<PAGE>
1933 Act File No. 33-87762 1940 Act File No. 811-8918
Form N-1A
Securities and Exchange Commission
Washington, D.C. 20549
Registration Statement Under the Securities Act of 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 16 [x]
and/or
Registration Statement Under the Investment Company Act of 1940 [ ]
Amendment No. 17 [x]
(Check appropriate box or boxes.)
THE HIRTLE CALLAGHAN TRUST
(Exact Name of Registrant as Specified in Charter)
100 Four Falls Corporate Center Suite 500
West Conshohocken, PA 19428-2970
(Address of Principal Executive Offices) (Zip Code)
610-828-7200
(Registrant's Telephone Number, including Area Code)
Laura Anne Corsell, Esq. (With Copy To):
7307 Elbow Lane Audrey Talley, Esq.
Philadelphia, PA 19119 Drinker Biddle & Reath
1345 Chestnut Street
Philadelphia, PA, 19107-2700
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: NA
It is proposed that this filing will become effective (check appropriate box)
[ ] Immediately upon filing pursuant to paragraph (b)
[ ] on ___________ pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on _______ pursuant to paragraph (a)(1) of rule 485
[ ] 75 days after filing pursuant to paragraph (a)(ii) of Rule 485
[ ] on ________ pursuant to paragraph (a)(2) of Rule 485
[x] on September 22, 2000 pursuant to paragraph (a)(3) of Rule 485
<PAGE>
The Hirtle Callaghan Trust
================================================================================
__________
Prospectus
__________
September 25, 2000
The Securities and Exchange Commission has not approved or disapproved the
shares described in this prospectus or determined whether this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
============================================================================================================
<S> <C>
A Summary of the risks, past performance Portfolio Descriptions and Expenses
and fees of each Portfolio -----------------------------------
The Equity Portfolios
The Value Equity Portfolio
The Growth Equity Portfolio
The Small Capitalization Equity Portfolio
The International Equity Portfolio
The Income Portfolios
The Intermediate Term Municipal Bond Portfolio
The Fixed Income Portfolio
The Fixed Income II Portfolio
The High Yield Bond Portfolio
An overview of securities that may be Investment Risk and Strategies
purchased, investment techniques that may be ------------------------------
used and the risks associated with them. About Equity Securities
About Fixed Income Securities
About Temporary Investment Practices
About Hedging Strategies, Derivatives and
Other Permitted Instruments
A look at the people and organizations Management of the Trust
responsible for the investments and -----------------------
operation of the Trust's Portfolios Hirtle Callaghan & Co., Inc.
The Specialist Managers
Your guide to an account in the Shareholder Information
Hirtle Callaghan Trust -----------------------
Purchases and Redemptions
Dividends, Distributions and Taxes
Additional Information
Selected Per Share Information Financial Highlights
--------------------
Where to Learn More
-------------------
</TABLE>
1
<PAGE>
Introduction to The Hirtle Callaghan Trust
================================================================================
The Trust offers both The Hirtle Callaghan Trust ("Trust") offers eight
equity-oriented and separate investment portfolios (each a "Portfolio").
fixed income Of these, four -- The Equity Portfolios -- invest
investments. primarily (i.e. at least 65% of total assets) in
equity securities. The remaining four portfolios --The
Income Portfolios -invest primarily in fixed income
securities. Hirtle Callaghan & Co. serves as the
overall sponsor and investment adviser to the Trust,
monitoring the performance of the individual
Portfolios and advising the Trust's Board of Trustees.
Portfolio management is Day-to-day investment decisions are made for the
provided by Specialist Portfolios by one or more independent money management
Managers seeking organizations -- the Specialist Managers. The Equity
securities whose Portfolios are designed to operate on a
long-term economic "multi-manager" basis. This means that each of the
value is not reflected Trust's Portfolios may be managed by more than one
in current market Specialist Manager. Each of the Equity Portfolios has
prices retained two separate portfolio management firms to
make investment decisions on its behalf. The multi-
Top-down investing manager structure of the Equity Portfolios is designed
means focusing on to combine a bottom-up stock selection philosophy and
industry and economic top-down investment approach.
trends, often in the
context of investment There are two basic risks to which all mutual funds,
modeling techniques including each of the Portfolios of the Trust, are
that incorporate risk, subject. Mutual fund shareholders run the risk that
capitalization and the value of the securities held by a Portfolio may
industry move down in response to general market and economic
characteristics of a conditions, or conditions that affect specific market
"benchmark index," to sectors or individual companies. This is referred to
identify individual as "market risk." The second risk common to all mutual
securities and market fund investments is "management risk" --the risk that
sectors that may offer investment strategies employed in the investment
investment selection process may not result in an increase in the
opportunities, often value of your investment or in overall performance
before analyzing equal to other investments.
information relating
to specific issuers. Investments in any one of the Equity Portfolios also
involve other risks. One of these, which we refer to
here as "multi-manager risk" is the risk that the
Trust may be unable to (a) identify and retain
Specialist Managers who achieve superior investment
records relative to other similar investments; (b)
pair Specialist Manager that have complementary
investment styles (e.g., top-down vs. bottom-up
investment selections processes; or (c) effectively
allocate Portfolio assets among Specialist Managers to
Bottom-up investing enhance the return and reduce the volatility that
means seeking would typically be expected of any one management
investment style. Moreover, use of the multi-manager structure
opportunities by may, under certain circumstances, incur costs that
analyzing fundamental might not occur in a portfolio that is served by a
information about a single Specialist Manager. For example, one Specialist
company -- factors Manager may sell a security that is to be purchased by
such as earnings and another Specialist Manager for the same Portfolio or a
sales, product lines Portfolio may experience a higher portfolio turnover
and the ability of the (e.g., over 100% year) in the event that one
company's management. Specialist Manager is replaced by another. In either
circumstance, higher transaction costs are likely to
result and will reduce total return.
"Sector risk" may also affect your investment in an
Equity Portfolio. Sector risk is the risk that the
value of a mutual fund that holds a substantial
position in companies in a particular market sector
(e.g. technology or financial services) will be
adversely affected by economic trends, new
technologies, regulatory developments or other factors
A "benchmark index" is that affect companies in that sector. Because the
an independently investment selection processes followed by certain of
compiled index of the Specialist Managers that serve the Value Equity,
securities that may Growth Equity and Small Capitalization Equity
serve as a performance Portfolios may be made with reference to industry and
standard or a proxy market sectors represented in the "benchmark index"
for asset allocation for the portfolio each serves, these Portfolios may
purposes. hold a substantial position in one or more of the
market sectors that are represented in that benchmark
index. For example, as of the date of this prospectus,
a substantial proportion of the companies represented
in these benchmark indices may be considered to be
"technology companies" and, as a result, these indices
may be disproportionately affected by developments in
Your investment in any the technology sector. To the extent that such
Portfolio of the Trust developments are negative and to the extent that the
involves a risk that portfolio in which you invest holds a substantial
you will lose money on position in the technology sector, the value of your
your investment. investment is likely to also be negatively affected. A
more detailed discussion of this matter appears under
the heading "Investment Risk and Strategies" later in
this prospectus.
Depending on the investments made by an individual
Portfolio and the investment strategies and techniques
used by its Specialist Manager(s), a Portfolio may be
subject to additional risks. On the following pages
you will find a Portfolio-by-Portfolio summary of the
investment policies of each Portfolio of the Trust,
illustrations of the past performance of the
individual Portfolios and the expenses that you will
bear as a shareholder of each Portfolio, and a summary
of the investment risks to which each Portfolio may be
subject. A more detailed discussion of these
investment risks appears under the heading "Investment
Risk and Strategies" later in this prospectus.
1
<PAGE>
Fund Description and Risk Factors -- The Value Equity Portfolio
================================================================================
Investment Objective. The investment objective of this Portfolio is to provide
total return consisting of capital appreciation and current income. The Value
Equity Portfolio seeks to achieve its objective by investing primarily in a
diversified portfolio of equity securities.
Principal Investment Strategies. In selecting securities for the Portfolio, the
Specialist Managers follow a value-oriented investment approach. "Value
investing" means that the Specialist Managers seek to identify securities whose
market price is lower than might be expected based on the intrinsic value of the
issuing company, as measured by fundamental investment considerations such as
earnings, book value and dividend paying ability. When the market price of such
an "undervalued" security increases to more accurately reflect the intrinsic
value of the issuing company, the Portfolio can be expected to realize a capital
gain upon their sale. In general, value-oriented funds such as The Value Equity
Portfolio may appeal to investors who want some dividend income and the
potential for capital gains, but are less tolerant of the share-price
fluctuations typical in growth-oriented funds. It is anticipated that many of
the common stocks in which the Portfolio invests will be dividend paying issues.
Up to 15% of the Portfolio's total assets may be invested in other income-
producing securities, such as preferred stocks or bonds, that are convertible
into common stock. Up to 20% of the Portfolio's total assets may also be
invested in securities issued by non-U.S. companies. Consistent with its
investment policies, the Portfolio may purchase and sell securities without
regard to the effect on portfolio turnover. Higher portfolio turnover (e.g. over
100%/year) will cause the Portfolio to incur additional transaction costs and
may result in taxable gains being passed through to shareholders. Higher
transaction costs will reduce total return. The Portfolio may engage in
transactions involving "derivative instruments" -- option or futures contracts,
Standard & Poor's Depositary Receipts (referred to as "SPDRs") and similar
instruments -- in order to hedge against fluctuations in market price of the
securities in which the Portfolio primarily invests.
Specialist Managers. Institutional Capital Corporation ("ICAP") and Geewax
Terker & Co. ("Geewax") currently provide portfolio management services to this
Portfolio.
The ICAP Investment ICAP adheres to a value-oriented, fundamental
Selection Process investment style. Its investment process involves
three key components: valuation, identification of a
"catalyst" and research. First, ICAP uses its
proprietary valuation models to identify, from a
universe of approximately 450 well established large-
and mid-capitalization companies, those companies
that ICAP believes offer the best values relative to
this universe. From these undervalued companies,
stocks that exhibit deteriorating earnings trends are
eliminated. Next, ICAP looks beyond traditional
measures of value to find companies where ICAP
believes there exists a catalyst for positive change.
The catalyst can be thematic (e.g., consolidation of
the banking industry), something that would benefit a
number of companies (e.g. new technologies or product
markets), or an event that is company specific (e.g.,
a corporate restructuring or the introduction of a
new product). An integral part of ICAP's disciplined
process is communication with the top management at
each of these companies, and often the customers,
competitors and suppliers of these companies. ICAP
continuously monitors each security and, generally,
will consider selling a security if believes that the
price target established by ICAP for the security
involved has been achieved, the catalyst is no longer
a factor for positive change or another stock offers
greater opportunity for appreciation.
The Geewax Investment Geewax adheres to a top-down quantitative investment
Selection Process philosophy. In selecting investments for the
Portfolio, Geewax uses a proprietary valuation system
to identify those market sectors and industries that
Geewax believes have good prospects for growth.
Geewax then conducts in-depth analysis of the market
capitalization, cash flow, earnings and revenues and
other financial characteristics of individual
companies within those sectors or industries.
Decisions with respect to both the purchase and
disposition of securities are made using a variety of
proprietary investment models and with a view to
structuring and maintaining an investment portfolio
that has risk, capitalization and industry
characteristics similar to the Russell 1000 Value
Index(R).
2
<PAGE>
Fund Description and Risk Factors -- The Value Equity Portfolio (continued)
================================================================================
Principal Investment Risks. The principal risks associated with an investment in
this Portfolio are:
. Equity Market Risk -- The market value of . Credit Risk -- convertible
an equity security and the equity markets securities are subject to the
in general can be volatile. risk that the issuing company
may be fail to make principal
and interest payments when due.
. Foreign Securities Risk -- Non-U.S. . Derivative Risk -- the value
companies may be adversely affected by of derivative instruments may
political, social and/or economic rise or fall more rapidly than
developments abroad and differences other investments and there is
between U.S. and foreign regulatory a risk that the Portfolio may
requirements and market practices. more than the amount invested
in the derivative instrument in
the first place. Derivative
instruments also involve the
. Foreign Currency Risk -- the value of risk that other parties to the
securities denominated in foreign derivative contract may fail to
currencies may fall if the value of meet their obligations, which
that currency relative to the U.S. dollar could cause losses to the
falls, and may be adversely affected by Portfolio. Further information
volatile currency markets, or actions of about these instruments appears
U.S. and foreign governments or central in this prospectus under the
banks. heading "Investment Risks and
Strategies -- About Hedging
Strategies."
. Interest Rate Risk -- convertible . Mid-Cap Risk - although the
securities are subject to the risk that, Portfolio's benchmark index is
if interest rates rise, the value of considered an indicator of the
income-producing securities may performance of large
experience a corresponding decline. capitalization stocks, the
index does include "mid-cap"
issuers and the Portfolio and
the Portfolio may invest in
these companies. These
companies may have more limited
financial resources, markets
and depth of management than
larger companies. As of the
date of this prospectus,
companies with a market
capitalization of between $2
billion and $8 billion would
likely be included in the "mid-
cap" range.
3
<PAGE>
Performance and Shareholder Expenses -- The Value Equity Portfolio
================================================================================
The chart and table below show how The Value Equity Portfolio has performed and
how its performance has varied year to year. The bar chart gives some indication
of risk by showing changes in the Portfolio's yearly performance fore each full
calendar year since the Portfolio's inception. The table accompanying the bar
chart compares the Portfolio's performance over time to that of the Russell 1000
Value Stock Index(R), widely recognized, unmanaged index of common stocks. All
of the information below -- the bar chart, tables and examples -- assume the
reinvestment of all dividends and distributions in shares of the Portfolio. Of
course, past performance does not indicate how the Portfolio will perform in the
future.
Year-by-Year Total Returns as of 12/31*
[BAR CHART APPEARS HERE]
<TABLE>
<CAPTION>
1996 1997 1998 1999
<S> <C> <C> <C>
21.24% 30.87% 9.15% 10.89%
</TABLE>
Average Annual Total Returns
<TABLE>
<CAPTION>
12 mos. From
ended 12/31/99 inception
-------------- ---------
<S> <C> <C>
Value Equity 10.89% 18.65%
----- -----
Russell 1000
Value
Stock Index 7.35% 20.64%
---- -----
</TABLE>
* Results are shown on a calendar year basis; the Portfolio's fiscal year,
however, is June 30. The Portfolio's return for calendar year 2000, as of June
30, 2000 was (3.74)% (annualized).
----------------------------------------------------------
Best quarter: 4/th/ Qtr. 1998 13.62%
Worst quarter: 3/rd/ Qtr. 1999 (9.78)%
----------------------------------------------------------
Shareholder Expenses Example: This Example is intended
-------
The following table describes the fees and to help you compare the cost of
expenses that you may pay if you buy and investing in the Portfolio with
hold shares of the Portfolio. the cost of investing in other
mutual funds. The Example assumes
Shareholder Fees that you invest $10,000 in the
(Fees paid directly from your investment, Portfolio for the time periods
expressed as a percentage of offering price) indicated and then redeem all of
your shares at the end of those
Maximum Sales Charges ............... None periods. The Example also assume
Maximum Redemption Fee............... None that your investment has a 5%
return each year and that the
Annual Operating Expenses Portfolio's operating expenses
(Expenses that are deducted from the remain the same. Although your
Portfolio's assets, expressed as a actual cost may be higher or
percentage of average net assets) lower, based on these assumptions,
your costs would be:
Management Fees...................... 38% 1 Year.......... $ 56
Other Expenses....................... 17% 3 Years......... $176
Total Portfolio 5 Years......... $307
Operating Expenses................... 55% 10 Years......... $689
4
<PAGE>
Fund Description and Risk Factors -- The Growth Equity Portfolio
================================================================================
Investment Objective. The investment objective of this Portfolio is to provide
capital appreciation, with income as secondary consideration. The Portfolio will
seek to achieve this objective by investing primarily in a diversified portfolio
of equity securities.
Principal Investment Strategies. In selecting securities for the Portfolio, the
Specialist Managers follow a growth-oriented investment approach. "Growth
investing" means that Specialist Managers will generally focus on companies
believed to have above-average potential for growth in revenue and earnings. As
a growth-oriented investment, The Growth Equity Portfolio may appeal to
investors willing to accept more share-price fluctuation than may be the case
for The Value Equity Portfolio, in exchange for the potential for greater
increases in share prices. Although some of the equity securities in which the
Portfolio will invest are expected to be dividend-paying issues, income is a
secondary consideration in the stock selection process. Accordingly, dividends
paid by The Growth Equity Portfolio can generally be expected to be lower than
those paid by The Value Equity Portfolio. However, the Portfolio may invest up
to 15% of its total assets in income-producing securities, such as preferred
stocks or bonds, that are convertible into common stock. Consistent with its
investment policies, the Portfolio may purchase and sell securities without
regard to the effect on portfolio turnover. Higher portfolio turnover (e.g. over
100% year) will cause the Portfolio to incur additional transaction costs and
may result in taxable gains being passed through to shareholders. Higher
transaction costs will reduce total return. In addition, a maximum of 20% of the
Portfolio's total assets may be invested in securities of non-U.S. issuers. The
Portfolio may engage in transactions involving "derivative instruments" --option
or futures contracts, Standard & Poor's Depositary Receipts (referred to as
"SPDRS") and similar instruments -- in order to hedge against fluctuations in
market price of the securities in which the Portfolio primarily invests.
