in the securities markets or market sectors,
rather than anticipated increases or decreases in the value of a particular
security. Thus, the effectiveness of techniques using stock index options will
depend on the extent to which price movements in the securities index selected
correlate with price movements of the portfolio to be hedged. Options on stock
indices are settled exclusively in cash.
Risk Factors Relating to the Use of Options Strategies. The premium paid or
- ------------------------------------------------------
received with respect to an option position will reflect, among other things,
the current market price of the underlying security, the relationship of the
exercise price to the market price, the historical price volatility of the
underlying security, the option period, supply and demand, and interest rates.
Moreover, the successful use of options as a hedging strategy depends upon the
ability to forecast the direction of market fluctuations in the underlying
securities, or in the case of index options, in the market sector represented by
the index selected.
Under normal circumstances, options traded on one or more of the several
recognized options exchanges may be closed by effecting a "closing purchase
transaction," i.e. by purchasing an identical option with respect to the
underlying security in the case of options written and by selling an identical
option on the underlying security in the case of options purchased. A closing
purchase transaction will effectively cancel an option position, thus permitting
profits to be realized on the position, to prevent an underlying security from
being called from, or put to, the writer of the option or, in the case of a call
option, to permit the sale of the underlying security. A profit or loss may be
realized from a closing purchase transaction, depending on whether the overall
cost of the closing transaction (including the price of the option and actual
transaction costs) is less or more than the premium received from the writing of
the option. It should be noted that, in the event a loss is incurred in a
closing purchase transaction, that loss may be partially or entirely offset by
the premium received from a simultaneous or subsequent sale of a different call
or put option. Also, because increases in the market price of an 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 appreciation of the underlying security held. Options will
normally have expiration dates between three and nine months from the date
written. The exercise price of the options may be below, equal to, or above the
current market values of the underlying securities at the time the options are
written. Options that expire unexercised have no value. Unless an option
purchased by a Portfolio is exercised or a closing purchase transaction is
effected with respect to that position, a loss will be realized in the amount of
the premium paid.
HEDGING THROUGH THE USE OF FUTURES CONTRACTS AND RELATED INSTRUMENTS
As indicated in the prospectus, each of the Portfolios may, consistent with its
investment objectives and policies, use futures contracts and options on futures
contracts to reduce the risks associated with the types of securities in which
each is authorized to invest and/or in anticipation of future purchases. A
Portfolio may invest in futures-related instruments only for hedging purposes
and not for speculation and only in a manner consistent with its investment
objective and policies. In particular, a Portfolio may not commit more than 5%
of its net assets, in the aggregate, to margin deposits on futures contracts or
premiums for options on futures contracts. The following discussion sets forth
certain information relating to the types of futures contracts that the
Portfolios may use, together with the risks that may be associated with their
use.
About Futures Contracts and Options on Futures Contracts. A futures contract is
- --------------------------------------------------------
a bilateral agreement pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of the specified type of security or currency
called for in the contract at a specified future time and at a specified price.
In practice, however, contracts relating to financial instruments or currencies
are closed out through the use of closing purchase transactions before the
settlement date and without delivery or the underlying security or currency. In
the case of futures contracts based on a securities index, the contract provides
for "delivery" of an amount of cash equal to the dollar amount specified
multiplied by the difference between the value of the underlying index on the
settlement date and the price at which the contract was originally fixed.
Stock Index Futures Contracts. A Portfolio may sell stock index futures
- ------------------------------
contracts in anticipation of a general market or market sector decline that may
adversely affect the market values of securities held. To the extent that
securities held correlate with the index underlying the contract, the sale of
futures contracts on that index could reduce the risk associated with a market
decline. Where a significant market or market
18
<PAGE>
sector advance is anticipated, the purchase of a stock index futures contract
may afford a hedge against not participating in such advance at a time when a
Portfolio is not fully invested. This strategy would serve as a temporary
substitute for the purchase of individual stocks which may later be purchased in
an orderly fashion. Generally, as such purchases are made, positions in stock
index futures contracts representing an equivalent securities would be
liquidated.
Futures Contracts on Debt Securities. Futures contracts on debt securities,
- ------------------------------------
often referred to as "interest rate futures," obligate the seller to deliver a
specific type of debt security called for in the contract, at a specified future
time. A public market now exists for futures contracts covering a number of
debt securities, including long-term U.S. Treasury bonds, ten-year U.S. Treasury
notes, and three-month U.S. Treasury bills, and additional futures contracts
based on other debt securities or indices of debt securities may be developed in
the future. Such contracts may be used to hedge against changes in the general
level of interest rates. For example, a Portfolio may purchase such contracts
when it wishes to defer a purchase of a longer-term bond because short-term
yields are higher than long-term yields. Income would thus be earned on a
short-term security and minimize the impact of all or part of an increase in the
market price of the long-term debt security to be purchased in the future. A
rise in the price of the long-term debt security prior to its purchase either
would be offset by an increase in the value of the contract purchased by the
Portfolio or avoided by taking delivery of the debt securities underlying the
futures contract. Conversely, such a contract might be sold in order to
continue to receive the income from a long-term debt security, while at the same
time endeavoring to avoid part or all of any decline in market value of that
security that would occur with an increase in interest rates. If interest rates
did rise, a decline in the value of the debt security would be substantially
offset by an increase in the value of the futures contract sold.
Options on Futures Contracts. An option on a futures contract gives the
- ----------------------------
purchaser the right, in return for the premium, 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 price at any time during the period of
the option. The risk of loss associated with the purchase of an option on a
futures contract is limited to the premium paid for the option, plus transaction
cost. The seller of an option on a futures contract is obligated to a broker
for the payment of initial and variation margin in amounts that depend on the
nature of the underlying futures contract, the current market value of the
option, and other futures positions held by the Portfolio. Upon exercise of the
option, the option seller must deliver the underlying futures position to the
holder of the option, together with the accumulated balance in the seller's
futures margin account that represents the amount by which the market price of
the underlying futures contract exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option involved. If an option
is exercised on the last trading day prior to the expiration date of the option,
settlement will be made entirely in cash equal to the difference between the
exercise price of the option and the value at the close of trading on the
expiration date.
Risk Considerations Relating to Futures Contracts and Related Instruments.