Specialist Managers. Jennison Associates LLC ("Jennison") and Goldman Sachs
Asset Management ("GSAM") currently provide portfolio management services to
this Portfolio.
The Jennison Investment Jennison selects stocks on a company-by-company
Selection Process basis using fundamental analysis. This bottom-up
approach emphasizes companies that are
experiencing some or all of the following:
above-average revenues and earnings per share,
growth, improving profitability and /or strong
market position. Often, companies selected for
investment are believed by Jennison to have
superior management, unique marketing
competence, strong research and development and
financial discipline. Generally, Jennison will
consider selling a security if believes the
earnings or growth potential initially
identified by Jennison has been realized; the
factors that underlay the original investment
decision are no longer valid; or a more
attractive situation is identified.
The GSAM Investment Selection In selecting investments for the Portfolio, GSAM
Selection Process emphasizes a company's growth prospects.
Investments are selected using both a variety of
quantitative techniques and fundamental
research, with a view to maintaining risk,
capitalization and industry characteristics
similar to the Russell 1000 Growth Index(R).
GSAM monitors the performance of securities it
purchases for the Portfolio through the use of a
proprietary computerized ranking system designed
to forecast the returns of securities acquired
for the Portfolio by GSAM and, within this
framework may consider selling a security when
forecasted returns are not achieved. GSAM also
attempts to limit the extent to which positions
acquired by GSAM for the Portfolio deviate from
the benchmark.
Principal Investment Risks. The principal risks associated with an investment in
this Portfolio are:
. Equity Market Risk - The market value . Credit Risk -- convertible
an equity security and the equity securities are subject to the
markets in general can be volatile. risk that the issuing Company
may fail to make principal and
interest payments when due.
5
<PAGE>
Fund Description and Risk Factors -- The Growth Equity Portfolio (continued)
================================================================================
. Foreign Securities Risk -- Non-U.S. Derivative Risk -- the value of
Companies may be adversely affected by derivative instruments may rise
political, social and/or economic or fall more rapidly than other
developments abroad and differences investments and there is a risk
between U.S. and foreign regulatory that the Portfolio may lose
requirements and market practices. more than the amount invested
in the derivative instrument in
. Foreign Currency Risk -- the value of the first place. Derivative
securities denominated in foreign instruments also involve the
currencies may fall if the value of that risk that other parties to the
currency relative to the U.S. dollar derivative contract may fail to
falls, and may be adversely affected by meet their obligations, which
volatile currency markets, or actions of could cause losses to the
U.S. and foreign governments or central Portfolio. Further information
banks. about these instruments appears
in this prospectus under the
heading "Investment Risks and
Strategies -- About Hedging
Strategies."
. Interest Rate Risk - convertible Mid-Cap Risk -- although the
securities are subject to the risk that, Portfolio's benchmark index is
if interest rates rise, the value of considered an indicator of the
income-producing securities may experience performance of large
a corresponding decline. capitalization stocks, the
index does include "mid-cap"
issuers and the Portfolio may
invest in these companies.
These companies may have more
limited financial resources,
markets and depth of management
than larger companies. As of
the date of this prospectus,
companies with a market
capitalization of between $2
billion and $8 billion would
likely be included in the "mid-
cap" range.
Performance and Shareholder Expenses - The Growth Equity Portfolio
================================================================================
The chart and table below show how The Growth Equity Portfolio has performed and
how its performance has varied from year to year. The bar chart gives some
indication of risk by showing changes in the Portfolio's yearly performance for
each full calendar year since the Portfolio's inception. The table accompanying
the bar chart compares the Portfolio's performance over time to that of Russell
1000 Growth Stock Index(R), a widely recognized, unmanaged index of common
stocks. Both the bar chart and the table assume all dividends and distributions
were reinvested in shares of the Portfolio. All of the information below -- the
Bar chart, tables and example -- assume the reinvestment of all dividends and
distributions in shares of the Portfolio. Of course, past performance does not
indicate how the Portfolio will perform in the future.
Year-by-Year Total Returns as of 12/31*
[BAR CHART APPEARS HERE]
<TABLE>
<CAPTION>
1996 1997 1998 1999
<S> <C> <C> <C>
20.11% 28.04% 32.54% 42.16%
</TABLE>
Average Annual Total Returns
<TABLE>
<CAPTION>
2 mos. From
ended 12/31/99 inception
-------------- ---------
<S> <C> <C>
Growth Equity 42.16% 28.06%
Russell 1000
Growth
Index 33.16% 30.58%
</TABLE>
* Results are shown on a calendar year basis; the Portfolio's fiscal year,
however, is June 30. The Portfolio's return for calendar year 2000, as of June
30, 2000 was 3.38% (annualized).
-----------------------------------------------------
Best quarter: 4/th/ Qtr. 1998 28.16%
Worst quarter: 3/rd/ Qtr. 1998 (14.05)%
-----------------------------------------------------
6
<PAGE>
Performance and Shareholder Expenses -- The Growth Equity Portfolio (continued)
================================================================================
<TABLE>
<S> <C>
Example: This Example is intended to
-------
Shareholder Expenses help you compare the cost of investing
The following table describes the fees and expenses that you in the Portfolio with the cost of
may pay if you buy and hold shares of the Portfolio. investing in other mutual funds. The
Example assumes that you invest
Shareholder Fees $10,000 in the Portfolio for the time
(Fees paid directly from your investment, expressed as a periods indicated and then redeem all
percentage of offering price) of your shares at the end of those
Maximum Sales Charges.......... None periods. The Example also assumes that
Maximum Redemption Fee......... None your investment has a 5% return each
year and that the Portfolio's
Annual Operating Expenses operating expenses remain the same.
(Expenses that are deducted from the Portfolio's assets, Although your actual cost may be
expressed as a percentage of average net assets) higher or lower, based on these
assumptions, your costs would be:
1 Year.............. $ 63
Management Fees*............... 45% 3 Years............. $ 199
Other Expenses................. 17% 5 Years............. $ 346
Total Portfolio 10 Years............. $ 774
Operating Expenses............. 62%
</TABLE>
* The figures shown reflect the total management fees payable by the Portfolio,
including the maximum performance fee to which GSAM may be entitled under
certain performance arrangements. This maximum fee may be applicable only if the
GSAM portion of the Portfolio out performs the Russell 1000 Growth Index by 110
basis points (1.1%). A full description of the GSAM fee arrangement appears
under the heading "Management of the Trust -- Specialist Managers." During the
period shown, GSAM did not earn the maximum performance fee; actual management
fees paid by the Portfolio were .35% and the Portfolio's actual operating
expenses were .52%.
Fund Description and Risk Factors -- The Small Capitalization Equity Portfolio
================================================================================
Investment Objective. The investment objective of this Portfolio is to provide
long term capital appreciation by investing primarily in equity securities of
smaller companies.
Principal Investment Strategies. Companies in which the Portfolio may invest are
those which, in the view of one or more of the Portfolio's Specialist Managers,
have demonstrated, or have the potential for, strong capital appreciation due to
the position of these companies in their markets relative to their competitors
or target markets, anticipated earnings, changes in management or other
factors. Under normal market conditions, at least 65% of the Portfolio's total
assets are invested in equity securities of "small -cap" issuers. As of the
date of this prospectus, companies with capitalizations of between $1.5 billion
and $250 million at the time of purchase are considered small cap issuers.
Consistent with its investment policies, the Portfolio may purchase and sell
securities without regard to the effect on portfolio turnover. Higher portfolio
turnover (e.g. over 100% year) will cause the Portfolio to incur additional
transaction costs and may result in taxable gains being passed through to
shareholders. Higher transaction costs will reduce total return. Up to 35% of
the Portfolio's total assets may be invested in the equity securities of
companies with above the small cap range at the time of purchase. The Portfolio
may engage in transactions involving "derivative instruments" -- option or
futures contracts, Standard & Poor's Depositary Receipts (referred to as
"SPDRS") and similar instruments -- in order to hedge against fluctuations in
market price of the securities in which the Portfolio primarily invests.
Specialist Managers. Frontier Capital Management Company ("Frontier") and Geewax
Terker & Co. ("Geewax") currently provide portfolio management services to this
Portfolio. Further information about this Portfolio's Specialist Managers
appears on page 27 of this Prospectus.
The Frontier Investment Frontier seeks to identify companies with
Selection Process unrecognized earning potential. Factors that may be
relevant in the process include earnings per share,
growth and price appreciation. Frontier's
investment process combines fundamental research
with a valuation model that screens for equity
valuation, forecasts for earnings growth and
unexpectedly high or low earnings. Generally,
Frontier will consider selling a security if
Frontier believes earnings or growth potential
initially identified by Frontier has been realized;
the factors that underlay the original investment
decision are no longer valid; or a more attractive
situation is identified.
7
<PAGE>
Fund Description and Risk Factors -- The Small Capitalization Equity Portfolio
===============================================================================
(continued)
===========
The Geewax Investment Geewax adheres to a top-down quantitative investment
Selection Process philosophy. In selecting investments for the Portfolio,
Geewax uses a proprietary valuation system to identify
those market sectors and industries that Geewax
believes have good prospects for growth. Geewax then
conducts in-depth analysis of the market
capitalization, cash flow, earnings and revenues and
other financial characteristics of individual companies
within those sectors or industries. Decisions with
respect to both the purchase and disposition of
securities are made are made using a variety of
proprietary quantitative techniques and with a view to
maintaining risk, capitalization and industry
characteristics similar to the Russell 2000 Small Cap
Stock Index(R).
Principal Investment
Risks. The principal risks associated with an investment in
this Portfolio are:
<TABLE>
<S> <C>
. Equity Market Risk -- The market value of an equity . Small Cap Risk - small cap companies may be more
security and the equity markets in general can vulnerable to adverse business or economic developments. They
be volatile. may also be less liquid and/or more volatile than securities
of larger companies or the market averages in general. Small
. Derivative Risk -- the value of derivative instruments cap companies may be adversely affected during periods when
may rise or fall more rapidly than other investments and investors prefer to hold securities of large capitalization
there is a risk that the Portfolio may lose more than the companies. As of the date of this prospectus, companies with
amount invested in the derivative instrument in the first a market capitalizations of $1.5 billion or less at the time
place. Derivative instruments also involve the risk that of purchase would likely be included in the "small-cap" range.
other parties to the derivative contract may fail to meet
their obligations, which could cause losses to the
Portfolio. Further information about these instruments
appears in this prospectus under the heading "Investment
Risks and Strategies -- About Hedging Strategies."
</TABLE>
================================================================================
Performance and Shareholder Expenses -- The Small Capitalization Equity
Portfolio
The chart and table below show how The Small Capitalization Equity Portfolio has
performed and how its performance has varied from year to year. The bar chart
gives some indication of risk by showing changes in the Portfolio's yearly
performance for each full calendar year since the Portfolio's inception. The
table accompanying the bar chart compares the Portfolio's performance over time
to that of the Russell 2000 Small Cap Stock Index(R) a widely recognized,
unmanaged index of small capitalization stocks. Both the bar chart and the table
assume all dividends and distributions were reinvested in shares of the
Portfolio. All of the information below -- the bar chart, tables and example --
assume the reinvestment of all dividends and distributions in shares of the
Portfolio. Of course, past performance does not indicate how the Portfolio will
perform in the future.
Year-by-Year Total Returns as of 12/31*
[BAR CHART APPEARS HERE]
<TABLE>
<CAPTION>
1996 1997 1998 1999
<S> <C> <C> <C>
26.47% 19.00% (4.08%) 24.70%
</TABLE>
Average Annual Total Returns
<TABLE>
<CAPTION>
12 mos. From
ended 12/31/99 inception
-------------- ---------
<S> <C> <C>
Small Cap Equity 24.70% 14.52%
Russell 2000
Stock Index 21.26% 13.81%
</TABLE>
* Results are shown on a calendar year basis; the Portfolio's fiscal year,
however, is June 30. The Portfolio's return for calendar year 2000, as of June
30, 2000, was 9.35% (annualized).
<TABLE>
<S> <C> <C>
-------------------------------------------
Best quarter: 4/th/ Qtr. 1998 20.91%
Worst quarter: 3/rd/ Qtr. 1998 (21.10)%
-------------------------------------------
</TABLE>
8
<PAGE>
Performance and Shareholder Expenses -- The Small Capitalization Equity
Portfolio (continued)
================================================================================
<TABLE>
<S> <C>
Shareholder Expenses Example: This Example is intended to help you
-------
The following table describes the fees and expenses that you may pay if compare the cost of investing in the Portfolio
you buy and hold shares of the Portfolio. with the cost of investing in other mutual
funds. The Example assumes that you invest
Shareholder Fees $10,000 in the Portfolio for the time periods
(Fees paid directly from your investment, expressed as a percentage of indicated and then redeem all of your shares
offering price) at the end of those periods. The Example also
Maximum Sales Charges............. None assumes that your investment has a 5% return
Maximum Redemption Fee............ None each year and that the Portfolio's operating
expenses remain the same. Although your actual
Annual Operating Expenses cost may be higher or lower, based on these
(Expenses that are deducted from the Portfolio's assets, expressed assumptions, your costs would be:
as a percentage of average net assets)
Management Fees................... .43% 1 Year ............ $ 61
Other Expenses.................... .17% 3 Years............ $192
Total Portfolio 5 Years............ $335
Operating Expenses................ .60% 10 Years............ $750
</TABLE>
Fund Description and Risk Factors -- The International Equity Portfolio
================================================================================
Investment Objective. 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.
Principal Investment Strategies. The International Equity Portfolio is designed
to invest in the equity securities of non-U.S. issuers. 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 and Far East Index ("EAFE Index"). Currently, these markets
are Australia, Austria, Belgium, Denmark, France, Finland, Germany, Hong Kong,
Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore,
Spain, Sweden, Switzerland and the United Kingdom. Consistent with its
objective, the Portfolio will invest in both dividend-paying securities and
securities that do not pay dividends. The Portfolio may engage in transactions
involving "derivative instruments" -- forward foreign currency exchange
contracts, option or futures contracts or similar instruments -- in order to
hedge against fluctuations in the relative value of the currencies in which
securities held by the Portfolio are denominated or to achieve market exposure
pending investment. 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. Up to 10% of
the assets of The International Equity Portfolio may be invested in securities
of companies located in emerging market countries.
Specialist Managers. Capital Guardian Trust Company ("CapGuardian") and Artisan
Partners Limited Partnership ("Artisan") currently provide portfolio management
services to this Portfolio.
The CapGuardian Investment CapGuardian's selection process emphasizes
Selection Process individual stock selections, with a focus on
industries and market sectors represented in the
MSCI EAFE Index rather than country or regional
allocation factors. Decisions with respect to
both the purchase and sale of individual stocks
are made in a manner that is consistent with
this "core" investment focus and based on the
analysis by one or more of CapGuradian's
individual portfolio managers of fundamental
investment factors such as earnings, sales,
product lines and other factors. CapGuardian may
consider selling a security if the individual
portfolio manager believes anticipated earnings
or growth potential of an particular issue has
been realized, the factors that underlay the
original investment decision are no longer
valid; or identifies more attractive situation.
Those principles traditionally associated with
"growth" or "value" investing are of only
secondary importance in the CapGuardian
investment process.
9
<PAGE>
Fund Description and Risk Factors -- The International Equity Portfolio
===============================================================================
(continued)
===========
The Artisan Investment In selecting investments for the Portfolio,
Selection Process Artisan emphasizes a bottom up investment
approach. In the context of The International
Equity Portfolio, this means that Artisan
focuses on identifying companies, including
companies located in emerging market countries,
that seem well positioned for strong,
sustainable growth, based on an fundamental
securities analysis and other factors relating
to individual issuers. Artisan's research method
favors countries and regions with improving or
rapidly expanding economies, taking into account
factors such as gross domestic product growth,
corporate profitability, economic climate and
social change. Artisan attempts to avoid
securities and markets that appear, in Artisan's
judgment, to be overvalued. Artisan may consider
selling a security if it believes that
anticipated earnings or growth potential of an
particular issue has been realized, the factors
that underlay the original investment decision
are no longer valid; or identifies more
attractive situation.
Principal Investment Risks. The principal risks associated with an investment
in this Portfolio are:
<TABLE>
<S> <C>
. Equity Market Risk -- The market value of an equity . Derivative Risk -- the value of derivative instruments
security and the equity markets in general can be may rise or fall more rapidly than other investments and
volatile. there is a risk that the Portfolio may lose more than the
amount invested in the derivative instrument in the first
. Foreign Securities Risk -- An investment in the place. Derivative instruments also involve the risk that
Portfolio is subject to risks that are not normally other parties to the derivative contract may fail to meet
associated with investments in the securities of U.S. their obligations, which could cause losses to the
companies. These include risks relating to political, Portfolio. Further information about these instruments
social and economic developments abroad and differences appears in this prospectus under the heading "Investment
between U.S. and foreign regulatory requirements and Risks and Strategies - About Hedging Strategies."
market practices.
. Foreign Currency Risk - Securities denominated in foreign
. Emerging Markets Risk -- Risks associated with foreign currencies are subject to the risk that the value of the
investments may be intensified in the case of investments foreign currency will fall in relation to the U.S. dollar.
in emerging market countries, whose political, legal and Currency exchange rates can be volatile and can be affected
economic systems are less developed and less stable than by, among other factors, the general economics of a country,
those of more developed nations. Such investments are or the actions of the U.S. or foreign governments or central
often less liquid and more volatile than securities banks. In addition, transaction expenses related to foreign
issued by companies located in developed nations, such the securities, including custody fees, are generally more
U.S., Canada and those included in the EAFE Index. costly than is the case for domestic securities.
</TABLE>
Performance and Shareholder Expenses -- The International Equity Portfolio
================================================================================
The chart and table below show how The International Equity Portfolio has
performed and how its performance has varied from year to year. The bar chart
gives some indication of risk by showing changes in the Portfolio's yearly
performance for each full calendar year since the Portfolio's inception. The
table accompanying the bar chart compares the Portfolio's performance over time
to that of the EAFE Index. Both the bar chart and the table assume all dividends
and distributions were reinvested in shares of the Portfolio. All of the
information below -- the bar chart, tables and example -- assume the
reinvestment of all dividends and distributions in shares of the Portfolio. Of
course, past performance does not indicate how the Portfolio will perform in the
future.
10
<PAGE>
Performance and Shareholder Expenses -- The International Equity Portfolio
================================================================================
(continued)
===========
Year-by-Year Total Returns as of 12/31*
[BAR CHART APPEARS HERE]
<TABLE>
<CAPTION>
1996 1997 1998 1999
<S> <C> <C> <C>
13.85% 5.52% 15.57% 29.77%
</TABLE>
Average Annual Total Returns
<TABLE>
<CAPTION>
12 mos. From
ended 12/31/99 inception
-------------- ---------
<S> <C> <C>
International
Equity 29.77% 16.23%
EAFE Index 26.96 13.70%
</TABLE>
* Results are shown on a calendar year basis; the Portfolio's fiscal year,
however, is June 30. The Portfolio's return for 2000, as of June 30, 2000 was
(2.10)% (annualized).
<TABLE>
------------------------------------------------------------------------------------------------------------------------
Best quarter: 4/th/ Qtr. 1999 23.39%
Worst quarter: 3/rd/ Qtr. 1998 (13.62)%
------------------------------------------------------------------------------------------------------------------------
<S> <C>
Shareholder Expenses Example: This Example is intended to help you
-------
The following table describes the fees and expenses that you may pay if compare the cost of investing in the Portfolio
you buy and hold shares of the Portfolio. with the cost of investing in other mutual
funds. The Example assumes that you invest
Shareholder Fees $10,000 in the Portfolio for the time periods
(Fees paid directly from your investment, expressed as a percentage of indicated and then redeem all of your shares
offering price) at the end of those periods. The Example also
Maximum Sales Charges................. None assumes that your investment has a 5% return
Maximum Redemption Fee................ None each year and that the Portfolio's operating
expenses remain the same. Although your actual
Annual Operating Expenses cost may be higher or lower, based on these
(Expenses that are deducted from the Portfolio's assets, expressed as a assumptions, your costs would be:
percentage of average net assets) -----------------------------------------------
Management Fees*...................... .55% 1 Year............ $ 77
Other Expenses........................ .20% 3 Years........... $240
Total Portfolio 5 Years........... $417
Operating Expenses.................... .75% 10 Years........... $930
</TABLE>
* The figures shown reflect the total management fees payable by the Portfolio,
including the maximum performance fee to which CapGuardian may be entitled under
certain performance arrangements. This maximum fee may be applicable only if the
CapGuardian portion of the Portfolio out performs the EAFE Index by 40 basis
points (.40%). A full description of the CapGuardian fee arrangement appears
under the heading "Management of the Trust -- Specialist Managers." During the
period shown, CapGuardian did not earn the maximum performance fee; actual
management fees paid by the Portfolio were .45% and the Portfolio's actual
operating expenses were .65%.
11
<PAGE>
Fund Description and Risk Factors -- The Intermediate Term Municipal Bond
=========================================================================
Portfolio
=========
Investment Objective. 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 intermediate-term fixed income
securities the interest on which is exempt from regular Federal income tax.
These securities, which include both securities issued by municipalities and so-
called "private activity bonds" are referred to as "Municipal Securities."
Principal Investment Strategies. 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. Municipal Securities acquired for the
Portfolio will generally be rated within one of the three highest rating
categories by one of the major independent rating agencies, or are in the view
of the Specialist Manager, of comparable quality deemed of comparable quality.
The Portfolio is, however, authorized to invest up to 15% in Municipal
Securities that are rated in the fourth highest category. In order to maintain
liquidity or in the event that the Portfolio's Specialist Manager believes 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 net assets in taxable instruments. Municipal Securities
purchased for the Portfolio will have varying maturities, but under normal
circumstances the Portfolio will have an effective dollar weighted average
portfolio maturity of between 5 and 10 years.
Specialist Managers. Deutsche Asset Management, Inc. ("Deutsche ") currently
provides portfolio management services to this Portfolio.
The Deutsche Investment In selecting securities for investment by the
Selection Process Portfolio, Deutsche generally uses a bottom-up
approach. This approach focuses on individual
security selection rather than relying on interest
rate forecasts. Deutsche's analytic process involves
assigning a relative value, based on
creditworthiness, cash flow and price, to each bond.
Credit analysis is then used to determine the
issuer's ability to fulfill its obligations. By
comparing each bond to a U.S. Treasury instrument,
Deutsche then seeks to identify whether the market
price of the bond is an accurate reflection of its
intrinsic value. Municipal 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. In the event any
security held by the Portfolio is downgraded below
the Portfolio's authorized rating categories,
Deutsche will review the security and determine
whether to retain or dispose of that security.
Principal Investment Risks. The principal risks associated with an investment in
this Portfolio are:
<TABLE>
<S> <C>
. Interest Rate Risk -- One of the primary risks . Credit Risk -- An investment in the Portfolio also
associated with an investment in the Portfolio involves the risk that the issuer of a Municipal Security
is the risk that the value of Municipal Securities will not make principal or interest payments when they are
held in the Portfolio will decline with changes in due, or that the value of the Municipal Securities will
interest rates. Prices of fixed income securities with decline because of a market perception that the issuer may
longer effective maturities are more sensitive to interest not make payments on time. This risk is greater for lower
rate changes than those with shorter effective maturities. quality bonds, such as those rated in the fourth highest
In addition, when interest rates are declining, issuers category.
of securities held by the Portfolio may prepay principal
earlier than scheduled. As a result of this prepayment . AMT Risk -- There is no limit on purchases of Municipal
risk, the Portfolio may have to reinvest these prepayments Securities the interest on which is a preference item for
at those lower rates, thus reducing its income. purposes of the Federal alternative minimum tax. If the
Portfolios holdings of such securities is substantial and you
are subject to this tax, a substantial portion of any income
you receive as a result of your investment in the Portfolio
will be subject to this tax. Moreover, the Portfolio may invest
up to 20% of its net assets in taxable securities, income from
which is subject to regular Federal income tax.
</TABLE>
12
<PAGE>
Performance and Shareholder Expenses -- The Intermediate Term Municipal Bond
============================================================================
Portfolio
=========
Performance. The chart and table below show how The Intermediate Term Municipal
Bond Portfolio has performed and how its performance has varied from year to
year. The bar chart gives some indication of risk by showing changes in the
Portfolio's yearly performance for each full calendar year since the Portfolio's
inception. The table accompanying the bar chart compares the Portfolio's
performance over time to that of the Lehman Brothers 5 Year Government
Obligations Index, ("Lehman 5 Year G.O. Index"). Both the bar chart and the
table assume all dividends and distributions were reinvested in shares of the
Portfolio. All of the information below -- the bar chart, tables and example --
assume the reinvestment of all dividends and distributions in shares of the
Portfolio. Of course, past performance does not indicate how the Portfolio will
perform in the future.
Year-by-Year Total Returns as of 12/31*
[BAR CHART APPEARS HERE]
<TABLE>
<CAPTION>
1999
<S> <C>
-1.02%
</TABLE>
Average Annual Total Returns
12 mos. From
ended 12/31/99 inception
-------------- ---------
Intermediate (1.02)% 1.18%
Term Municipal
Bond
Lehman 5 Year 0.72% 4.31%
G.O. Index
. Results are shown on a calendar year basis; the Portfolio's fiscal year,
however, is June 30. The Portfolio's return for 2000, as of June 30, 2000 was
3.11% (annualized).
--------------------------------------------------------------------------------
Best quarter: 1/st/ Qtr. 2000 1.86%
Worst quarter: 2/nd/ Qtr. 1999 (1.20)%
-------------------------------------------------------------------------------
Shareholder Expenses.
The following table and accompanying example describe the fees and expenses that
you may pay if you buy and hold shares of the Portfolio
Shareholder Fees
(Fees paid directly from your investment, expressed as a percentage of offering
price)
Maximum Sales Charges........................................ None
Maximum Redemption Fee....................................... None
Annual Operating Expenses
(Expenses that are deducted from the Portfolio's assets, expressed as a
percentage of average net assets)
Management Fees.............................................. .33%
Other Expenses............................................... .14%
Total Portfolio
Operating Expenses........................................... .47%
Example: This Example is intended to help you compare the cost of investing in
-------
the Portfolio with the cost of investing in other mutual funds. The Example
assumes that you invest $10,000 in the Portfolio for the time periods indicated
and then redeem all of your shares at the end of those periods. The Example also
assumes the reinvestment of all dividends and distributions in shares of the
Portfolio and that your investment has a 5% return each year and that the
Portfolio's operating expenses remain the same. Although your actual cost may be
higher or lower, based on these assumptions, your costs would be:
1 Year .................... $ 48
3 Years ................... $151
5 Years.................... $263
10 Years.................... $591
13
<PAGE>
Fund Description and Risk Factors - The Fixed Income Portfolio
================================================================================
Investment Objective. The investment objective of this Portfolio is to provide a
high level of current income consistent with the preservation of capital. The
Portfolio seeks to achieve this objective by investing primarily in a
diversified portfolio of intermediate-term fixed income securities, but may
purchase securities with any stated maturity.
Principal Investment Strategies. The Portfolio will normally invest at least 80%
of its assets in fixed income securities of all types. These securities, which
may be issued by corporations, banks, government agencies or other issuers, may
have fixed, 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. From time to time, a substantial portion of the Portfolio may be
invested in mortgage-backed or asset-backed issues. Investments in U.S. dollar
denominated securities of non-U.S. issuers will not exceed 25% of its total
assets. Under normal conditions the 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 Specialist 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 one of the major independent rating
agencies, or deemed of comparable quality. The Portfolio is, however, authorized
to invest up to 15% in fixed income securities that are rated in the fourth
highest category or are in the view of the Specialist Manager, of comparable
quality. Securities purchased for the Portfolio will have varying maturities,
but under normal circumstances the Portfolio will have an effective dollar
weighted average portfolio maturity of between 5 and 10 years. Consistent with
its investment policies, the Portfolio may purchase and sell securities without
regard to the effect on portfolio turnover. Higher portfolio turnover (e.g. over
100% year) will cause the Portfolio to incur additional transaction costs and
may result in taxable gains being passed through to shareholders Higher
transaction costs will reduce total return.
Specialist Manager. Deutsche Asset Management, Inc. ("Deutsche ") currently
provides portfolio management services to this Portfolio. Further information
about this Portfolio's Specialist Manager appears on page 29 of this Prospectus.
The Deutsche Investment In selecting securities for investment by the
Selection Process Portfolio, Deutsche generally uses a bottom-up
approach. This approach focuses on individual
security selection rather than relying on interest
rate forecasts. Deutsche's analytic process involves
assigning a relative value, based on
creditworthiness, cash flow and price, to each bond.
Credit analysis is then used to determine the
issuer's ability to fulfill its obligations. By
comparing each bond to a U.S. Treasury instrument,
Deutsche then seeks to identify whether the market
price of the bond is an accurate reflection of its
intrinsic value. 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. In the event any
security held by the Portfolio is downgraded below
the Portfolio's authorized rating categories,
Deutsche will review the security and determine
whether to retain or dispose of that security.
Principal Investment Risks. The principal risks associated with an investment in
this Portfolio are:
. Interest Rate Risk - One of the primary risks associated with an investment
in the Portfolio is the risk that the value of fixed income securities held
in the Portfolio will decline with changes in interest rates. Prices of
fixed income securities with longer effective maturities are more sensitive
to interest rate changes than those with shorter effective maturities.
Accordingly, the yield of The Fixed Income Portfolio can be expected to be
somewhat more volatile in response to changes in interest rates than
shorter-term investment vehicles.
. Credit Risk - An investment in the Portfolio also involves the risk that
the issuer of a security that the Portfolio holds will not make principal
or interest payments when they are due, or that the value of the Municipal
Securities will decline because of a market perception that the issuer may
not make payments on time. This risk is greater for lower quality bonds,
such as those rated in the fourth highest category.
14
<PAGE>
Fund Description and Risk Factors -- The Fixed Income Portfolio (continued)
================================================================================
. Foreign Securities Risk -- The value of the Portfolio's holdings of foreign
securities are subject to risks which are not normally associated with
investments in the securities of U.S. companies. These include risks
relating to political, social and economic developments abroad and
differences between U.S. and foreign regulatory requirements and market
practices. Securities that are denominated in foreign currencies are
subject to the further risk that the value of the foreign currency will
fall in relation to the U.S. dollar and/or will be affected by volatile
currency markets or actions of U.S. or foreign governments or central
banks.
. Prepayment Risk -- When interest rates are declining, issuers of securities
held by the Portfolio may prepay principal earlier than scheduled. As a
result of this risk, the Portfolio may have to reinvest these prepayments
at those lower rates, thus reducing its income. Mortgage-backed and asset-
backed securities are especially sensitive to prepayment.
. Extension Risk - These securities are also subject to the risk that payment
on the loans underlying the securities held by the Portfolio will be made
more slowly when interest rates are rising. This could cause the market
value of the securities to fall. Further information about extension and
prepayment risk appears under the heading "Investment Strategies and Risks
-- About Fixed Income Securities."
Performance and Shareholder Expenses -- The Fixed Income Portfolio
================================================================================
Performance. The chart and table below show how The Fixed Income Portfolio has
performed and how its performance has varied from year to year. The bar chart
gives some indication of risk by showing changes in the Portfolio's yearly
performance for each full calendar year since the Portfolio's inception. The
table accompanying the bar chart compares the Portfolio's performance over time
to that of the Lehman Brothers Aggregate Bond Index ("Lehman Aggregate Bond
Index"). Both the bar chart and the table assume all dividends and distributions
were reinvested in shares of the Portfolio. All of the information below -- the
bar chart, tables and example -- assume the reinvestment of all dividends and
distributions in shares of the Portfolio. Of course, past performance does not
indicate how the Portfolio will perform in the future.
Year-by-Year Total Returns as of 12/31*
[BAR CHART APPEARS HERE]
<TABLE>
<CAPTION>
1999
<S> <C>
-1.19%
</TABLE>
Average Annual Total Returns
12 mos. From
ended 12/31/99 inception
-------------- ---------
Fixed Income (1.19)% 2.20%
------------ ------ ----
Lehman (7.03)% (3.87)%
------
Aggregate
Bond Index
* Results are shown on a calendar year basis; the Portfolio's fiscal year,
however, is June 30. The Portfolio's return for 2000, as of June 30, 2000 was
4.05% (annualized).
--------------------------------------------------------------------------------
Best quarter: 1/st/ Qtr. 2000 2.74%
Worst quarter: 2/nd/ Qtr. 1999 (0.85)%
--------------------------------------------------------------------------------
15
<PAGE>
Performance and Shareholder Expenses -- The Fixed Income Portfolio (continued)
================================================================================
Shareholder Expenses
The following table describes the fees and expenses that you may pay if you buy
and hold shares of the Portfolio.