- -------------------------------------------------------------------------
Participants in the futures markets are subject to certain risks. Positions in
futures contracts may be closed out only on the exchange on which they were
entered into (or through a linked exchange): no secondary market exists for such
contracts. In addition, there can be no assurance that a liquid market will
exist for the contracts at any particular time. Most futures exchanges and
boards of trade limit the amount of fluctuation permitted in futures contract
prices during a single trading day. Once the daily limit has been reached in a
particular contract, no trades may be made that day at a price beyond that
limit. It is possible that futures contract prices could move to the daily
limit for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses. In such event, and in the event of adverse price
movements, a Portfolio would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of that
portion of the securities being hedged, if any, may partially or completely
offset losses on the futures contract.
As noted above, there can be no assurance that price movements in the futures
markets will correlate with the prices of the underlying securities positions.
In particular, there may be an imperfect correlation between movements in the
prices of futures contracts and the market value of the underlying securities
positions being hedged. In addition, the market prices of futures contracts may
be affected by factors other than interest rate changes and, as a result, even a
correct forecast of interest rate trends might not result in a successful
hedging strategy. If participants in the futures market elect to close out
their contracts through offsetting transactions rather than by meeting margin
deposit requirements, distortions in the normal relationship between debt
securities and the futures markets could result. Price distortions could also
result
19
<PAGE>
if investors in the futures markets opt to make or take delivery of the
underlying securities rather than engage in closing transactions because such
trend might result in a reduction in the liquidity of the futures market. In
addition, an increase in the participation of speculators in the futures market
could cause temporary price distortions.
The risks associated with options on futures contracts are similar to those
applicable to all options and are summarized above under the heading "Hedging
Through the Use of Options: Risk Factors Relating to the Use of Options
Strategies." In addition, as is the case with futures contracts, there can be
no assurance that (1) there will be a correlation between price movements in the
options and those relating to the underlying securities; (2) a liquid market for
options held will exist at the time when a Portfolio may wish to effect a
closing transaction; or (3) predictions as to anticipated interest rate or other
market trends on behalf of a Portfolio will be correct.
Margin Requirements and Limitations Applicable to Futures Related Transactions.
- ------------------------------------------------------------------------------
When a purchase or sale of a futures contract is made by a Portfolio, that
Portfolio is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. The Portfolio expects to earn interest income on its initial margin
deposits. A futures contract held by a Portfolio is valued daily at the
official settlement price of the exchange on which it is traded. Each day the
Portfolio pays or receives cash, called "variation margin" equal to the daily
change in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the
Portfolio but is instead a settlement between the Portfolio and the broker of
the amount one would owe the other if the futures contract expired. In
computing daily net asset value, the Portfolio will value its open futures
positions at market.
A Portfolio will not enter into a futures contract or an option on a futures
contract if, immediately thereafter, the aggregate initial margin deposits
relating to such positions plus premiums paid by it for open futures option
positions, less the amount by which any such options are "in-the-money," would
exceed 5% of the Portfolio's total assets. A call option is "in-the-money" if
the value of the futures contract that is the subject of the option exceeds the
exercise price. A put option is "in-the-money" if the exercise price exceeds
the value of the futures contract that is the subject of the option.
Segregation Requirements.
Futures Contracts. When purchasing a futures contract, a Portfolio will
- -----------------
maintain, either with its custodian bank or, if permitted, a broker, and will
mark-to-market on a daily basis, cash, U.S. Government securities, or other
highly liquid securities that, when added to the amounts deposited with a
futures commission merchant as margin, are equal to the market value of the
futures contract. Alternatively, a Portfolio may "cover" its position by
purchasing a put option on the same futures contract with a strike price as high
or higher than the price of the contract held by the Portfolio. When selling a
futures contract, a Portfolio will similarly maintain liquid assets that, when
added to the amount deposited with a futures commission merchant as margin, are
equal to the market value of the instruments underlying the contract.
Alternatively, a Portfolio may "cover" its position by owning the instruments
underlying the contract (or, in the case of an index futures contract, a
portfolio with a volatility substantially similar to that of the index on which
the futures contract is based), or by holding a call option permitting a
Portfolio to purchase the same futures contract at a price no higher than the
price of the contract written by that Portfolio (or at a higher price if the
difference is maintained in liquid assets with the Trust's custodian).
Options on Futures Contracts. When selling a call option on a futures contract,
- ----------------------------
a Portfolio will maintain, either with its custodian bank or, if permitted, a
broker, and will mark-to-market on a daily basis, cash, U. S. Government
securities, or other highly liquid securities that, when added to the amounts
deposited with a futures commission merchant as margin, equal the total market
value of the futures contract underlying the call option. Alternatively, the
Portfolio may cover its position by entering into a long position in the same
futures contract at a price no higher than the strike price of the call option,
by owning the instruments underlying the futures contract, or by holding a
separate call option permitting the Portfolio to purchase the same futures
contract at a price not higher than the strike price of the call option sold by
the Portfolio.
20
<PAGE>
When selling a put option on a futures contract, the Portfolio will similarly
maintain cash, U.S. Government securities, or other highly liquid securities
that equal the purchase price of the futures contract, less any margin on
deposit. Alternatively, the Portfolio may cover the position either by entering
into a short position in the same futures contract, or by owning a separate put
option permitting it to sell the same futures contract so long as the strike
price of the purchased put option is the same or higher than the strike price of
the put option sold by the Portfolio.
HEDGING THROUGH THE USE OF CURRENCY RELATED INSTRUMENTS
As indicated in the prospectus, The Growth Equity Portfolio may use forward
foreign currency exchange contracts in connection with permitted purchases and
sales of securities of non-U.S. issuers. In addition, The International Equity
Portfolio and The Fixed Income Portfolio may, consistent with their respective
investment objectives and policies, use such contracts as well as certain other
currency related instruments to reduce the risks associated with the types of
securities in which it is authorized to invest and to hedge against fluctuations
in the relative value of the currencies in which securities held by The
International Equity Portfolio are denominated. The following discussion sets
forth certain information relating to forward currency contracts and other
currency related instruments, together with the risks that may be associated
with their use.