Shareholder Fees
(Fees paid directly from your investment, expressed as a percentage of offering
price)
Maximum Sales Charges ........................................... None
Maximum Redemption Fee .......................................... None
Annual Operating Expenses
(Expenses that are deducted from the Portfolio's assets, expressed as a
percentage of average net assets)
Management Fees ................................................. .33%
Other Expenses .................................................. .14%
Total Portfolio
Operating Expenses ............................................... .47%
Example: This Example is intended to help you compare the cost of investing in
--------
the Portfolio with the cost of investing in other mutual funds. The Example
assumes that you invest $10,000 in the Portfolio for the time periods indicated
and then redeem all of your shares at the end of those periods. The Example also
assumes the reinvestment of all dividends and distributions in shares of the
Portfolio and that your investment has a 5% return each year and that the
Portfolio's operating expenses remain the same. Although your actual cost may be
higher or lower, based on these assumptions, your costs would be:
1 Year ............................................. $ 48
3 Years ............................................. $151
5 Years ............................................. $263
10 Years ............................................. $591
Fund Description and Risk Factors -- The High Yield Bond Portfolio
================================================================================
Investment Objective. The investment objective of this Portfolio is to achieve
above-average total return over a market cycle of three to five years. The
Portfolio seeks to achieve this objective by investing in high yield securities
(commonly referred to as "junk bonds").
Principal Investment Strategies. The Portfolio will normally invest at least 65%
of its total assets in junk bonds. These securities are fixed income securities
that are rated below the fourth highest category assigned by one of the major
independent rating agencies or below, or are in the view of the Specialist
Manager, of comparable quality. Junk bonds are considered speculative securities
and are subject to the risks noted below and more fully discussed later in this
prospectus and in the Trust's statement of additional information. The Portfolio
may also acquire other fixed income securities, including U.S. Government
securities, investment grade corporate bonds and, to a limited extent, foreign
fixed income, mortgage-backed or asset-backed securities. Under normal
conditions the 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
Specialist Manager determines that securities meeting the Portfolio's investment
objective and policies are not otherwise readily available for purchase.
Consistent with its investment policies, the Portfolio may purchase and sell
securities; such sales may result in capital gain to the Portfolio (e.g. during
periods of declining interest rates or in the event that the rating assigned to
a particular security is upgraded). Purchases and sales of securities may be
effected without regard to the effect on portfolio turnover. Higher portfolio
turnover (e.g. over 100% year) will cause the Portfolio to incur additional
transaction costs; and higher transaction costs will reduce total return.
Securities purchased for the Portfolio will have varying maturities, but under
normal circumstances the Portfolio will have an effective dollar weighted
average portfolio maturity of between 5 and 10 years. The Portfolio may engage
in transactions involving "derivative instruments" both in order to hedge
against fluctuations in the market value of the securities in which the
Portfolio invests and to achieve market exposure pending investment and, in the
case of asset-backed and similar securities, for investment purposes.
16
<PAGE>
Fund Description and Risk Factors -- The High Yield Bond Portfolio (continued)
==============================================================================
Specialist Managers. Miller, Anderson & Sherrerd, LLP ("MAS") currently provides
portfolio management services to this Portfolio. Further information about this
Portfolio's Specialist Manager appears on page 284 of this Prospectus.
The MAS Investment Selection Mas uses both equity valuation (e.g. analysis of
Process factors such as earnings, sales and ability of
management) and fixed income valuation
techniques (e.g. credit analysis). Using these
techniques, together with analyses of economic
and industry trends, MAS determines the
Portfolio's overall structure, sector allocation
and desired maturity. MAS emphasizes securities
of companies that it believes have strong
industry positions and favorable outlooks for
cash flow and asset values. MAS conducts a
credit analysis for each security considered for
investment to evaluate the attractiveness of the
extra yield offered by that security relative to
higher rated securities and relative to the
level of risk it presents MAS may sell
securities when it believes that expected risk-
adjusted return is low compared to other
investment opportunities and/or to realize
capital gains.
Principal Investment Risks. The principal risks associated with an investment
in this Portfolio are:
. Interest Rate Risk -- One of the primary risks associated with an
investment in the Portfolio is the risk that the value of fixed income
securities held in the Portfolio will decline with changes in interest
rates. Prices of fixed income securities with longer effective maturities
are more sensitive to interest rate changes than those with shorter
effective maturities. Accordingly, the yield of The High Yield Portfolio
can be expected to be somewhat more volatile in response to changes in
interest rates than shorter-term investment vehicles.
. Extension Risk -- These securities are also subject to the risk that
payment on the loans underlying the securities held by the Portfolio will
be made more slowly when interest rates are rising. This could cause the
market value of the securities to fall.
. Prepayment Risk -- When interest rates are declining, issuers of securities
held by the Portfolio may prepay principal earlier than scheduled. As a
result of this risk, the Portfolio may have to reinvest these prepayments
at those lower rates, thus reducing its income. Mortgage- backed and asset-
backed securities are especially sensitive to prepayment. Further
information about extension and prepayment risk appears under the heading
"More About Investment Strategies and Risks --About Fixed Income
Securities."
. Derivative Risk - the value of derivative instruments may rise or fall more
rapidly than other investments and there is a risk that the Portfolio may
lose more than the amount invested in the derivative instrument in the
first place. Derivative instruments also involve the risk that other
parties to the derivative contract may fail to meet their obligations,
which could cause losses to the Portfolio. Further information about
derivative instruments appears under the heading "Investment Strategies and
Risks -- About Fixed Income Securities" and "About Hedging Strategies."
. Credit Risk -- An investment in the Portfolio also involves the risk that
the issuer of a security will not make principal or interest payments when
they are due, or that the value of the securities will decline because of a
market perception that the issuer may not make payments on time. This risk
is greater for lower quality or "junk bonds" such as those in which this
Portfolio invests.
. Junk Bond Risk -Junk bonds are considered speculative under traditional
investment standards. Prices of these securities will rise and fall
primarily in response to changes in the issuer's financial health, although
changes in market interest rates also will affect prices. Junk Bonds may
also experience reduced liquidity, and sudden and substantial decreases in
price, during certain market conditions. Further information about the
risks associated with such securities appears under the heading "Investment
Risk and Strategies -- Special Considerations Relating to High Yield or
"Junk" Bonds.
. Foreign Securities Risk -- The value of the Portfolio's holdings of foreign
securities are subject to risks which are not normally associated with
investments in the securities of U.S. companies. These include risks
relating to political, social and economic developments abroad and
differences between U.S. and foreign regulatory requirements and market
practices. Securities that are denominated in foreign currencies are
subject to the further risk that the value of the foreign currency will
fall in relation to the U.S. dollar and/or will be affected by volatile
currency markets or actions of U.S. or foreign governments or central
banks.
17
<PAGE>
Performance and Shareholder Expenses -- The High Yield Bond Portfolio
---------------------------------------------------------------------
Performance. The High Yield Bond Portfolio commenced operations on September 26,
2000. During the period since the Portfolio's inception, its performance
benchmark has been the Salomon High Yield Index, an unmanaged index of fixed
income securities that is widely recognized as an indicator of the performance
of the types of securities in which this Portfolio invests. Because the
Portfolio has experienced less than a full calendar year of operations,
illustrations of the Portfolio's performance against its benchmark are not
available for the fiscal year ending June 30, 2001.
<TABLE>
<S> <C>
Shareholder Expenses Example: This Example is intended to help you
-------
The following table and accompanying example describe the fees and compare the cost of investing in the Portfolio
expenses that you may pay if you buy and hold shares of the Portfolio. with the cost of investing in other mutual
funds. The Example assumes that you invest
Shareholder Fees $10,000 in the Portfolio for the time periods
(Fees paid directly from your investment, expressed as a percentage of indicated and then redeem all of your shares at
offering price) the end of those periods. The Example also
Maximum Sales Charges......................... None assumes the reinvestment of all dividends and
Maximum Redemption Fee........................ None distributions in shares of the Portfolio and
that your investment has a 5% return each year
Annual Operating Expenses and that the Portfolio's operating expenses
(Expenses that are deducted from the Portfolio's assets, expressed as a remain the same. Although your actual cost may
percentage of average net assets) be higher or lower, based on these assumptions,
your costs would be:
Management Fees............................... .43%
Other Expenses................................ .21%
Total Portfolio 1 Year ... $ 65
Operating Expenses............................ .64% 3 Years... $205
</TABLE>
18
<PAGE>
Fund Description and Risk Factors -- Fixed Income II Portfolio
================================================================================
Investment Objective. The investment objective of this Portfolio is to achieve
above-average total return over a market cycle of three to five years. The
Portfolio seeks to achieve this objective by investing primarily in fixed income
securities, including U.S. Government securities, investment grade corporate
bonds and mortgage-backed or asset-backed securities.
Principal Investment Strategies. The Portfolio invests primarily in fixed
income securities that, at the time of purchase, are rated in one of four
highest rating categories assigned by one of the major independent rating
agencies, or deemed of comparable quality. At least 65% of its total assets in
fixed income securities, including, to a limited extent, foreign securities.
Under normal conditions the Portfolio may invest up to 20% of its total assets
in high yield securities ("junk bonds") and up to 20% of its total assets in
cash or money market instruments in order to maintain liquidity, or in the event
that the Specialist Manager determines that securities meeting the Portfolio's
investment objective and policies are not otherwise readily available for
purchase. Consistent with its investment policies, the Portfolio may purchase
and sell securities; such sales may result in capital gain to the Portfolio
(e.g. during periods of declining interest rates or in the event that the rating
assigned to a particular security is upgraded). Purchases and sales of
securities may be effected without regard to the effect on portfolio turnover.
Higher portfolio turnover (e.g., over 100% year) will cause the Portfolio to
incur additional transaction costs; higher transaction costs will reduce total
return. Securities purchased for the Portfolio will have varying maturities, but
under normal circumstances the Portfolio will have an effective dollar weighted
average portfolio maturity of between 5 and 10 years. The Portfolio may engage
in transactions involving "derivative instruments" both in order to hedge
against fluctuations in the market value of the securities in which the
Portfolio invests and to achieve market exposure pending investment and, in the
case of asset-backed and similar securities, for investment purposes.
19
<PAGE>
Fund Description and Risk Factors -- The Fixed Income II Portfolio (continued)
===============================================================================
Specialist Manager. Miller, Anderson & Sherrerd, LLP ("MAS") currently provides
portfolio management services to this Portfolio. Further information about this
Portfolio's Specialist Manager appears on page 284 of this Prospectus.
The MAS Investment Selection MAS employed a value approach toward fixed
Process income investing. "Value investing" in this
context means that the Specialist Manager relies
upon value measures to guide its investment
decisions, such as the attractiveness of the
extra yield offered by fixed income securities
relative to the yield offered by U.S. Treasury
issues. MAS seeks to identify relative
attractiveness among corporate, mortgage and
U.S. Government securities, and also may
consider the attractiveness of non-dollar
denominated issues relative to U.S. dollar
denominated securities. MAS also measures
various types of risk, focusing on the level of
real interest rates, the shape of the yield
curve, credit risk, prepayment risk, country
risk and currency valuations. As indicated
above, the MAS portfolio management team selects
individual securities based on their relative
values, but may sell securities when it believes
that expected risk-adjusted return is low
compared to other investment opportunities
and/or to realize capital gains.
Principal Investment Risks. The principal risks associated with an investment in
this Portfolio are:
<TABLE>
<S> <C>
. Interest Rate Risk - One of the primary risks associated with . Credit Risk -- An investment in the Portfolio also
an investment in the Portfolio is the risk that the value of involves the risk that the issuer of a security will
fixed income securities held in the Portfolio will decline with not make principal or interest payments when they are
changes in interest rates. Prices of fixed income securities due, or that the value of the securities will decline
with longer effective maturities are more sensitive to interest because of a market perception that the issuer may not
rate changes than those with shorter effective maturities. make payments on time. This risk is greater for lower
Accordingly, the yield of the Portfolio can be expected to be quality bonds. Fixed income securities rated in the
somewhat more volatile in response to changes in interest rates fourth highest rating category by a rating agency may
than shorter-term investment vehicles. have speculative characteristics.
. Extension Risk -- These securities are also subject to the . Junk Bond Risk -- Up to 20% of the Portfolio's
risk that payment on the loans underlying the securities held assets may be invested in these securities. Junk
by the Portfolio will be made more slowly when interest rates bonds are considered speculative under traditional
are rising. This could cause the market value of the securities investment standards. The prices of these securities
to fall. will rise and fall primarily in response to changes
in the issuer's financial health. Change in market
. Prepayment Risk -- When interest rates are declining, issuers interest rates also will affect prices. Junk bonds
of securities held by the Portfolio may prepay principal may also experience reduced liquidity, and sudden
earlier than scheduled. As a result of this risk, the Portfolio and substantial decreases in price, during certain
may have to reinvest these prepayments at those lower rates, market conditions. Further information about the
thus reducing its income. Mortgage-related and asset-backed risks associated with investments in junk bonds
securities are especially sensitive to prepayment. Further appears under the heading "Investment Risk and
information about extension and prepayment risk appears under Strategies -- Special Considerations Relating to
the heading "Investment Strategies and Risks -- About Fixed Junk Bonds."
Income Securities."
. Foreign Securities Risk -- The value of the
Portfolio's holdings of foreign securities are
subject to risks which are not normally associated
with investments in the securities of U.S. companies.
These include risks relating to political, social and
economic developments abroad and differences between
U.S. and foreign regulatory requirements and market
practices. Securities that are denominated in
foreign currencies are subject to the further risk
that the value of the foreign currency will fall in
relation to the U.S. dollar and/or will be affected
by volatile currency markets or actions of U.S. or
foreign governments or central banks.
</TABLE>
. Derivative Risk -- the value of derivative instruments may rise or fall more
rapidly than other investments and there is a risk that the Portfolio may
lose more than the amount invested in the derivative instrument in the first
place. Derivative instruments also involve the risk that other parties to the
derivative contract may fail to meet their obligations, which could cause
losses to the Portfolio. Further information about these instruments appears
in this prospectus under the heading "More About Investment Risks and
Strategies." -- About Fixed Income Securities" and "About Hedging
Strategies."
20
<PAGE>
Performance and Shareholder Expenses -- The Fixed Income II Portfolio
================================================================================
Performance. The Fixed Income II Portfolio commenced operations on September 26,
2000. During the period since the Portfolio's inception, its performance
benchmark has been the Salomon Broad Investment-Grade Index, an unmanaged index
of fixed income securities that is widely recognized as an indicator of the
performance of the types of securities in which this Portfolio invests. Because
the Portfolio has experienced less than a full calendar year of operations,
illustrations of the Portfolio's performance against its benchmark are not
available for the fiscal year ending June 30, 2001.
<TABLE>
<S> <C>
Shareholder Expenses Example: This Example is intended to help you
-------
The following table and accompanying example describe the fees and compare the cost of investing in the Portfolio
expenses that you may pay if you buy and hold shares of the Portfolio with the cost of investing in other mutual
funds. The Example assumes that you invest
Shareholder Fees $10,000 in the Portfolio for the time periods
(Fees paid directly from your investment, expressed as a percentage indicated and then redeem all of your shares at
of offering price) the end of those periods. The Example also
Maximum Sales Charges............... None assumes the reinvestment of all dividends and
Maximum Redemption Fee.............. None distributions in shares of the Portfolio and
that your investment has a 5% return each year
Annual Operating Expenses and that the Portfolio's operating expenses
(Expenses that are deducted from the Portfolio's assets, expressed remain the same. Although your actual cost may
be higher or lower, based on these assumptions,
your costs would be:
as a percentage of average net assets)
Management Fees..................... .33% 1 Year................... $53
Other Expenses...................... .19% 3 Years.................. $167
Total Portfolio
Operating Expenses.................. .52%
</TABLE>
Investment and Risk and Strategies
================================================================================
The following is a summary of the types of investments that the Trust's
Portfolio's may make. A more extensive discussion appears in the Statement of
Additional Information.
About Sector Risk. Because the investment selection processes followed by
certain of the Specialist Managers that serve the Value Equity, Growth Equity
and Small Capitalization Equity Portfolios may be made with reference to
industry and market sectors represented in the "benchmark index" for the
portfolio each serves, these Portfolios may hold a substantial position in one
or more of the market sectors that are represented in that benchmark index. To
the extent that market or regulatory developments that affect any such sector
are negative and to the extent that the portfolio in which you invest holds a
substantial position in any such sector, the value of your investment in that
portfolio is likely to also be negatively affected. For example, as of the date
of this prospectus, a substantial proportion of the companies represented in
these benchmark indices may be considered to be "technology companies" and, as a
result, these indices may be disproportionately affected by developments in the
technology sector. Technology companies can be significantly affected by
obsolescence of existing technology, short product cycles, and competition from
new market entrants. Changes in governmental policies and the need for
regulatory approvals may also adversely affect the sector. The performance of
the technology sector may differ in direction and degree from that of the
overall stock market.