About Currency Transactions and Hedging. The International Equity Portfolio and
- ---------------------------------------
The Fixed Income Portfolio are authorized to purchase and sell options, futures
contracts and options thereon relating to foreign currencies and securities
denominated in foreign currencies. Such instruments may be traded on foreign
exchanges, including foreign over-the-counter markets. Transactions in such
instruments may not be regulated as effectively as similar transactions in the
United States, may not involve a clearing mechanism and related guarantees, and
are subject to the risk of governmental actions affecting trading in, or the
prices of, foreign securities. The value of such positions also could be
adversely affected by: (i) foreign political, legal and economic factors; (ii)
lesser availability than in the United States of data on which to make trading
decisions; (iii) delays in a Portfolio's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States; and
(iv) lesser trading volume. Foreign currency exchange transactions may be
entered into for the purpose of hedging against foreign currency exchange risk
arising from the Portfolio's investment or anticipated investment in securities
denominated in foreign currencies. The International Equity Portfolio may also
purchase and sell options relating to foreign currencies to increase exposure to
a foreign currency or to shift foreign currency exposure from one country to
another.
Foreign Currency Options and Related Risks. The International Equity Portfolio
- ------------------------------------------
and The Fixed Income Portfolio may take positions in options on foreign
currencies to hedge against the risk of foreign exchange rate fluctuations on
foreign securities the Portfolio holds in its portfolio or intends to purchase.
For example, if the Portfolio were to enter into a contract to purchase
securities denominated in a foreign currency, it could effectively fix the
maximum U.S. dollar cost of the securities by purchasing call options on that
foreign currency. Similarly, if the Portfolio held securities denominated in a
foreign currency and anticipated a decline in the value of that currency against
the U.S. dollar, it could hedge against such a decline by purchasing a put
option on the currency involved. The markets in foreign currency options are
relatively new, and the Portfolio's ability to establish and close out positions
in such options is subject to the maintenance of a liquid secondary market.
There can be no assurance that a liquid secondary market will exist for a
particular option at any specific time. In addition, options on foreign
currencies are affected by all of those factors that influence foreign exchange
rates and investments generally. The quantities of currencies underlying option
contracts represent odd lots in a market dominated by transactions between
banks, and as a result extra transaction costs may be incurred upon exercise of
an option. There is no systematic reporting of last sale information for
foreign currencies or any regulatory requirement that quotations be firm or
revised on a timely basis. Quotation information is generally representative of
very large transactions in the interbank market and may not reflect smaller
transactions where rates may be less favorable. Option markets may be closed
while round-the-clock interbank currency markets are open, and this can create
price and rate discrepancies.
Forward Foreign Currency Exchange Contracts. The Growth Equity and Fixed Income
- -------------------------------------------
Portfolios may use forward contracts to protect against uncertainty in the level
of future exchange rates in connection with specific transactions. For example,
when the Portfolio enters into a contract for the purchase or sale of a
21
<PAGE>
security denominated in a foreign currency, or when the Portfolio anticipates
the receipt in a foreign currency of dividend or interest payments on a security
that it holds, the Portfolio may desire to "lock in" the U.S. dollar price of
the security or the U.S. dollar equivalent of the payment, by entering into a
forward contract for the purchase or sale of the foreign currency involved in
the underlying transaction in exchange for a fixed amount of U.S. dollars or
foreign currency. This may serve as a hedge against a possible loss resulting
from an adverse change in the relationship between the currency exchange rates
during the period between the date on which the security is purchased or sold,
or on which the payment is declared, and the date on which such payments are
made or received. The International Equity Portfolio may also use forward
contracts in connection with specific transactions. In addition, it may use such
contracts to lock in the U.S. dollar value of those positions, to increase the
Portfolio's exposure to foreign currencies that the Investment Manager believes
may rise in value relative to the U.S. dollar or to shift the Portfolio's
exposure to foreign currency fluctuations from one country to another. For
example, when the Investment Manager believes that the currency of a particular
foreign country may suffer a substantial decline relative to the U.S. dollar or
another currency, it may enter into a forward contract to sell the amount of the
former foreign currency approximating the value of some or all of the portfolio
securities held by the Portfolio that are denominated in such foreign currency.
This investment practice generally is referred to as "cross-hedging."
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for a
Portfolio to purchase additional foreign currency on the spot (i.e., cash)
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Portfolio is obligated
to deliver and if a decision is made to sell the security 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 if its market value exceeds the amount of foreign currency the
Portfolio is obligated to deliver. The projection of short-term currency market
movements is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. Forward contracts involve the risk that
anticipated currency movements will not be accurately predicted, causing the
Portfolio to sustain losses on these contracts and transaction costs. A
Portfolio may enter into forward contracts or maintain a net exposure to such
contracts only if: (1) the consummation of the contracts would not obligate the
Portfolio to deliver an amount of foreign currency in excess of the value of the
Portfolio's securities and other assets denominated in that currency; or (2) the
Portfolio maintains cash, U.S. Government securities or other liquid securities
in a segregated account in an amount which, together with the value of all the
Portfolio's securities denominated in such currency, equals or exceeds the value
of such contracts.
At or before the maturity date of a forward contract that requires the Portfolio
to sell a currency, the Portfolio may either sell a portfolio security and use
the sale proceeds to make delivery of the currency or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Portfolio will obtain, on the same maturity date,
the same amount of the currency that it is obligated to deliver. Similarly, the
Portfolio may close out a forward contract requiring it to purchase a specified
currency by entering into another contract entitling it to sell the same amount
of the same currency on the maturity date of the first contract. As a result of
such an offsetting transaction, a Portfolio would realize a gain or a loss to
the extent of any change in the exchange rate between the currencies involved
between the execution dates of the first and second contracts. The cost to a
Portfolio of engaging in forward contracts varies with factors such as the
currencies involved, the length of the contract period and the prevailing market
conditions. Because forward contracts are usually entered into on a principal
basis, no fees or commissions are involved. The use of forward contracts does
not eliminate fluctuations in the prices of the underlying securities the
Portfolio owns or intends to acquire, but it does fix a rate of exchange in
advance. In addition, although forward contracts limit the risk of loss due to
a decline in the value of the hedged currencies, they also limit any potential
gain that might result should the value of the currencies increase.
Although the International Equity Portfolio values its assets daily in terms of
U.S. dollars, it does not intend to convert its holdings of foreign currencies
into U.S. dollars on a daily basis. The Portfolio may convert foreign currency
from time to time, and investors should be aware of the costs of currency
conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference between the prices
at which they are buying and selling various currencies. Thus, a dealer may
22
<PAGE>
offer to sell a foreign currency to the Portfolio at one rate, while offering a
lesser rate of exchange should the Portfolio desire to resell that currency to
the dealer.
Other Hedging Instruments. As permitted under the Investment Company Act, a
- -------------------------
Portfolio may invest up to 5% of its net assets in securities of other
investment companies but may not acquire more than 3% of the voting securities
of the investment company. Generally, the Portfolios do not make such
investments. The Growth Equity Portfolio does, however, invest in certain
instruments known as Standard & Poor's Depositary Receipts or "SPDRs" as part of
its overall hedging strategies. Such strategies are designed to reduce certain
risks that would otherwise be associated with the investments in the types of
securities in which the Portfolio invests and/or in anticipation of future
purchases, including to achieve market exposure pending direct investment in
securities, provided that the use of such strategies are not for speculative
purposes and are otherwise consistent with the investment policies and
restrictions adopted by the Portfolio. SPDRs are interests in a unit investment
trust ("UIT") that may be obtained from the UIT or purchased in the secondary
market (SPDRs are listed on the American Stock Exchange). The UIT will issue
SPDRs in aggregations known as "Creation Units" in exchange for a "Portfolio
Deposit" consisting of (a) a portfolio of securities substantially similar to
the component securities ("Index Securities") of the Standard & Poor's 500
Composite Stock Price Index (the "S&P Index"), (b) a cash payment equal to a pro
rata portion of the dividends accrued on the UIT's portfolio securities since
the last dividend payment by the UIT, net of expenses and liabilities, and (c) a
cash payment or credit, called a "Balancing Amount") designed to equalize the
net asset value of the S&P Index and the net asset value of a Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the UIT. To
redeem, the Portfolio must accumulate enough SPDRs to reconstitute a Creation
Unit. The liquidity of small holdings of SPDRs, therefore, will depend upon the
existence of a secondary market. Upon redemption of a Creation Unit, the
Portfolio will receive Index Securities and cash identical to the Portfolio
Deposit required of an investor wishing to purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held by the
UIT. Accordingly, the level of risk involved in the purchase or sale of a SPDR
is similar to the risk involved in the purchase or sale of traditional common
stock, with the exception that the pricing mechanism for SPDRs is based on a
basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by the Funds could result in losses on SPDRs. Trading
in SPDRs involves risks similar to those risks involved in the writing of
options on securities.
INVESTMENT RESTRICTIONS
In addition to the investment objectives and policies of the Portfolios, each
Portfolio is subject to certain investment restrictions both in accordance with
various provisions of the Investment Company Act and guidelines adopted by the
Trust's Board. These investment restrictions are summarized below. The
following investment restrictions (1 though 9) are fundamental and cannot be
changed with respect to any Portfolio without the affirmative vote of a majority
of the Portfolio's outstanding voting securities as defined in the Investment
Company Act.
A Portfolio may not:
1. Purchase the securities of any issuer, if as a result of such purchase, more
than 5% of the total assets of the Portfolio would be invested in the
securities of that issuer, or purchase any security if, as a result of such
purchase, a Portfolio would hold more than 10% of the outstanding voting
securities of an issuer, provided that up to 25% of the value of the
Portfolio's assets may be invested without regard to this limitation, and
provided further that this restriction shall not apply to investments in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, repurchase agreements secured by such obligations, or
securities issued by other investment companies.
2. Borrow money, except that a Portfolio (i) may borrow amounts, taken in the
aggregate, equal to up to 5% of its total assets, from banks for temporary
purposes (but not for leveraging or investment) and (ii) may engage in
reverse repurchase agreements for any purpose, provided that (i) and (ii) in
combination do not exceed 33 1/3% of the value of the Portfolio's total
assets (including the amount borrowed) less liabilities (other than
borrowings).
3. Mortgage, pledge or hypothecate any of its assets except in connection with
any permitted borrowing, provided that this restriction does not prohibit
escrow, collateral or margin arrangements in connection
23
<PAGE>
with a Portfolio's permitted use of options, futures contracts and similar
derivative financial instruments described in the Trust's prospectus.
4. Issue senior securities, as defined in the Investment Company Act, provided
that this restriction shall not be deemed to prohibit a Portfolio from making
any permitted borrowing, mortgage or pledge, and provided further that the
permitted use of options, futures contracts and similar derivative financial
instruments described in the Trust's prospectus shall not constitute issuance
of a senior security.
5. Underwrite securities issued by others, provided that this restriction shall
not be violated in the event that the Portfolio may be considered an
underwriter within the meaning of the Securities Act of 1933 in the
disposition of portfolio securities.
6. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments, provided that this shall not prevent a
portfolio from investing in securities or other instruments backed by real
estate or securities of companies engaged in the real estate business.
7. Purchase or sell commodities or commodity contracts, unless acquired as a
result of ownership of securities or other instruments, provided that a
Portfolio may purchase and sell futures contracts relating to financial
instruments and currencies and related options in the manner described in the
Trust's prospectus.
8. Make loans to others, provided that this restriction shall not be construed
to limit (a) purchases of debt securities or repurchase agreements in
accordance with a Portfolio's investment objectives and policies; and (b)
loans of portfolio securities in the manner described in the Trust's
prospectus.
9. Invest more than 25% of the market value of its assets in the securities of
companies engaged in any one industry provided that this restriction does not
apply to obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, repurchase agreements secured by such
obligations or securities issued by other investment companies.
The following investment restrictions (10 through 11) reflect policies that have
been adopted by the Trust, but which are not fundamental and may be changed by
the Trust's Board, without shareholder vote.
A Portfolio may not:
10. Make short sales of securities or maintain a short position, or purchase
securities on margin, provided that this restriction shall not preclude the
Trust from obtaining such short-term credits as may be necessary for the
clearance of purchases and sales of its portfolio securities, and provided
further that this restriction will not be applied to limit the use by a
Portfolio of options, futures contracts and similar derivative financial
instruments in the manner described in the Trust's prospectus.
11. Invest in securities of other investment companies except as permitted under
the Investment Company Act.
An investment restriction applicable to a particular Portfolio shall not be
deemed violated as a result of a change in the market value of an investment,
the net or total assets of that Portfolio, or any other later change provided
that the restriction was satisfied at the time the relevant action was taken.
In order to permit the sale of its shares in certain states, the Trust may make
commitments more restrictive than those described above. Should the Trust
determine that any such commitment may no longer be appropriate, the Board will
consider whether to revoke the commitment and terminate sales of its shares in
the state involved.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Trust reserves the right in its sole discretion to suspend the continued
offering of the Trust's shares and to reject purchase orders in whole or in part
when in the judgment of the Board such action is in the best interest of the
Trust.