About Equity Securities. The prices of equity and equity-related securities will
fluctuate -- sometimes dramatically -- over time and a Portfolio could lose a
substantial part, or even all, of its investment in a particular issue. The term
equity securities includes common and preferred stock; equity-related securities
refers to securities that may be convertible into common stock or preferred
stock, or securities that carry the right to purchase common or preferred stock.
Price fluctuations may reflect changes in the issuing company's financial
condition, overall market conditions or even perceptions in the marketplace
about the issuing company or economic trends. Prices of convertible securities
may, in addition, also be affected by prevailing interest rates, the credit
quality of the issuer and any call provisions.
Small Company Risk. Equity securities of smaller companies may be subject to
more abrupt or erratic price movements than larger, more established companies.
These securities 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. This may make them more difficult to sell at the time and at a price
that is desirable. Smaller companies can provide greater growth potential than
larger, more mature firms. Investing in the securities of such companies also
involves greater risk, portfolio price volatility and cost. Historically, small
capitalization stocks have been more volatile in price than companies with
larger capitalizations. Among the reasons for this
21
<PAGE>
Investment Risk and Strategies (continued)
===============================================================================
greater price volatility are the lower degree of market liquidity (the
securities of companies with small stock market capitalizations may trade less
frequently and in limited volume) and the greater sensitivity of small companies
to changing economic conditions. For example, these companies are associated
with higher investment risk due to the greater business risks of small size and
limited product lines, markets, distribution channels and financial and
managerial resources.
About Foreign Securities. Equity securities of non- U.S. companies are subject
to the same risks as other equity or equity-related securities. Foreign
investments also involve additional risks. These 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; 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. Transactions in markets overseas are generally 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 non-
recovered portion of foreign withholding taxes will reduce the Portfolio's
income.
Foreign Currency Risk. The prices of securities denominated in a foreign
currency will also be affected by the value of that currency relative to the
U.S. dollar. Exchange rate movements can be large and long-lasting, and can
affect either favorably or unfavorably the value of securities held in the
Portfolio. Such rate movements may result from actions taken by foreign
governments or central banks, actions of the U.S. government, or as a result of
speculation in the currency markets. On January 1, 1999, the European Economic
and Monetary Union introduced a single currency to be used by all of its member
states. This event has brought about some uncertainty in the international
markets. These include the legal treatment of certain outstanding financial
contracts after January 1, 1999, the establishment of exchange rates and the
creation of suitable clearing and settlement payment systems for the new
currency. Companies that issue securities have until July 1, 2002 to
redenominate corporate stocks and bonds from national currencies to the Euro
and, until January 2002, the Euro will only exist as book entries in financial
institutions. The lack of policies and laws or regulations in participating
countries makes is difficult to assess all of the processing and systems changes
that will be required as a result of the Euro conversion or the impact the
conversion process may have on international investors, including mutual funds.
Foreign Government Securities. Foreign governments, as well as supranational or
quasi-governmental entities such as the World Bank for example, may issue fixed
income securities. Investments in these securities involve both the risks
associated with any fixed income investment and the risks associated with an
investment in foreign securities. In addition, a governmental entity's ability
or willingness to repay principal and interest due in a timely manner may be
affected not only by economic factors but also by political circumstances either
internationally or in the relevant region. These risks extend to debt
obligations, such as "Brady Bonds," that were created as part of the
restructuring of commercial bank loans to entities (including foreign
governments) in emerging market countries. Brady Bonds may be collateralized or
not, and may be issued in various currencies, although most are U.S. dollar
denominated.
Emerging Market Securities. Investing in emerging market securities increases
the risks of foreign investing. The risk of political or social upheaval,
expropriation and restrictive controls on foreign investors' ability to
repatriate capital is greater in emerging markets. Emerging market securities
generally are less liquid and subject to wider price and currency fluctuations
than securities issued in more developed countries. In certain countries, there
may be few publicly traded securities and the market may be dominated by a few
issuers or sectors. Fixed income securities issued by emerging market issuers
are more likely to be considered equivalent to risky high yield securities.
Investment funds and structured investments are mechanisms through which U.S. or
other investors to invest in certain emerging markets that have laws precluding
or limiting direct investments in their securities by foreign investors.
About Fixed-Income Securities. Fixed income securities -- sometimes referred to
as "debt securities" -- include bonds, notes (including structured notes),
mortgage- backed and asset-backed securities, convertible and preferred
securities as well as short-term debt instruments, often referred to as money
market instruments. Fixed income securities may be issued by U.S. or foreign
corporations, banks, governments, government agencies or subdivisions or other
entities. A fixed income security may have all types of interest rate payment
and reset terms, including fixed rate, adjustable rate, zero coupon, contingent,
deferred, payment in-kind and auction rate features. All of these factors -- the
type of instrument, the issuer and the payment terms will affect the volatility
and the risk of loss associated with a particular fixed-income issue. The
"maturity" of a fixed income instrument and the "duration" of a portfolio of
fixed income instruments also affects investment risk. The maturity of an
individual security refers to the period remaining until holders of the
instrument are entitled to the return of its principal
22
<PAGE>
Investment Risk and Strategies (continued)
===============================================================================
amount. Longer-term securities tend to experience larger price changes than
shorter-term securities because they are more sensitive to changes in interest
rates or in the credit ratings of issuers. Duration refers to a combination of
criteria, including yield to maturity, credit quality and other factors that
measures the exposure of a portfolio of fixed income instruments to changing
interest rates. A portfolio with a lower average duration generally will
experience less price volatility in response to changes in interest rates as
compared with a portfolio with a higher average duration.
Interest Rate Risk. Although the term fixed income securities includes a broad
range of sometimes very different investments, all fixed income securities are
subject to the risk that their value will fluctuate as interest rates in the
overall economy rise and fall. The value of fixed income securities will tend to
decrease when interest rates are rising and, conversely, will tend to increase
when interest rates fall. Thus, in periods of falling 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.
Prepayment Risk and Extension Risk. Prepayments of fixed income securities will
also affect their value. When interest rates are falling, the issuers of fixed
income securities may repay principal earlier than expected. As a result, the
Portfolio may have to reinvest these prepayments at those lower rates, thus
reducing its income. In the case of mortgage-backed or asset-backed issues --
securities backed by pools of loans -- payments due on the security may also be
received earlier than expected. This may happen when market interest rates are
falling and the underlying loans are being prepaid. Conversely payments may be
received more slowly when interest rates are rising, as prepayments on the
underlying loans slow. This may affect the value of the mortgage or asset-backed
issue if the market comes to view the interest rate to be too low relative to
the term of the investment. Either situation can affect the value of the
instrument adversely.
Credit Risk. 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 of foreign issuers, the financial condition of the
region. Fixed income securities may be rated by one or more nationally
recognized statistical rating organization, such as S&P and Moody's. These
ratings represent the judgment of the rating organization about the safety of
principal and interest payments. They are not guarantees of quality and may be
subject to change even after a Portfolio has acquired the security. Not all
fixed income securities are rated, and unrated securities may be acquired by the
Income Portfolios if the relevant Specialist Manager determines that their
quality is comparable to rated issues.
Special Considerations Relating to High Yield or "Junk" Bonds. Fixed income
securities that are not investment grade are commonly referred to as junk bond
or high yield, high risk securities. These securities offer a higher yield than
other, higher rated securities, but they carry a greater degree of risk and are
considered speculative by the major credit rating agencies. Such securities may
be issued by companies that are restructuring, are smaller and less credit
worthy or are more highly indebted than other companies. This means that they
may have more difficulty making scheduled payment of principal and interest.
Changes in the value of these securities are influenced more by changes in the
financial and business position of the issuing company than by changes in
interest rates when compared to investment-grade securities.
When-issued Securities. Fixed income securities may be purchased for future
delivery but at a predetermined price. The market value of securities purchased
on a "when-issued" basis may change before delivery; this could result in a gain
or loss to the purchasing Portfolio.
Mortgage-Backed and Asset-Backed Securities. Mortgage-backed securities
represent participations in (or are backed by) loans secured by real property.
Asset-backed securities are sponsored by entities such as government agencies,
banks, financial companies and commercial or industrial companies. They
represent interests in pools of mortgages or other cash-flow producing assets
such as automobile loans, credit card receivables and other financial assets. In
effect, these securities "pass through" the monthly payments that individual
borrowers make on their mortgages or other assets net of any fees paid to the
issuers. Examples of these include guaranteed mortgage pass-through
certificates, collateralized mortgage obligations ("CMOs") and real estate
mortgage investment conduits ("REMICs"). Because of their derivative
structure --the fact that their value is derived from the value of the
underlying assets --these securities are particularly sensitive to prepayment
and extension risks noted above. Small changes in interest or prepayment rates
may cause large and sudden price movements. These securities can also become
illiquid and hard to value in declining markets. In addition to credit and
market risk, asset-backed securities involve prepayment risk because the
underlying assets (loans) may be prepaid at any time. The value of these
securities may also change because of actual or perceived changes in the
creditworthiness of the originator, the servicing agent, the financial
institution providing the credit support or the counterparty. Like other fixed
income securities, when interest rates rise, the value of an asset-backed
security generally will decline. However, when interest rates decline, the value
of an asset-backed security with prepayment features may not increase as much as
that of other fixed income securities.
23
<PAGE>
Investment Risk and Strategies (continued)
================================================================================
In addition, non-mortgage asset-backed securities involve certain risks not
presented by mortgage-backed securities. Primarily, these securities do not have
the benefit of the same security interest in the underlying collateral. Credit
card receivables are generally unsecured, and the debtors are entitled to the
protection of a number of state and Federal consumer credit laws. Automobile
receivables are subject to the risk that the trustee for the holders of the
automobile receivables may not have an effective security interest in all of the
obligations backing the receivables.
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.
Municipal Securities. Municipal Securities -- fixed income securities issued by
local, state and regional governments or other governmental authorities -- may
be issued for a wide range of purposes, including construction of public
facilities or short-term funding and may be issued for varying maturities.
Interest on Municipal Securities will be exempt from regular Federal income
taxes but may be a tax preference item for purposes of computing alternative
minimum tax ("AMT"). The Fixed Income Portfolio may invest in Municipal
Securities regardless of whether the interest is taxable. The tax treatment that
will be accorded to interest payable by issuers of Municipal Securities will
depend on the specific terms of the security involved.
Private Activity and Industrial Revenue Bonds. 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. Municipal Bonds may be payable
from revenues derived from a particular facility that will be operated by a non-
government user. The payment of principal and interest on these bonds is
generally dependent solely on the ability of the private user or operator to
meet its financial obligations and the pledge, if any, of real or personal
property securing that obligation.
Credit Supports. The creditworthiness of particular Municipal Securities will
generally depend on the creditworthiness of the entity responsible for payment
of interest on the Municipal Bond. Municipal Securities also include instruments
issued by financial institutions that represent interests in Municipal
Securities held by that institution -- sometimes referred to as participation
interests -- and securities issued by a municipal issuer that are guaranteed or
otherwise supported by a specified financial institution. Because investors
will generally look to the creditworthiness of the supporting financial
institution, changes in the financial condition of that institution or ratings
assigned by rating organizations of its securities, may affect the value of the
instrument.
About Temporary Investment Practices. It is the intention of the Trust that 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. The portfolios
may also invest in 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 recognized rating organization. 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. If such action is taken by a Specialist Manager as a result of an
incorrect prediction about the effect of economic, financial or political
conditions, the performance of the affected Portfolio will be adversely affected
and the Portfolio may be unable to achieve its objective.
About Hedging Strategies. Each of the Portfolios may engage in certain
strategies ("Hedging Strategies") designed to reduce certain risks that would
otherwise be associated with their respective securities investments, and/or in
anticipation of future 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. Both the Equity
Portfolios and the Income Portfolios may also use forward foreign currency
contracts in connection with the purchase and sale of those securities,
denominated in foreign currencies, in which each is permitted to invest. In
addition, The International Equity 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.
24
<PAGE>
Investment Risk and Strategies (continued)
================================================================================
The High Yield Portfolio and The Fixed Income II Portfolio may also use foreign
currency options and foreign currency futures to hedge against fluctuations in
the relative value of the currencies in which the foreign securities held by
these Portfolios are denominated. In addition, these Portfolios may enter into
swap transactions. Swap transactions are contracts in which a Portfolio agrees
to exchange the return or interest rate on one instrument for the return or
interest rate on another instrument. Payments may be based on currencies,
interest, rates, securities indices or commodity indices. Swaps may be used to
manage the maturity and duration of a fixed income portfolio or to gain exposure
to a market without directly investing in securities traded in that market.
A Portfolio may invest in the instruments noted above (collectively, "Hedging
Instruments") only in a manner consistent with its investment objective and
policies 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. No Portfolio may
invest more than 10% of its total assets in option purchases. 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 Specialist 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
counterparty to enter into a closing transaction. In the case of currency-
related instruments, such as foreign currency options, options 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 counterparty to enter into a closing
transaction.
About Other Permitted Instruments. Each of the Portfolios may borrow money from
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. Accordingly, the Trust will 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.
Each of the Portfolios of the Trust may acquire securities issued by other
investment companies to the extent permitted under the Investment Company Act,
provided that such investments are otherwise consistent with the overall
investment objectives and policies of that Portfolio. Investment company
securities include interests in unit investment trusts structured to reflect a
specified index, such as the Standard & Poor's 500 Composite Stock Price Index
Depositary Receipts ("SPDRs") or the Standard & Poor's Mid-Cap 400 Index
Depositary Receipts ("MidCap SPDRs"); the Portfolios may also invest in
similarly structured instruments currently available in the securities markets
or created in the future. SPDRs and MidCap SPDRs may be
25
<PAGE>
Investment Risk and Strategies (continued)
================================================================================
obtained from the issuing unit investment trust or purchased in the secondary
market. Because the market value of these instruments is derived from the value
of the equity securities held by the issuing unit investment trust, these
instruments may be used by an Specialist Manager to achieve market exposure
pending investment. SPDRs and MidCap SPDRs are listed on the American Stock
Exchange. Further information about these instruments is contained in the
Statement of Additional Information. Generally, the Investment Company Act
limits investments in instruments in other investment companies (including
SPDRs, MidCap SPDRs and similar instruments) to 5% of a Portfolio's total
assets. Provided certain requirements set forth in that Act are met, however,
investments in excess of 5% of a Portfolio's assets may be made. SPDRs and
similar instruments may be used by a Specialist Manager to hedge against the
relative value of the securities in which the acquiring portfolio primarily
invests, facilitate the management of cash flows in or out of that portfolio or
to achieve market exposure pending investment.
Management of the Trust
================================================================================
Hirtle Callaghan & Co., Inc. Hirtle Callaghan & Co., Inc. serves as the overall
investment adviser to the Trust under the terms of its investment advisory
agreement ("Hirtle Callaghan Agreement") with the Trust. Hirtle Callaghan
continuously monitors the performance of various investment management
organizations, including the Specialist Managers and generally oversees the
services provided to the Trust by its administrator, custodian and other service
providers. Although Hirtle Callaghan advises the Board of Trustees with regard
to investment matters, Hirtle Callaghan is not responsible for day-to-day
investment decisions for the Trust or its Portfolios. Hirtle Callaghan is,
however, responsible for monitoring both the overall performance of each
Portfolio, and the individual performance of each Specialist Manager within
those portfolios served by more than one Specialist Manager Hirtle Callaghan
may, from time to time, recommend that the assets of a multi-manager portfolio
be reallocated between the Specialist Managers that provide portfolio management
services to that portfolio when it believes that such action would be
appropriate to achieve the overall objectives of the particular portfolio.
Officers of Hirtle Callaghan serve as the executive officers of the Trust and/or
as members of the Board of Trustees. For its services under the Hirtle
Callaghan Agreement, Hirtle Callaghan is entitled to receive an annual fee of
.05% of each Portfolio's average net assets. The principal offices of Hirtle
Callaghan are located at 100 Four Falls Corporate Center, Suite 500, West
Conshohocken, PA 19428-2970. A registered investment adviser under the
Investment Advisers Act, Hirtle Callaghan had, as of June 30, 2000, over $3.9
billion in assets under management. Hirtle Callaghan is controlled by its
founders, Jonathan Hirtle and Donald E. Callaghan.
Specialist Managers. Day-to-day investment decisions for each of the Portfolios
are the responsibility of one or more Specialist Managers retained by the Trust.
In accordance with the terms of separate portfolio management agreements
relating to the respective Portfolios, and subject to the general supervision of
the Trust's Board, each of the Specialist 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 the Portfolios they
serve.
In the case of those portfolios that are served by more than one Specialist
Managers, the Board is responsible for determining the appropriate manner in
which to allocate assets to each such Specialist Manager. Under normal
circumstances, it is expected that the assets of each of these portfolios will
be allocated equally among its Specialist Managers. The Board may, however,
increase or decrease the allocation to a Specialist Manager, or to terminate a
particular Specialist Manager, if the Board deems it appropriate to do so in
order to achieve the overall objectives of the Portfolio involved. The goal of
the multi-manager structure is to achieve a better rate of return with lower
volatility than would typically be expected of any one management style. Its
success depends upon the ability of the Trust to (a) identify and retain
Specialist Managers who have achieved and will continue to achieve superior
investment records relative to selected benchmarks; (b) pair Specialist Manager
that have complementary investment styles (e.g., top-down vs. bottom-up
investment selections processes); (c) monitor Specialist Managers' performance
and adherence to stated styles; and (d) effectively allocate Portfolio assets
among Specialist Managers.
26
<PAGE>
Management of the Trust (continued)
================================================================================
The Specialist Managers that currently serve the Trust's various portfolios are:
Artisan Partners Limited Partnership ("Artisan") serves as a Specialist Manager
for the International Equity Portfolio. For its services to the Portfolio,
Artisan receives an annual fee of 0.40% of the average daily net asset value of
that portion of the Portfolio's assets managed by it. Artisan, the principal
offices of which are located at 1000 N. Water Street, Suite 1770, Milwaukee,
Wisconsin 53202, has provided investment management services for international
equity assets since 1995. Artisan also maintains offices at 100 Pine Street,
Suite 2950, San Francisco, California and Five Concourse Parkway, Suite 2120,
Atlanta, Georgia. As of June 30, 2000, Artisan managed total assets in excess
of $9.9 billion, of which approximately $5.5 billion consisted of mutual fund
assets. Artisan's sole general partner is Artisan Investment Corporation, which
is controlled by its founders, Mr. Ziegler and Carlene Murphy Ziegler.
A team of investment professionals, lead by Mr. Mark L. Yockey, an Artisan
partner, will be responsible for making day-to-day investment decisions for that
portion of the International Portfolio allocated to Artisan. Mr. Yockey has
been with Artisan since 1995 and currently serves as a vice president of Artisan
Funds, Inc., an open-end, series management investment company registered under
the Investment Company Act. Before joining Artisan, Mr. Yockey was portfolio
manager of United International Growth Fund and Vice President of Waddell &
Reed, Inc., an investment adviser and mutual fund organization located in
Missouri. Mr. Yockey holds BA and MBA degrees from Michigan State University
and is a Chartered Financial Analyst.
The Trust has conditionally approved an amendment to the portfolio management
agreement relating to Artisan's services to the Portfolio ("Performance Fee
Amendment"). Under the Performance Fee Amendment, Artisan 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 Artisan, when compared to the current fixed
fee arrangement and could result in the payment of incentive compensation during
periods of declining markets.
Capital Guardian Trust Company ("CapGuardian") currently serves as a Specialist
Manager for the International Equity Portfolio. CapGuardian, the principal
offices of which are located at 333 South Hope Street, Los Angeles, CA 90071, is
a trust company and is organized as a corporation under California law. It is an
indirect, wholly-owned subsidiary of The Capital Group Companies, Inc. ("Capital
Group") and maintains offices throughout the world. As of June 30, 2000,
CapGuardian managed total assets of in excess of $130 billion, including
approximately $6 billion in assets of registered investment companies.
CapGuardian is currently compensated for its services to The International
Equity Portfolio based on the performance that CapGuardian is able to achieve
for that portion of the assets of the Portfolio ("CapGuardian Account")
allocated to it. Under this arrangement, CapGuardian will receive a base fee
("Base Fee") calculated at the annual rate of .40% (or 40 basis points) of the
average net assets of the CapGuardian Account. After an initial one year
period, the Base Fee would be increased or decreased at an annual rate of 12.5%
of the net value added by CapGuardian over the total return of the EAFE Index
plus 40 basis points during the 12 months immediately preceding the calculation
date. This 40 basis point "performance hurdle" is designed to assure that
CapGuardian will earn a performance adjustment only with respect to the value
that its portfolio management adds to the CapGuardian Account. CapGuardian's
total compensation under the Performance Fee Amendment could not exceed 60
basis points with respect to any 12 month period; the minimum annual fee that
would be payable to CapGuardian under the Performance Fee Arrangement is 20
basis points (.20%). Under the performance fee arrangement, CapGuardian could
earn a positive performance adjustment in declining markets if the decline in
the total return of CapGuardian Account is less than the decline in the total
return of the EAFE Index. Detailed information about the performance fee
arrangement, including the manner in which the fee is computed, appears in the
Statement of Additional Information.
Day-to-day portfolio management for that portion of the Portfolio allocated to
CapGuardian will be the responsibility of the following individuals:
David I. Fisher, is Chairman of the Board of CapGuardian and an officer and/or
director of several affiliated companies. Mr. Fisher joined the Capital Group in
1969. Mr. Fisher is a graduate of the University of California at Berkeley,
holds an MBA from the University of Missouri Graduate School of Business
Administration. Mr. Fisher is a member of the Los Angeles Society of Financial
analysts and a founding member of the International Society of Security
Analysts.
27
<PAGE>
Management of the Trust (continued)
================================================================================
Hartmut Giesecke is Chairman of the Board of Capital Group's Japanese investment
management subsidiary and serves as an officer and/or director of several
companies in the Capital Group. Mr. Giesecke has been with the Capital Group
since 1972, focusing on international and emerging markets. Mr. Giesecke was a
Research Fellow with the Geneva Graduate Institute of International Studies and
German Research Association and holds a Master of Economics degree from Freiburg
University, Germany, and an MBA from Columbia University Graduate School of
Business.
Richard N. Havas is a Senior Vice President and a portfolio manager with
research responsibilities for CapGuardian and several affiliated companies, and
serves as an officer and/or director of several companies in the Capital Group.
Mr. Havas joined the Capital Group in 1986 as a financial analyst. He holds a
BA from the University of Toronto and an MBA from INSEAD in Fontainebleau,
France.
Nancy J. Kyle is a portfolio manager in CapGuardian's New York office. Ms. Kyle
is a Senior Vice President, Director and member of the Executive Committee of
CapGuardian, and serves as an officer and/or director of several companies in
the Capital Group. Before joining CapGuardian in 1991, Ms. Kyle was a Managing
Director at J.P. Morgan Investment Management Inc., where she was head of the
international equity business in the U.S. Ms. Kyle earned a BA in political
science from Connecticut College and did graduate work in international
political science in the London School of Economics.
Robert Ronus is a portfolio manager in CapGuardian's Los Angeles office. Mr.
Ronus is president and a director of Cap Guardian and serves as an officer
and/or director of several companies in the Capital Group. Mr. Ronus,
responsible for both global and non-U.S. portfolios, joined the Capital Group in
1972. He holds a BA and an MA from Oxford University.
Lionel M. Sauvage is a portfolio manager in CapGuardian's West Los Angeles
office. Mr. Sauvage is senior vice president and portfolio manager of
CapGuardian and a vice president of Capital International Research, Inc. Mr.
Sauvage joined the Capital Group in 1987 as an investment analyst and has
covered European food, beverage and airline industries, as well a U.S. aerospace
companies. He holds an MBA from INSEAD in Fontainebleau, France and electronic
engineering degree from ENSEM in Nancy, France.
Nilly Sikorsky is a portfolio manager based in Cap Guardian's Geneva office.
Ms. Sikorsky serves as President and Managing Director of Capital International,
S.A. and Chairman of Capital International Perspective S.A. and as an officer
and/or director of several companies in the Capital Group. Ms. Sikorsky, who
joined the Capital Group of Companies in 1962 as a statistician, was managing
editor of the Morgan Stanley Capital International Perspective for 20 years.
Ms. Sikorsky is a graduate in sociology of the University of Geneva and also
attended the University of Geneva Graduate School of International Studies. She
is a member of the Swiss Association of Financial Analysts.
Rudolf M. Staehelin a portfolio manager in Cap Guardian's Geneva office. Mr.
Staehelin is a Senior Vice President and Director of Capital International
Research, Inc. and Director and Senior Vice President of Capital International
S.A. He joined the Capital Group Companies in 1981 as a financial analyst with
international research responsibilities in banking and pharmaceuticals. Mr.
Staehelin holds an MBA from Stanford University Graduate School of Business, as
well as a doctorate and master's degree in law from the UniversitatBasel in
Switzerland. Mr. Staehelin is a member of the Swiss Association of Financial
Analysts, the German Society for Securities Analysts, the International Society
of Financial Analysts and the New York Society of Security Analysts.
Christopher A. Reed is a Director and a Vice President of Capital International
Research, Inc. with portfolio management responsibilities for Japan, Pacific
Basin, and non-U.S. equity portfolios, and research responsibilities for the
Japanese financial sector. Prior to joining CapGuardian in 1994, Mr. Reed worked
as an East Asia and aerospace analyst for the U.S. Air Force. Mr. Reed received
his MBA from Stanford University's Graduate School of Business. He also earned
a BSFS in Asian studies and an MA in national securities studies, both from
Georgetown University. Mr. Reed is a Chartered Financial Analyst. He is based
in CapGuardian's Tokyo office.
Arthur J. Gromadzki is a Vice President of Capital International Research, Inc.
with European equity portfolio management and investment analyst
responsibilities. As an analyst, Mr. Gromadzki specializes in the international
automotive industry, industrial components and selected leisure companies, and
also serves as a global equity Research Portfolio Coordinator. Mr. Gromadzki
joining CapGuardian in 1987 after having obtained his MBA at IMD in Lausanne,
Switzerland. He holds an MS in civil engineering from the Technical University
of Szczecin, Poland. Mr. Gromadzki's work experience includes four years as
business manager for the estate of the renowned pianist Arthur Rubinstein. He
is a founding President of the Association of European Automotive Analysts, and
is based in CapGuardian's Geneva office.
28
<PAGE>
Management of the Trust (continued)
================================================================================
Geewax, Terker and Co. ("Geewax"), a Pennsylvania partnership and registered
investment adviser, serves as a Specialist Manager for The Value Equity
Portfolio and The Small Capitalization Equity Portfolio. For its services to
The Value Equity, Portfolio, Geewax receives a fee, based on the average daily
net asset value of that portion of the assets of The Value Equity Portfolio
managed by it, at an annual rate of 0.30%. For its services to The Small
Capitalization Equity, Portfolio, Geewax receives a fee, based on the average
daily net asset value of that portion of the assets of The Small Capitalization
Equity Portfolio managed by it, at an annual rate of 0.30 %. The principal
offices of Geewax are located at 99 Starr Road, Phoenixville, PA 19460. John
Geewax has been a general partner and chief investment officer 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.
Christopher P. Ouimet is a research analyst and assistant portfolio manager for
the Portfolio. 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 June 30, 2000, Geewax managed assets of approximately $7.1 billion,
of which approximately $400 million represented assets of mutual funds. Geewax
is controlled by Mr. Geewax and Bruce Terker, the firm's general partners.
Frontier Capital Management Company ("Frontier") serves as a Specialist 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, a
Senior Vice President of Frontier, is a chartered financial analyst and 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 June 30, 2000,
approximately $5.4 billion in assets under management, of which approximately
$573 million represented assets of mutual funds. Affiliated Managers Group,
Inc. ("AMG"), a Boston-based asset management holding company holds majority
interest in Frontier. Shares of AMG are listed on the New York Stock Exchange
(Symbol: AMG).
Goldman Sachs Asset Management ("GSAM") serves as a Specialist Manager for The
Growth Equity Portfolio. GSAM's principal offices are located at 32 Old Slip,
New York, New York 10005. As of June 30, 2000, GSAM, together with its
affiliates, managed total assets of in excess of $270 billion. Robert C. Jones,
Victor Pinter, Kent Clark and Melissa Brown are 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. Clark is a Managing Director of GSAM. He joined GSAM as a
portfolio manager in the quantitative equity management team in 1992. Mr. Pinter
is a Vice President of GSAM. He joined GSAM in 1990 as a research analyst and
became a portfolio manager in 1992. Ms. Brown is a Vice President. She joined
GSAM as a portfolio manager in 1998. From 1984 to 1998, Ms. Brown was the
director of Quantitative Equity Research and served on the Investment Policy
Committee at Prudential Securities Incorporated. GSAM is a separate operating
division of Goldman Sachs & Co. Goldman Sachs & Co. is controlled by Goldman
Sachs Group, Inc.
GSAM is currently compensated for its services to The Growth Equity Portfolio at
an annual rate of 0.30% of those assets of the Portfolio's assets allocated to
GSAM ("GSAM Account"). Under the terms of a performance fee arrangement which
first became effective on October 1, 1999, GSAM's asset-based fee ("Base Fee")
may be adjusted to reflect the performance of the GSAM Account. Under the
arrangement, the Base Fee may 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 date
on which the fee is calculated. 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.
Because the performance of the GSAM Account will vary, the advisory fee payable
to GSAM will also vary. The maximum fee payable to GSAM for any annual period
under the incentive fee arrangement is .50% of the average net assets of the
GSAM Account and the minimum fee payable to GSAM for any annual period under the
incentive fee arrangement is 0.10% of the average net assets of the GSAM
Account. Shareholders should be aware that one consequence of the performance
fee arrangement is that GSAM could be entitled to a positive performance
adjustment even during periods when the value of the GSAM Account and/or the
Portfolio overall declines. This could occur if the decline in the value of the
Russell 1000 Growth Index is greater than the decline in the value of the
Portfolio. Detailed information about the performance fee arrangement,
including the manner in which the fee is computed, appears in the Statement of
Additional Information.
29
<PAGE>
Management of the Trust (continued)
================================================================================
Institutional Capital Corporation ("ICAP") serves as a Specialist 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 $13.2 billion
under management as of July 31, 2000, of which approximately $2.6 billion
represented assets of mutual funds.
Jennison Associates LLC ("Jennison") serves as a Specialist 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. Jeffrey P. Siegel, an Executive President
of Jennison, is responsible for making day-to-day investment decisions for that
portion of The Growth Equity Portfolio allocated to Jennison. Mr. Seigel joined
Jennison in June 1999 after eleven years at TIAA-CREF, where he was a portfolio
manager. As of June 30, 2000, Jennison had approximately $63.5 billion under
management, of which approximately $25.4 billion represented assets of mutual
funds. Jennison is a wholly-owned subsidiary of The Prudential Insurance
Company of America.
Miller Anderson & Sherrerd, LLP ("MAS") serves as the Specialist Manager for The
High Yield Bond Portfolio and The Fixed Income II Portfolio. For its services to
The High Yield Portfolio, MAS receives a fee, payable monthly, calculated at an
annual rate of .375% of the average daily net assets of the Portfolio. For its
services to The Fixed Income II Portfolio, MAS receives a monthly fee,
calculated in accordance with the following annual rates: .275% of the first
$200 million of the average daily net assets of the Portfolio; .250% of the next
$200 million of such assets; and .200 of such assets over $400 million. MAS,
whose principal offices are located at One Tower Bridge, West Conshohocken,
Pennsylvania 19428-0868, was founded in 1969 and is a division of Morgan Stanley
Dean Witter Investment Management and is wholly-owned by indirect subsidiaries
of Morgan Stanley Dean Witter & Co. ("MSDW"). As of June 30, 2000, MSDW,
together with its affiliates, managed assets in excess of $177.2 billion, of
which approximately $47.8 billion represented assets of mutual funds.
Day-to-day investment decisions for The High Yield Portfolio are the
responsibility of Stephen F. Esser, Robert E. Angevine and Gordon W. Loery. Mr.
Esser, a Managing Director of MSDW, joined MAS in 1988 and has been part of the
management team for The High Yield Bond Portfolio since the inception of this
Portfolio. Mr. Angevine, a Principal of MSDW, joined MSDW in 1988 as a Fixed
Income Portfolio Manager and has been a part of the management team for The High
Yield Bond Portfolio since 1996. Before joining the management team for The
High Yield Bond Portfolio in 1999, Mr. Loery, who is also a Principal of MSDW,
joined MAS in 1996, having served as a Fixed Income Analyst for Morgan Stanley
Asset Management Inc. from 1990 to 1996.
Day-to-day portfolio management decisions for The Fixed Income II Portfolio are
the responsibility of Angelo G. Manioudakis and Scott F. Richard. Mr.
Manioudakis, a Principal of MSDW, joined MAS in 1993. He served as a Fixed
Income Analyst for Morgan Stanley Asset Management Inc., a affiliate of MAS,
from 1993 to 1995, and as a Fixed Income Portfolio Manager from 1995 to 1998.