24
<PAGE>
Payments to shareholders for shares of the Trust redeemed directly from the
Trust will be made as promptly as possible but no later than seven days after
receipt by the Trust's transfer agent of the written request in proper form,
with the appropriate documentation as stated in the prospectus, except that the
Trust may suspend the right of redemption or postpone the date of payment during
any period when (a) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays; (b) an emergency exists as determined by the SEC making disposal of
portfolio securities or valuation of net assets of the Trust not reasonably
practicable; or for such other period as the SEC may permit for the protection
of the Trust's shareholders.
Each of the Portfolios reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase of the
Trust's shares by making payment in whole or in part in readily marketable
securities chosen by the Trust and valued in the same way as they would be
valued for purposes of computing each Portfolio's net asset value. If such
payment were made, an investor may incur brokerage costs in converting such
securities to cash. The value of shares on redemption or repurchase may be more
or less than the investor's cost, depending upon the market value of the Trust's
portfolio securities at the time of redemption or repurchase.
PORTFOLIO TRANSACTIONS AND VALUATION
Subject to the general supervision of the Board, the Investment Managers of the
respective Portfolios are responsible for placing orders for securities
transactions for each of the Portfolios. Securities transactions involving
stocks will normally be conducted through brokerage firms entitled to receive
commissions for effecting such transactions. In placing portfolio transactions,
an Investment Manager will use its best efforts to choose a broker or dealer
capable of providing the services necessary to obtain the most favorable price
and execution available. The full range and quality of services available will
be considered in making these determinations, such as the size of the order, the
difficulty of execution, the operational facilities of the firm involved, the
firm's risk in positioning a block of securities, and other factors. In placing
brokerage transactions, the respective Investment Managers may, however,
consistent with the interests of the Portfolios they serve, select brokerage
firms on the basis of the research, statistical and pricing services they
provide to the Investment Manager. In such cases, a Portfolio may pay a
commission that is higher than the commission that another qualified broker
might have charged for the same transaction, providing the Investment Manager
involved determines in good faith that such commission is reasonable in terms
either of that transaction or the overall responsibility of the Investment
Manager to the Portfolio and such manager's other investment advisory clients.
Transactions involving debt securities and similar instruments are expected to
occur primarily with issuers, underwriters or major dealers acting as
principals. Such transactions are normally effected on a net basis and do not
involve payment of brokerage commissions. The price of the security, however,
usually includes a profit to the dealer. Securities purchased in underwritten
offerings include a fixed amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. When securities are
purchased directly from or sold directly to an issuer, no commissions or
discounts are paid.
The table below reflects the aggregate dollar amount of brokerage commissions
paid by each of the Portfolios of the Trust paid the during the fiscal years
indicated.
<TABLE>
<CAPTION>
Aggregate Brokerage Commissions
for the Fiscal Years ended
Portfolio 1998 1997 1996
- -------------------------------------------------------------------
<S> <C> <C> <C>
Value Equity $195,023 $179,053 $137,963
Growth Equity $401,358 258,337 238,948
Small Cap $328,917 227,730 147,928
International Equity $527,518 250,705 144,359
Limited Duration -0- -0- -0-
</TABLE>
The Trust has adopted procedures pursuant to which each Portfolio is permitted
to allocate brokerage transactions to affiliates of the various Investment
Managers. Under such procedures, commissions paid to any such affiliate must be
fair and reasonable compared to the commission, fees or other remuneration paid
25
<PAGE>
to other brokers in connection with comparable transactions. Several of the
Trust's Investment Managers are affiliated with brokerage firms to which
brokerage transactions may, from time to time, be allocated. The table below
reflects the aggregate dollar amount of commissions paid to each such firm, as
well as similar information about transactions allocated to Furman Selz, LLC,
(which served as the Trust's principal underwriter prior to January 1, 1997) by
the Portfolios during the period. Information shown is expressed both as a
percentage of the total amount of commission dollars paid by each portfolio and
as a percentage of the total value of all brokerage transactions effected on
behalf of each portfolio. "NA" indicates that during the relevant period,
indicated broker was not considered an affiliate of the specified Portfolio.
Affiliated Broker(1)
<TABLE>
<CAPTION>
Portfolio
---------------------------------------------------------------
For Value For Growth For Small
Equity(2) Equity Cap Equity
1998 1997 1996 1998 1997 1996 1998 1997 1996
----- ----- ----- ------- ----- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cowen & Co. (3)
% of commissions -0- -0- 34% NA -0- .02% NA -0- -0-
% of transactions -0- -0- .94% NA -0- .05% NA -0- -0-
Prudential Securities(4)
% of commissions NA NA NA 0.20% 1.36% NA NA NA NA
% of transactions NA NA NA 0.21% 1.38% NA NA NA NA
Merrill Lynch & Co. (5)
% of commissions 2.72% .80% NA NA 2.21% NA NA 1.51% NA
% of transactions 2.67% .61% NA NA 5.47% NA NA 1.56% NA
Union Swiss Bank
% of commissions NA NA NA NA NA NA NA NA NA
% of transactions NA NA NA NA NA NA NA NA NA
Furman Selz LLC(6)
% of commissions -0- -0- -0- -0- -0- 4.20% -0- -0- -0-
% of transactions -0- -0- -0- -0- -0- 1.26% -0- -0- -0-
Goldman Sachs & Co.
% of commissions NA NA NA 1.68%* NA NA NA NA NA
% of transactions NA NA NA 6.26%* NA NA NA NA NA
</TABLE>
<TABLE>
<CAPTION>
Portfolio
--------------------------------------------------
For International Equity For Limited Duration
1998 1997 1996 1998 1997 1996
-------- -------- ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Cowen & Co. (3)
% of commissions -0- -0- -0- -0- -0- -0-
% of transactions -0- -0- -0- -0- -0- -0-
Prudential Securities(4)
% of commissions NA NA NA NA NA NA
% of transactions NA NA NA NA NA NA
Merrill Lynch & Co.(5)
% of commissions NA 2.08% NA NA -0- NA
% of transactions NA 2.74% NA NA -0- NA
Union Swiss Bank
% of commissions 0.52% -0- -0- NA NA NA
% of transactions 0.85% -0- -0- NA NA NA
Furman Selz LLC(6)
% of commissions -0- -0- -0- -0- -0- -0-
% of transactions -0- -0- -0- -0- -0- -0-
Goldman Sachs & Co.