He has been part of the management team for The High Yield Bond Portfolio since
1999. Mr. Richards, who is a Managing Director of MSDW, joined MAS in 1992 and
has been part of the management team for The Fixed Income II Portfolio since the
inception of this Portfolio.
Deutsche Asset Management, Inc. ("Deutsche") serves as the Specialist Manager
for 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, Deutsche receives, based of the
average daily net assets value of each such portfolio, an annual fee of 0.275%.
Deutsche, which was formerly known as Morgan Grenfell, Incorporated, is
headquartered 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 Deutsche , 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 Deutsche (or
its predecessors) since 1989. As of June 30, 2000, Deutsche managed assets of
approximately $16.0 billion, of which approximately $2.7 billion represented
assets of mutual funds. Deutsche is an indirect, wholly-owned subsidiary of
Deutschebank, A.G., a German financial services conglomerate.
30
<PAGE>
Shareholder Information
================================================================================
Purchasing Shares of the Portfolios
You may purchase shares of any of the Portfolios only if you are a client of
Hirtle Callaghan or a financial intermediary that has established a relationship
with Hirtle Callaghan. Shares of each of the Portfolios are sold at its net
asset value per share ("NAV") next calculated after your purchase order is
accepted by the Trust.
A Portfolio's NAV is determined at the close of regular trading on the New York
Stock Exchange, normally at 4:00 p.m. Eastern time on days the Exchange is open.
The NAV is calculated by adding the total value of the Portfolio's investments
and other assets, subtracting its liabilities and then dividing that figure by
the number of outstanding shares of the Portfolio:
NAV = total assets - liabilities
--------------------------
number of shares outstanding
The value of each Portfolio's investments is generally determined by current
market quotations. If market quotations are not available, prices will be based
on fair value as determined by the Trust's Trustees. 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.
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. The Trust
reserves the right to reject any purchase order. Purchase orders may be
received by the Trust's transfer agent on any regular business day.
Selling Your Shares
You may redeem your shares in any Portfolio on any regular business day. Shares
will be redeemed at the NAV next computed after receipt of your redemption order
by the Trust. You will receive redemption proceeds within 7 days after receipt
of your redemption order by the Trust. Redemption proceeds may be wired to an
account that you have predesignated and which is on record with the Trust.
Shares purchased by check will not be redeemed until that payment has cleared --
normally, within 15 days of receipt of the check by the Trust.
As a mutual fund shareholder, you are technically selling shares when you
request a withdrawal in cash. This is also known as redeeming shares or a
redemption of shares.
Redemption requests must be in writing and must be signed by the shareholder(s)
named on the account. If you wish to redeem shares of any Portfolio valued at
$25,000 or more, each signature must be guaranteed.
Other Information about Purchases and Redemptions. Distributions are made on a
per share basis regardless of how long you have owned your shares. Therefore,
if you invest shortly before the distribution date, some of your investment will
be returned to you in the form of a distribution. Capital gains, if any, are
distributed at least annually.
The value of securities that are primarily listed on foreign exchanges may
change on days when the New York Stock Exchange is closed and the NAV of a
Portfolio is not calculated. You will not be able to purchase or redeem your
shares on days when the New York Stock Exchange is closed. The Trust may permit
investors to purchase shares of a Portfolio "in kind" by exchanging securities
for shares of the selected Portfolio. This is known as an "in-kind" purchase.
Shares acquired in an in-kind transaction will not be redeemed until the
transfer of securities to the Trust has settled -- usually within 15 days
following the in-kind purchase. The Trust may also redeem shares in-kind. This
means that all or a portion of the redemption amount would be paid by
distributing to the redeeming shareholder securities held in a Portfolio's
investment portfolio. Investors will incur brokerage charges on the sale of
these portfolio securities. In kind purchases and sales will be permitted
solely at the discretion of the Trust.
The Trust does not impose investment minimums or sales charges of any kind. If
your account falls below $5,000, the Portfolio may ask you to increase your
balance. If it is still below $5,000 after 30 days, the Portfolio may close your
account and send you the proceeds at the current NAV. In addition, if you
purchase shares of the Trust through a program of services offered by a
financial intermediary, you may incur advisory fees or custody expenses in
addition to those expenses described in this Prospectus. Investors should
contact such intermediary for information concerning what, if any, additional
fees may be charged.
31
<PAGE>
Shareholder Information (continued)
================================================================================
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.
Dividends, Distributions and Taxes. Any income a Portfolio receives is paid out,
less expenses, in the form of dividends to its shareholders. Income dividends on
The Value Equity Portfolio, The Growth Equity Portfolio and The Small
Capitalization Equity Portfolio are usually paid on a quarterly basis. Dividends
on The International Equity Portfolio are paid semi-annually. Dividends on each
of the Income Portfolios are paid monthly. Capital gains for all Portfolios, if
any, are distributed at least annually.
Federal Taxes. The following discussion is only a brief summary of some of the
important Federal tax considerations that may affect your investment in the
Trust. It is not a substitute for careful tax planning. 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.
Dividends that are derived from taxable investments are taxable as ordinary
income. Dividends and capital gain distributions are taxable in the year in
which they are paid, even if they appear on your account statement the following
year. The manner in which they are taxed will be the same, regardless of whether
you elect to receive your dividends and capital gains distributions in cash or
in additional shares. Taxes on capital gains by the Portfolios will vary with
the length of time the Portfolio has held the security - not how long you have
invested in the Portfolio.
During normal market conditions, it is expected that substantially all of the
dividends paid by The Intermediate Term Municipal Bond Portfolio will be
excluded from gross income for Federal income tax purposes. As previously noted,
the Portfolio may, however, invest in certain securities with interest that may
be a preference item for the purposes of the alternative minimum tax or a factor
in determining whether Social Security benefits are taxable; the Portfolio may
also realize capital gain. In such event, a portion of the Portfolio's dividends
would not be exempt from Federal income taxes. If a Portfolio invests in foreign
securities, it may be subject to foreign withholding taxes, and under certain
circumstances, 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.
You will be notified each year about the Federal tax status of dividends and
capital gains distributions made by the Portfolios. Depending on your residence
for tax purposes, dividends and capital gains distributions may also be subject
to state and local taxes, including withholding taxes. Foreign shareholders may
be subject to special withholding requirements.
32
<PAGE>
Financial Highlights
================================================================================
The financial highlights tables are intended to help you understand the
financial performance of each of the Trust's Portfolios for the past five years
or since the inception of the Portfolio, if less than five years. Certain
information reflects financial results for a single Portfolio share. The total
returns in the tables represent the rate that you would have earned or lost on
an investment in the Portfolio (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP,
whose report, along with the Trust's financial statements, are included in the
Statement of Additional Information, which is available upon request.
<TABLE>
<CAPTION>
Value Equity Portfolio
Year Year Year Year Period
Ended Ended Ended Ended Ended
June 30, June 30, June 30, June 30, June 30,
2000 1999 1998 1997 1996(a)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $ 14.85 $ 15.49 $ 14.41 $ 11.48 $ 10.00
Income from Investment Operations:
Net investment income................................. 0.17 0.22 0.24 0.23 0.22
Net realized and unrealized gain/(loss) on
investments.............................................. (0.92) 0.87 2.87 3.65 1.51
Total from investment operations.................... (0.75) 1.09 3.11 3.88 1.73
Distributions to Shareholders from:
Net investment income................................. (0.17) (0.22) (0.25) (0.21) (0.22)
Net realized gain on investments...................... (0.73) (1.51) (1.78) (0.74) (0.03)
Total distribution to shareholders.................. (0.90) (1.73) (2.03) (0.95) (0.25)
Net Asset Value, End of Period........................... $ 13.20 $ 14.85 $ 15.49 $ 14.41 $ 11.48
Total Return............................................. (5.14%) 9.07% 23.42% 35.28% 17.28%(c)
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in thousands).............. $ 241,803 $ 216,940 $ 176,587 $ 117,092 $ 71,503
Ratio of expenses to average net assets............... 0.55% 0.56% 0.52% 0.63% 0.63%(b)
Ratio of net investment income to average net
assets .................................................. 1.29% 1.64% 1.69% 1.89% 2.55%(b)
Ratio of expenses to average net assets excluding
fee waivers.............................................. 0.55% 0.56% 0.52% 0.65% 0.68%*(b)
Portfolio turnover rate............................... 128.72% 108.79% 86.45% 97.39% 92.00%
</TABLE>
* During the period, certain fees were waived or reimbursed. If such fees were
not waived or reimbursed, the ratios would have been as indicated.
(a) For the period August 25, 1995 (commencement of operations) through June 30,
1996.
(b) Annualized.
(c) Not annualized.
<TABLE>
<CAPTION>
Growth Equity Portfolio
Year Year Year Year Period
Ended Ended Ended Ended Ended
June 30, June 30, June 30, June 30, June 30,
2000 1999 1998 1997 1996(a)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $ 17.96 $ 15.25 $ 13.67 $ 11.13 $ 10.00
Income from Investment Operations:
Net investment income................................. 0.08 0.03 0.04 0.06 0.04
Net realized and unrealized gain on investments
and futures.............................................. 4.69 3.76 4.37 2.58 1.13
Total from investment operations.................... 4.77 3.79 4.41 2.64 1.17
Distributions to Shareholders from:
Net investment income................................. (0.08) (0.03) (0.04) (0.05) (0.04)
In excess of net investment income.................... -- -- (0.02) -- --
Net realized gain on investments and futures.......... (2.02) (1.05) (2.77) (0.05) --
Total distribution to shareholders.................. (2.10) (1.08) (2.83) (0.10) (0.04)
Net Asset Value, End of Period........................... $ 20.63 $ 17.96 $ 15.25 $ 13.67 $ 11.13
Total Return............................................. 27.71% 26.76% 37.00% 23.83% 11.69%(c)
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in thousands).............. $ 361,607 $ 264,877 $ 216,129 $ 160,961 $ 110,537
Ratio of expenses to average net assets............... 0.52% 0.53% 0.53% 0.55% 0.63%(b)
Ratio of net investment income to average net
assets................................................... 0.47% 0.20% 0.33% 0.49% 0.46%(b)
Ratio of expenses to average net assets excluding
fee waivers.............................................. 0.52% 0.53% 0.53% 0.55% 0.68%*(b)
Portfolio turnover rate............................... 94.37% 70.61% 95.07% 80.47% 80.00%
</TABLE>
* During the period, certain fees were waived or reimbursed. If such fees were
not waived or reimbursed, the ratios would have been as indicated.
(a) For the period August 8, 1995 (commencement of operations) through June 30,
1996.
(b) Annualized.
(c) Not annualized.
33
<PAGE>
Financial Highlights (continued)
================================================================================
<TABLE>
<CAPTION>
Small Capitalization Equity Portfolio
Year Year Year Year Period
Ended Ended Ended Ended Ended
June 30, June 30, June 30, June 30, June 30,
2000 1999 1998 1997 1996(a)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....................... $ 12.33 $ 13.13 $ 12.95 $ 11.07 $ 10.00
Income from Investment Operations:
Net investment income................................... 0.02 0.04 0.06 0.07 0.10
Net realized and unrealized gain on investments......... 2.96 0.35 1.54 2.11 1.07
Total from investment operations...................... 2.98 0.39 1.60 2.18 1.17
Distributions to Shareholders from:
Net investment income................................... (0.02) (0.04) (0.06) (0.07) (0.10)
Net realized gain on investments........................ -- (1.15) (1.36) (0.23) --
Total distribution to shareholders.................... (0.02) (1.19) (1.42) (0.30) (0.10)
Net Asset Value, End of Period............................. $ 15.29 $ 12.33 $ 13.13 $ 12.95 $ 11.07
Total Return............................................... 24.21% 4.73% 12.66% 19.88% 11.82%(c)
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in thousands)................ $ 279,784 $ 210,737 $ 150,527 $ 113,480 $ 61,503
Ratio of expenses to average net assets................. 0.60% 0.62% 0.70% 0.78% 0.78%(b)
Ratio of net investment income to average net assets.... 0.18% 0.39% 0.41% 0.68% 1.33%(b)
Ratio of expenses to average net assets excluding
fee waivers........................................... 0.60% 0.62% 0.70%* 0.78%* 0.90%*(b)
Portfolio turnover rate................................. 111.52% 125.52% 103.41% 54.16% 38.00%
</TABLE>
* During the period, certain fees were waived or reimbursed. If such fees were
not waived or reimbursed, the ratios would have been as indicated.
(a) For the period September 5, 1995 (commencement of operations) through June
30, 1996.
(b) Annualized.
(c) Not annualized.
<TABLE>
<CAPTION>
International Equity Portfolio
Year Year Year Year Period
Ended Ended Ended Ended Ended
June 30, June 30, June 30, June 30, June 30,
2000 1999 1998 1997 1996(a)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $ 12.85 $ 12.70 $ 12.84 $ 11.26 $ 10.00
Income from Investment Operations:
Net investment income.................................... 0.12 0.24 0.16 0.22 0.16
Net realized and unrealized gain on investment and
foreign currency transactions.......................... 2.82 0.39 0.49 1.92 1.35
Total from investment operations....................... 2.94 0.63 0.65 2.14 1.51
Distributions to Shareholders from:
Net investment income.................................... (0.07) (0.21) (0.47) (0.22) (0.24)
In excess of net investment income....................... -- -- -- (0.04) --
Net realized gain on investments and foreign currency
transactions........................................... (0.38) (0.27) (0.32) (0.30) (0.01)
Total distribution to shareholders..................... (0.45) (0.48) (0.79) (0.56) (0.25)
Net Asset Value, End of Period.............................. $ 15.34 $ 12.85 $ 12.70 $ 12.84 $ 11.26
Total Return................................................ 23.14% 5.20% 5.91% 19.61% 15.15%(c)
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in thousands)................. $ 383,572 $ 256,177 $ 229,875 $ 146,122 $ 77,732
Ratio of expenses to average net assets.................. 0.65% 0.69% 0.70% 0.78% 0.81%(b)
Ratio of net investment income to average net assets..... 0.98% 1.51% 2.00% 1.97% 1.75%(b)
Ratio of expenses to average net assets excluding fee
waivers................................................ 0.65% 0.69% 0.71% 0.78% 0.92%*(b)
Portfolio turnover rate.................................. 144.41% 56.77% 36.80% 29.85% 15.00%
</TABLE>
* During the period, certain fees were waived or reimbursed. If such fees were
not waived or reimbursed, the ratios would have been as indicated.
(a) For the period August 17, 1995 (commencement of operations) through June 30,
1996.
(b) Annualized.
(c) Not annualized.
34
<PAGE>
Financial Highlights (continued)
================================================================================
<TABLE>
<CAPTION>
Intermediate Term
Fixed Income Municipal Bond
Portfolio Portfolio
Year Period Year Period
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2000 1999(a) 2000 1999(a)
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............................ $ 9.64 $ 10.00 $ 9.79 $ 10.00
Income from Investment Operations:
Net investment income........................................ 0.62 0.58 0.46 0.45
Net realized and unrealized gain/(loss) on investments....... (0.20) (0.28) (0.23) (0.21)
Total from investment operations........................... 0.42 0.30 0.23 0.24
Distributions to Shareholders from:
Net investment income........................................ (0.62) (0.58) (0.46) (0.45)
Net realized gain on investments............................. -- (0.08) -- --
Total distribution to shareholders......................... (0.62) (0.66) (0.46) (0.45)
Net Asset Value, End of Period.................................. $ 9.44 $ 9.64 $ 9.56 $ 9.79
Total Return.................................................... 4.49% 2.88% 2.45% 2.44%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (in thousands)..................... $ 130,508 $ 108,074 $ 199,566 $ 107,105
Ratio of expenses to average net assets...................... 0.46% 0.50% 0.46% 0.47%
Ratio of net investment income to average net assets......... 6.52% 5.78% 4.84% 4.54%
Ratio of expenses to average net assets excluding
fee waivers................................................. 0.46% 0.50% 0.46% 0.54%*
Portfolio turnover rate...................................... 147.65% 146.78% 51.34% 42.24%
</TABLE>
* During the period, certain fees were waived or reimbursed. If such fees were
not waived or reimbursed, the ratios would have been as indicated.
(a) For the period July 1, 1998 (commencement of operations) through June 30,
1999.
35
<PAGE>
--------------------------------------------------------------------------------
The Hirtle Callaghan Trust
================================================================================
For More Information:
For more information about the Funds, the following documents are available free
upon request:
Annual/Semi-Annual Reports:
The Trust's annual and semi-annual reports to shareholders contain additional
information on the Trust's investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Trust's performance during its last fiscal year.
Statement of Additional Information ("SAI"):
The SAI provides more detailed information about the Trust, including its
operations and investment policies. It is incorporated by reference and is
legally considered a part of this prospectus.