% of commissions NA NA NA NA NA NA
% of transactions NA NA NA NA NA NA
</TABLE>
26
<PAGE>
* Goldman Sachs Asset Management became Investment Manager on October 1,
1997. These figures are calculated for the period October 1, 1997 through
June 30, 1998 only.
__________
1. Other brokers deemed to be affiliated with respect to the Income Portfolios
are companies affiliated with Deutchebank, the parent company of Morgan
Grenfell Capital Management Incorporated. No brokerage transactions were
affected through such companies during the periods reflected in the above
table by the relevant Portfolios.
2. Effective October 1, 1997, Goldman Sachs Asset Management served as an
Investment Manager of the Growth Equity Portfolio.
3. Cowen Asset Management, which served as an Investment Manager of The Value
Equity Portfolio prior to August 1, 1996, is a division of Cowen & Co.
4. Both Prudential Securities and Jennison Associates LLC, which serves as an
Investment Manager of The Growth Equity Portfolio, are wholly-owned
subsidiaries of The Prudential Insurance Company of America.
5. Figures shown include all brokers affiliated with Merrill Lynch & Co. Merrill
Lynch Asset Management, LLP, ("MLAM") of which Hotchkis and Wiley is a
division. MLAM is a wholly, indirect subsidiary of Merrill Lynch & Co.
6. Furman Selz LLC served as the Trust's principal underwriter prior to January
1, 1997.
In no instance will portfolio securities be purchased from or sold to Investment
Managers, Hirtle Callaghan or any affiliated person of the foregoing entities
except to the extent permitted by applicable law or an order of the SEC.
Investment decisions for the several Portfolios are made independently from
those of any other client accounts (which may include mutual funds) managed or
advised by an Investment Manager. Nevertheless, it is possible that at times
identical securities will be acceptable for both a Portfolio of the Trust and
one or more of such client accounts. In such cases, simultaneous transactions
are inevitable. Purchases and sales are then averaged as to price and allocated
as to amount according to a formula deemed equitable to each such account.
While in some cases this practice could have a detrimental effect upon the price
or value of the security as far as a Portfolio is concerned, in other cases it
is believed that the ability of a Portfolio to participate in volume
transactions may produce better executions for such Portfolio.
Portfolio Turnover. Changes may be made in the holdings of any of the
- -------------------
Portfolios consistent with their
27
<PAGE>
respective investment objectives and policies whenever, in the judgment of the
relevant Investment Manager, such changes are believed to be in the best
interests of the Portfolio involved. It is anticipated that the annual portfolio
turnover rate for a Portfolio will not exceed 100% under normal circumstances.
The portfolio turnover rate is calculated by dividing the lesser of purchases or
sales of portfolio securities by the average monthly value of a Portfolio's
securities. For purposes of this calculation, portfolio securities exclude all
securities having a maturity when purchased of one year or less. The portfolio
turnover rate for each of the Portfolios that has more than one Investment
Manager will be an aggregate of the rates for each individually managed portion
of that Portfolio. Rates for each portion, however, may vary significantly. The
portfolio turnover rate for each of the Trust's Portfolios for the fiscal year
ended June 30, 1998 were: for the Value Equity Portfolio, 86.45%; for the Growth
Equity Portfolio, 95.07%; for the International Portfolio, 36.80% and for the
Limited Duration Municipal Bond Portfolio, 42.50%. The portfolio turnover rate
for the Small Capitalization Equity Portfolio for the period was 103.41%, which
reflects turnover as a result of a change in one of the Investment Managers. The
portfolio turnover rate for each of the Trust's Portfolios for the fiscal year
ended June 30, 1997 were: for the Value Equity Portfolio, 97.30%; for the Growth
Equity Portfolio, 80.47%; for the Small Capitalization Equity Portfolio, 54.16%;
for the International Portfolio, 29.85% and for the Limited Duration Municipal
Bond Portfolio, 44.57%. The portfolio turnover rates for the portfolios for the
period beginning with the commencement of the respective portfolio's operations
and ending on June 30, 1996, were as follows: for the Value Equity Portfolio,
92.00%; for the Growth Equity Portfolio, 80.00%; for the Small Capitalization
Equity Portfolio, 38.00%; and for the International Portfolio, 15.00%.
The portfolio turnover rate for the Limited Duration Municipal Bond Portfolio
for the same period was 116.00%. This rate is due to the fact that securities
may be sold by the Investment Manager in order to adjust the overall duration or
average effective of the overall portfolio. The portfolio turnover rate for The
Fixed Income and Intermediate Term Municipal Bond Portfolios is similarly
expected to exceed 100%.
Valuation. The net asset value per share of the Portfolios is determined once
- ---------
on each Business Day as of the close of the New York Stock Exchange, which is
normally 4 p.m. Eastern Time, on each day the New York Stock Exchange is open
for trading. The Trust does not expect to determine the net asset value of its
shares on any day when the Exchange is not open for trading even if there is
sufficient trading in its portfolio securities on such days to materially affect
the net asset value per share.
In valuing the Trust's assets for calculating net asset value, readily
marketable portfolio securities listed on a national securities exchange or on
NASDAQ are valued at the last sale price on the business day as of which such
value is being determined. If there has been no sale on such exchange or on
NASDAQ on such day, the security is valued at the closing bid price on such day.
Readily marketable securities traded only in the over-the-counter market and not
on NASDAQ are valued at the current or last bid price. If no bid is quoted on
such day, the security is valued by such method as the Board shall determine in
good faith to reflect the security's fair value. All other assets of each
Portfolio are valued in such manner as the Board in good faith deems appropriate
to reflect their fair value. The net asset value per share of each of the
Trust's Portfolios is calculated as follows: All liabilities incurred or accrued
are deducted from the valuation of total assets which includes accrued but
undistributed income; the resulting net asset value is divided by the number of
shares outstanding at the time of the valuation and the result (adjusted to the
nearest cent) is the net asset value per share.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions. As noted in the prospectus, each Portfolio will
- ---------------------------
distribute substantially all of its net investment income and net realized
capital gains, if any. The Value Equity Portfolio, The Growth Equity Portfolio
and The Small Capitalization Equity Portfolios will declare and distribute
dividends from net investment income on a quarterly basis. The Limited Duration
Municipal Bond Portfolio, The Intermediate Municipal Bond Portfolio and the
Fixed-Income Portfolio will declare dividends daily, with payments on a monthly
basis. The International Equity Portfolio will declare dividends semi-annually.
The Trust expects to distribute any undistributed net investment income and
capital gains for the 12-month period ended each October 31, on or about
December 31 of each year.
Tax Information. Each of the Trust's Portfolios is treated as a separate entity
- ---------------
for federal income tax purposes. Each Portfolio intends to qualify and elect to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code") for the fiscal year
28
<PAGE>
ending June 30, 1996 and intends to continue to so qualify. Accordingly, it is
the policy of each Portfolio to distribute to its shareholders by December 31 of
each calendar year (i) at least 98% of its ordinary income for such year; (ii)
at least 98% of the excess of its realized capital gains over its realized
capital losses for the 12-month period ending on October 31 during such year;
and (iii) any amounts from the prior calendar year that were not distributed.
The following discussion and related discussion in the prospectus do not purport
to be a complete description of all tax implications of an investment in the
Trust. In addition, such information relates solely to the application of that
law to U.S. citizens or residents and U.S. domestic corporations, partnerships,
trusts and estates. A shareholder should consult with his or her own tax adviser
for more information about Federal, state, local or foreign taxes. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of shares of the Trust, including the possibility that
such a shareholder may be subject to a U.S. withholding tax on amounts
constituting ordinary income.
Distributions of net investment income and short-term capital gains are taxable
to shareholders as ordinary income. Distributions paid by a Portfolio out of
long-term capital gain are taxable to those investors who are subject to income
tax as long term capital gain, regardless of the length of time the investor has
owned shares in the portfolio. The rate at which such gains will be taxed,
however, will depend on the length of time the Portfolio held the assets that
generated the gain. In the case of corporate shareholders, a portion of the
distributions may qualify for the dividends-received deduction to the extent the
Trust designates the amount distributed by any Portfolio as a qualifying
dividend. The aggregate amount so designated cannot, however, exceed the
aggregate amount of qualifying dividends received by that Portfolio for its
taxable year. It is expected that dividends from domestic corporations will be
part of the gross income for one or more of the Portfolios and, accordingly,
that part of the distributions by such Portfolios may be eligible for the
dividends-received deduction for corporate shareholders. However, the portion
of a particular Portfolio's gross income attributable to qualifying dividends is
largely dependent on that Portfolio's investment activities for a particular
year and therefore cannot be predicted with any certainty. The deduction may be
reduced or eliminated if shares of such Portfolio held by a corporate investor
are treated as debt-financed or are held for less than 46 days.
Distributions of net investment income and short-term capital gains are taxable
to shareholders as long-term capital gains, regardless of the length of time
they have held their shares. Capital gains distributions are not eligible for
the dividends-received deduction referred to in the previous paragraph.
Distributions of any net investment income and net realized capital gains will
be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date. Distributions
are generally taxable when received. However, distributions declared in
October, November or December to shareholders of record on a date in such a
month and paid the following January are taxable as if received on December 31.
Distributions are includable in alternative minimum taxable income in computing
a shareholder's liability for the alternative minimum tax.
A redemption of Trust shares may result in recognition of a taxable gain or
loss. Any loss realized upon a redemption of shares within six months from the
date of their purchase will be treated as a long-term capital loss to the extent
of any amounts treated as distributions of long-term capital gains during such
six-month period. Any loss realized upon a redemption may be disallowed under
certain wash sale rules to the extent shares of the same Trust are purchased
(through reinvestment of distributions or otherwise) within 30 days before or
after the redemption or exchange.
The Trust is required to report to the Internal Revenue Service all
distributions of taxable income and capital gains as well as gross proceeds from
the redemption or exchange of Trust shares, except in the case of exempt
shareholders, which includes most corporations. Pursuant to the backup
withholding provisions of the Code, distributions of any taxable income and
capital gains and proceeds from the redemption of Trust shares may be subject to
withholding of federal income tax at the rate of 31 percent in the case of non-
exempt shareholders who fail to furnish the Trust with their taxpayer
identification numbers and with required certifications regarding their status
under the federal income tax law. If the withholding provisions are applicable,
any such distributions and proceeds, whether taken in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.
Corporate and other exempt shareholders should provide the Trust with their
taxpayer identification numbers or certify their exempt status in order to avoid
possible erroneous application of backup withholding. The Trust reserves the
right
29
<PAGE>
to refuse to open an account for any person failing to provide a certified
taxpayer identification number.
Tax Matters Relating to the Use of Certain Hedging Instruments and Foreign
- --------------------------------------------------------------------------
Investments. Certain of the Portfolios may write, purchase or sell certain
- -----------
options, futures and foreign currency contracts. Such transactions are subject
to special tax rules that may affect the amount, timing and character of
distributions to shareholders. Unless a Portfolio is eligible to make, and
makes, a special election, any such contract that is a "Section 1256 contract"
will be "marked-to-market" for Federal income tax purposes at the end of each
taxable year, i.e., each contract will be treated for tax purposes as though it
had been sold for its fair market value on the last day of the taxable year. In
general, unless the special election referred to in the previous sentence is
made, gain or loss from transactions in Section 1256 contracts will be 60% long
term and 40% short term capital gain or loss. Additionally, Section 1092 of the
Code, which applies to certain "straddles," may affect the tax treatment of
income derived by a Portfolio from transactions in option, futures and foreign
currency contracts. In particular, under this provision, a Portfolio may, for
tax purposes, be required to postpone recognition of losses incurred in certain
closing transactions.
Section 988 of the Code contains special tax rules applicable to certain foreign
currency transactions that may affect the amount, timing, and character of
income, gain or loss recognized by the Trust. Under these rules, foreign
exchange gain or loss realized with respect to foreign currency-denominated debt
instruments, foreign currency forward contracts, foreign currency-denominated
payables and receivables, and foreign currency options and futures contracts
(other than options, futures, and foreign currency contracts that are governed
by the mark-to-market and 60%-40% rules of Section 1256 of the Code and for
which no election is made) is treated as ordinary income or loss. Under the
Code, dividends or gains derived by a Portfolio from any investment in a
"passive foreign investment company" or "PFIC" -- a foreign corporation 75
percent or more of the gross income of which consists of interest, dividends,
royalties, rents, annuities or other "passive income" or 50 percent or more of
the assets of which produce "passive income" -- may subject a Portfolio to U.S.
federal income tax even with respect to income distributed by the Portfolio to
its shareholders. In addition, any such tax will not itself give rise to a
deduction or credit to the Portfolio or to any shareholder. In order to avoid
the tax consequences described above, those Portfolios authorized to invest in
foreign securities will attempt to avoid investments in PFICs, or will elect to
mark-to-market and recognize ordinary income each year with respect to any such
investments.
PERFORMANCE AND OTHER INFORMATION
From time to time, a Portfolio may state its total return in sales literature
and investor presentations. Total return may be stated for any relevant period
specified. Any statements of total return will be accompanied by information on
that Portfolio's average annual compounded rate of return over the most recent
four calendar quarters and the period from the inception of that Portfolio's
operations. The Trust may also advertise aggregate and average total return
information over different periods of time for the various Portfolios. The
average annual compounded rate of return for a Portfolio is determined by
reference to a hypothetical $1,000 investment that includes capital appreciation
and depreciation for the stated period, according to the formula P(1+T)/n/ =
ERV. For purposes of this formula, the variables represent the following values:
P = a hypothetical initial purchase of $1,000 T = average annual total return
n = number of years
ERV = redeemable value of hypothetical $1,000 initial purchase at the end of
the period.
Aggregate total return is calculated in a similar manner, except that the
results are not annualized. Each calculation assumes that all dividends and
distributions are reinvested at net asset value on the reinvestment dates during
the period and gives effect to the maximum applicable sales charge. From time
to time, evaluations of a Trust's performance by independent sources may also be
used in advertisements and in information furnished to present or prospective
investors in the Trusts. Investors should note that the investment results of
each of the Trust's Portfolios will fluctuate over time, and any presentation of
a Portfolio's total return for any period should not be considered as a
representation of what an investment may earn or what an investor's total return
may be in any future period.
The table below shows the name and address of record of each person known to the
Trust to hold, as of record or beneficially, 5% or more of shares of the Trust
as of October 26, 1998. Hirtle Callaghan may be deemed to have, or share,
investment and/or voting power with respect to more than 50% of the
30
<PAGE>
shares of the Trust's portfolios, with respect to which shares Hirtle Callaghan
disclaims beneficial ownership.
<TABLE>
<CAPTION>
Small Limited Intermediate
Name and Address of Value Growth Capitalization International Duration Fixed Term Municipal
Record Holder Equity Equity Equity Equity Municipal Bond Income Bond
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bankers Trust Company 65.28% 72.36% 74.43% 57.14% 94.55% 48.84% 78.13%
1 Bankers Trust Plaza
New York, N.Y 10006
PNC Bank, N.A 10.19% 7.61% 5.52% 28.69%(1) 1.15% 46.34% 5.31%
P.O. Box 7780-1888
Philadelphia, PA 19182
Northern Trust Company 5.89%(2) 7.62%(3) 6.60%(4) 4.22% 4.30% 0.03% 6.34%
P.O. Box 92956
Chicago, IL 60675
Mac and Company N/A N/A 7.34% N/A N/A N/A N/A
P.O. Box 3198
Philadelphia, PA 15230
</TABLE>
_________
(1) Shares include 22.08% held FBO 78 PGH Pension
(2) Shares include 5.15% held FBP SFTRS 26-31827
(3) Shares include 6.82% held FBO SFTRS HC
(4) Shares include 5.89% held FBO SFTRS HC
31
<PAGE>
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
PricewaterhouseCoopers LLP, serves as the Trust's independent accountants. The
Trust's financial statements as of June 30, 1998, have been audited by
PricewaterhouseCoopers LLP, whose address is 2400 Eleven Penn Center,
Philadelphia, PA 19103. Such statements and accompanying report are set forth
in the Trust's Annual Report to Shareholders, which accompanies this Statement
of Additional Information and is incorporated herein by reference.
32
<PAGE>
Ratings Appendix
Ratings for Corporate Debt Securities
<TABLE>
<S> <C>
Moody's Investors Service, Inc. Standard & Poor's Corporation
Aaa AAA
Judged to be of the best quality; smallest This is the highest rating assigned by S&P to a
degree of investment risk debt obligation and indicates an extremely strong capacity to
pay principal and interest.
Aa AA
Judged to be of high quality by all Also qualify as high-quality debt obligations.
standards; together with Aaa group, Capacity to pay principal and interest is very
comprise what are generally known as strong
"high grade bonds"
A A
Possess many favorable investment Strong capacity to pay principal and interest,
attributes and are to be considered as although securities in this category are somewhat upper
medium grade obligations more susceptible to the adverse effects of changes
in circumstances and economic conditions.
Baa BBB
Medium grade obligations, i.e. Bonds rated BBB are regarded as having an adequate
they are neither highly protected nor capacity to pay principal and interest. Although
poorly secured. Interest payments they normally exhibit adequate protection
and principal security appear parameters, adverse economic conditions or
adequate for present but certain changing circumstances are more likely to lead to
protective elements may be lacking or a weakened capacity to pay principal and interest
unreliable over time. Lacking in for bonds in this category than for bonds in the A
outstanding investment characteristics and category.
have speculative characteristics as well
Ba BB
Judged to have speculative elements: their Bonds rated BB are regarded, on balance, as
future cannot be considered as well predominantly speculative with respect to the
assured. Often the protection of issuer's capacity to pay interest and repay
interest and principal payments principal in accordance with the terms of the
may every moderate and thereby not well obligation. While such bonds will likely have some
safeguarded during both good and bad quality and protective characteristics, these are
times over the future. Uncertainty outweighed by large uncertainties or major risk
of position characterize bonds exposures to adverse conditions.
in this class
</TABLE>
RATINGS FOR MUNICIPAL SECURITIES
The following summarizes the two highest ratings used by Standard & Poor's
Corporation for short term notes:
SP-1 -- Loans bearing this designation evidence a very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics will be given a (+) designation.
33
<PAGE>
SP-2 -- Loans bearing this designation evidence a satisfactory capacity to pay
principal and interest.
The following summarizes the two highest ratings used by Moody's Investors
Service, Inc. for short term notes:
MIG-1/VIG-1 -- Obligations bearing these designations are of the best quality,
enjoying strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both.
MIG-1/VIG-2 -- Obligations bearing these designations are of the high quality,
with margins of protection ample although not so large as in the preceding
group.
The following summarizes the two highest ratings used by Standard & Poor's
Corporation for commercial paper:
Commercial Paper rated A-1 by Standard & Poor's Corporation indicated that the
degree of safety regarding timely payment is either overwhelming 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.
The following summarizes the two highest ratings used by Moody's Investors
Service, Inc. for commercial paper:
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 trends 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.
34