You can get free copies of these reports and the SAI, or request other
information and discuss your questions about the Trust by contacting a broker
or bank that sells the Portfolios. Or contact the Trust at:
The Hirtle Callaghan Trust
100 Four Falls Corporate Center, Suite 500
West Conshohocken, PA 19428-2970
Telephone: 610-828-7200
You can review the Trust's reports and SAI at the Public Reference Room of the
Securities and Exchange Commission. Information on the operation of the Public
Reference Room may be obtained by calling 1-202-942-8090. You can get text-only
copies of these documents:
. For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-0102, calling 202-942-8090 by electronic request
to: [email protected].
. Free from the Commission's website at http://www.sec.gov.
Investment Company Act File No. 811-8918.
36
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The Hirtle Callaghan Trust
100 Four Falls Corporate Center, Suite 500
West Conshohocken, PA 19428-2970
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").
Hirtle, Callaghan & Co., Inc ("Hirtle Callaghan") serve as the overall
investment adviser to the Trust. 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 September 25, 2000. A
copy of that prospectus is available by contacting the Trust at 610-828-7200.
<TABLE>
<CAPTION>
Statement of Additional Information Heading Corresponding Prospectus Heading
------------------------------------------- --------------------------------
<S> <C>
Management of the Trust Management of the Trust
Trustees and Officers
Investment Advisory Arrangements
Administration, Distribution and Related Services
Further Information About the Trust's Investment Policies Investment Risk and Strategies
Investment Restrictions Investment Risk and Strategies
Additional Purchases and Redemption Information Shareholder Information
Portfolio Transactions and Valuation Shareholder Information
Dividends, Distributions and Taxes Shareholder Information
Performance Information Portfolio Descriptions and Expenses
History of the Trust and Other Information Management of Trust
Financial Statements and Independent Accountants Financial Highlights
Ratings Appendix N/A
</TABLE>
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, 2000 accompanies this
Statement of Additional Information and is incorporated by reference herein.
The date of this Statement of Additional Information is September 25, 2000.
1
<PAGE>
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 ("Specialist 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 Specialist
Manager has been retained, allocation of that Portfolio's assets among such
Specialist Managers. In particular, the Board may, from time to time, allocate
portions of a Portfolio's assets between or among several Specialist 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
Specialist Managers, or terminate particular Specialist Managers, if the Board
deems it appropriate to do so in order to achieve the overall objectives of the
Portfolio involved. Further information regarding the Trust's use of multi-
manager structure appears below. In addition, the Board may retain additional
Specialist 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 100 Four Falls Corporate Center, Suite 500, West
Conshohocken, PA 19428-2970. Except for Mr. Williams, each of the Trustees has
served on the Trust's Board since its inception; Mr. Williams became a Trustee
as of July 15, 1999. An asterisk appears beside the name of each Trustee who is
an "interested person" of the Trust within the meaning of the Investment Company
Act.
<TABLE>
<CAPTION>
Position with the Principal Occupation
Name and Business Address Birthdate Trust for the Last Five Years
-------------------------- ------------- ------------------ -----------------------
<S> <C> <C> <C>
*Donald E. Callaghan 9/19/46 Chair and For more than the past five years, Mr. Callaghan has been a
President Principal of Hirtle Callaghan.
Ross H. Goodman 12/25/47 Trustee For more than the past five years, Mr. Goodman has been
Vice President of American Industrial Management & Sales,
Northeast, Inc. or its predecessors (manufacturing
representative).
*Jonathan J. Hirtle 12/31/52 Trustee For more than the past five years, Mr. Hirtle has been a
Principal of Hirtle Callaghan.
Jarrett Burt Kling 5/26/43 Trustee For more than the past five years, Mr. Kling has been
associated with CRA Real Estate Securities, L.P., a
registered investment adviser and indirect, wholly-owned
subsidiary of ING Group.
R. Richard Williams 8/24/45 Trustee For more than the last five years, Mr. Williams has served
as the Chief Executive Officer and President of Valquip
Corporation (flow control distribution).
Richard W. Wortham, III 9/12/38 Trustee For more than the past five years, Mr. Wortham has been
President of 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 J. Zion 12/7/61 Vice President, Mr. Zion is a Principal of Hirtle Callaghan, and has been
Secretary and employed by that firm for more than the last five years.
Treasurer
</TABLE>
2
<PAGE>
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. 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 Goodman 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. 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, 2000
(excluding reimbursed expenses).
<TABLE>
<CAPTION>
Name and Position Aggregate Pension Retirement Estimated Benefits Total Compensation
Compensation From Benefits From Upon Retirement From Trust
Trust Trust From Trust
<S> <C> <C> <C> <C>
Ross H. Goodman $4,000 none none $4,000
Jarrett Burt Kling 4,000 none none 4,000
Richard W. Wortham, III 4,000 none none 4,000
R. Richard Williams 4,000 none none 4,000
</TABLE>
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; officers and Trustees of the Trust may, however, be investment
advisory clients of Hirtle Callaghan and shareholders of the Trust.
The Trust, Hirtle Callaghan and each of the Trust's Specialist Managers, as well
as the Trust's distributor, have adopted codes of ethics (each, a "17j-1 Code")
under Rule 17j-1 under the Investment Company Act. The 17j-1 Code adopted by
each of these entities governs the manner and extent to which certain persons
associated with that entity may invest in securities for their own accounts
(including securities that may be purchased or held by the Trust). The 17j-1
Codes are on public file with, and are available from, the SEC's Public
Reference Room in Washington, D.C.
Multi-Manager Structure. The Trust expects to use the multi-manager structure
-----------------------
for certain of the Portfolios from time to time when such strategy appears
advisable for the particular Portfolio. At present, each of the Equity
Portfolios employs the multi-manager structure. Under this structure, the Trust
allocates portions of a Portfolio's assets among two or more specialist managers
with differing investment styles and/or security selection disciplines. The
Trust monitors the performance of both the overall Portfolio and of each
Specialist Manager. From time to time, the Trust may reallocate Portfolio assets
among individual Specialist Managers, or recommend that particular Specialist
Managers be hired or terminated, when the Trust believes the action is
appropriate to achieve the overall objectives of the particular Portfolio. For
example, a reallocation may be recommended by Hirtle Callaghan and considered by
the Board in the event that a Specialist Manager experiences variations in
performance as a result of by factors or conditions that affect the particular
universe of securities emphasized by that investment manager or otherwise affect
that Specialist Managers particular investment style.
The goal of the multi-manager structure is to achieve a better rate of return
with lower volatility than would typically be expected of any one management
style. Its success depends upon the ability of the Trust to (a) identify and
retain Specialist Managers who have achieved and will continue to achieve
superior investment records relative to selected benchmarks; (b) pair Specialist
Managers that have complementary investment styles (e.g., top-down vs. bottom-up
investment selections processes; (c) monitor Specialist Managers' performance
and adherence to stated styles; and (d) effectively allocate Portfolio assets
among Specialist Managers.
The Trust selects Specialist Managers, subject to the approval of the
shareholders of that Portfolio, in accordance
3
<PAGE>
with the Investment Company Act, based on a continuing quantitative and
qualitative evaluation of their skills and proven abilities in managing assets
pursuant to specific investment styles. While superior performance is regarded
as the ultimate goal, short-term performance by itself is not a significant
factor in selecting or terminating Specialist Managers.
From time to time, the Trust may recommend that the services of a Specialist
Manager be terminated. The criteria for termination may include, but are not
limited to, the following: (a) departure of key personnel from the Specialist
Manager's firm; (b) acquisition of the Specialist Manger by a third party; or
(c) change in or departure from investment style.
Investment Advisory Arrangements. As described in the prospectus, Hirtle,
---------------------------------
Callaghan has entered into a written consulting agreement with the Trust
("Hirtle Callaghan Agreement"). The Hirtle Callaghan 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 February 29, 2000. The Hirtle Callaghan Agreement will
remain in effect 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 Hirtle
Callaghan 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 Hirtle Callaghan Agreement permits the Trust to use
the name "Hirtle Callaghan." In the event, however, the Hirtle Callaghan
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 Hirtle Callaghan
Agreement further provides that Hirtle Callaghan 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 Hirtle Callaghan 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.
At a meeting of the Board held on February 29, 2000, the Board approved a
proposal to seek an order of the SEC that would, if issued, permit the Trust to
enter into portfolio management agreements with Specialist Managers upon the
approval of the Board in the manner contemplated by Section 15(c) but without
submitting such contracts for the approval of the shareholders of the relevant
portfolio. It is anticipated, however, that any such order would become
effective with respect to any Portfolio only upon the approval of the holders of
a majority of the outstanding shares of such Portfolio.
Portfolio Management Contracts. The Trust has also entered into investment
------------------------------
advisory contracts (each, as "Portfolio Management Contract") on behalf of each
of the Portfolios with one or more of the Specialist Managers. Although the
Trust is served by several different Specialist Managers, each of the contracts
that govern these advisory relationships include a number of similar provisions.
Each Portfolio Management Contract provides that the named Specialist Manager
will, subject to the overall supervision of the Board, provide a continuous
investment program for the assets of the Portfolio to which such contract
relates, or that portion of such assets as may be, from time to time allocated
to such Specialist Manager. Under their respective contracts, each Specialist
Manager is responsible 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
contracts provides that the named Specialist Manager will not be liable to the
Trust for any error of judgment or mistake of law on the part of the Specialist
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
Specialist Manager. Each of the Portfolio Management Contracts provides that
it 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 within the meaning of
Section 2(a)(42) of the Investment Company Act; and (ii) by a majority of the
Independent Trustees, by vote cast in person, and further, that the contract may
be terminated at any time,
4
<PAGE>
without penalty, either by the Trust or by the named Specialist Manager, in each
case upon sixty days' written notice. Each of the Portfolio Management Contracts
provides that it will automatically terminate in the event of its assignment, as
that term is defined in the Investment Company Act.
The Portfolio Management Contracts and the Portfolios to which they relate are
as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Portfolio Specialist Manager Served Portfolio Since Most Recent Contract Approval
---------------------------------------------
Shareholders Board
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
The Value Equity Institutional Capital Inception January 12, 1998 February 29, 2000
Portfolio Corporation ("ICAP")/(1)/
-------------------------------------------------------------------------
Geewax Terker & Co. April 1, 1999 June 15, 1999 February 29, 2000
("Geewax Terker")/(2)/
--------------------------------------------------------------------------------------------------------------------------------
The Growth Equity Jennison Associates LLC Inception July 21, 1995 February 29, 2000
Portfolio ("Jennison")
-------------------------------------------------------------------------
Goldman Sachs Asset October 1, 1997 January 12, 1998 September 12, 1999
Management ("GSAM")/(3)/
--------------------------------------------------------------------------------------------------------------------------------
The Small Geewax, Terker/(4)/ April 1, 1998 June 15, 1998 February 29, 2000
Capitalization
-------------------------------------------------------------------------
Equity Portfolio Frontier Capital Inception December 16, 1999 February 29, 2000
Management Company
("Frontier")/(5)/
--------------------------------------------------------------------------------------------------------------------------------
The International Capital Guardian Trust April 28, 2000 July 26, 2000 April 14, 2000
Equity Portfolio Company/(6)/
-------------------------------------------------------------------------
Artisan Limited Partnership July 23, 1999 July 23, 1999 June 8, 1999
("Artisan")/(7)/
--------------------------------------------------------------------------------------------------------------------------------
The Intermediate Deutsche Asset Management, Inception July 1, 1998 February 29, 2000
Term Municipal Inc. ("Deutsche ") (July 1, 1998)
Bond Portfolio/(8)/
--------------------------------------------------------------------------------------------------------------------------------
The Fixed Income Deutsche Inception July 1, 1998 February 29, 2000
Portfolio/(8)/ (July 1, 1998)
--------------------------------------------------------------------------------------------------------------------------------
The Fixed Income II Miller, Anderson & Sherrerd, Inception September 25, 2000 June 13, 2000
Portfolio LLP ("MAS")/(9)/ (September 25, 2000)
--------------------------------------------------------------------------------------------------------------------------------
The High Yield MAS /(9)/ Inception September 25, 2000 June 13, 2000
Portfolio (September 25, 2000)
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Portfolio Management Contract 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. See, "Investment Advisory Fees" in this Statement
of Additional Information.
(2) Geewax Terker replaced the prior manager following Board approval of the
Portfolio Management Contract between Geewax Terker and the Trust relating to
The Value Equity Portfolio and as permitted under Rule 15a-4 of the Investment
Company Act, as then in effect. Such contract, is substantially the same as the
corresponding agreement between the Trust and the prior
5
<PAGE>
manager, and provides for the payment to Geewax Terker by the Portfolio of the
same advisory fee as was paid to such prior manager.
(3) The Portfolio Management Contract between GSAM and the Trust provides that
GSAM's indemnification obligation of the Specialist Manager with respect to
information provided to the Trust by GSAM in connection with certain filings
made by the Trust with the SEC will not apply unless GSAM has had an
opportunity to review such filings for a specified period of time prior to the
date on which they are filed and unless the GSAM is notified in writing of any
claim for indemnification within specified periods. GSAM replaced the prior
manager following Board approval of the Portfolio Management Contract ("GSAM
Contract") between GSAM and the Trust relating to The Growth Equity Portfolio
and as permitted under Rule 15a-4 of the Investment Company Act as then in
effect. As indicated in the table, the GSAM Contract was approved by
shareholders of The Growth Equity Portfolio at a meeting held on January 12,
1998. At the same meeting, such shareholders also approved an amendment to the
GSAM Contract permitting the payment to GSAM of performance-based compensation
under certain circumstances. See, "Investment Advisory Fees" in this Statement
of Additional Information.
(4) Geewax Terker replaced the prior manager following Board approval of the
Portfolio Management Contract between Geewax Terker and the Trust relating to
The Small Capitalization Equity Portfolio and as permitted under Rule 15a-4 of
the Investment Company Act, as then in effect. Such contract is substantially
the same as the corresponding agreement between the Trust and the prior manager,
and provides for the payment to Geewax Terker by the Portfolio of the same
advisory fee as was paid by the prior manager. The Portfolio Management Contract
between Geewax Terker and the Trust provides that Geewax Terker's
indemnification obligation with respect to information provided to the Trust by
Geewax Terker in connection with certain filings made by the Trust with the SEC
will not apply unless Geewax Terker has had an opportunity to review such
filings for a specified period of time prior to the date on which they are filed
and unless the Geewax Terker is notified in writing of any claim for
indemnification within specified periods.
(5) Frontier has served as a Specialist Manager of The Small Capitalization
Equity Portfolio since the Portfolio's inception. The Portfolio Management
Contract between the Trust and Frontier was submitted to shareholders of the
Portfolio in December, 1999 in connection with the acquisition of Frontier by
Affiliated Managers Group, Inc. ("AMG"), a Boston-based asset management holding
company that holds majority interests in over a dozen investment management
firms, and which collectively manage approximately $90 billion in assets. Shares
of AMG are listed on the New York Stock Exchange (Symbol: AMG).
(6) CapGuardian replaced Brinson Partners, Inc. ("Brinson") following Board
approval of an interim portfolio management agreement ("Interim Agreement') on
April 28, 2000, and as permitted under Rule 15(a)(4) of the Investment Company
Act as then in effect. The Interim Agreement was replaced by a final Portfolio
Management Contract between CapGuardian and the Trust ("CapGuardian Contract")
following its approval by the Board on April 14, 2000, and by the shareholders
of the shareholders of the International Equity Portfolio, on the date indicated
in the table. As indicated in the prospectus, the CapGuardian Contract
provides for the payment of performance-based compensation to CapGuardian under
certain circumstances. See, "Investment Advisory Fees" in this Statement of
Additional Information. The Portfolio Management Agreement between Brinson and
the Trust was terminated upon the assumption by CapGuardian of its services
under the Interim Agreement. The terms and conditions of that agreement were,
in all material respects, the same as those of the CapGuardian Contract except
that the asset-based fee payable to Brinson under that agreement was calculated
at a rate of .40% of 1% on assets of $200 million or less, with reductions
(often called "break points") in the applicable rate at higher asset levels and
did not include any provision for performance compensation.
(7) The terms and conditions of the Portfolio Management Contract between
Artisan and the Trust ("Artisan Contract") provide for an advisory fee of .40%
of 1% of the Portfolio's assets assigned to Artisan, but does not include fee
reductions at higher asset levels. The Artisan Agreement will continue in effect
until July 23, 2001, and will continue in effect thereafter so long as it is
approved at least annually by the Board in the manner prescribed under the
Investment Company Act of 1940. As indicated in the prospectus, an amendment to
Artisan Contract was approved the Board on June 8, 1999 and by the shareholders
of the International Equity Portfolio on July 23, 1999; pursuant to such
amendment, Artisan is be entitled to receive performance-based compensation
under certain circumstances. See, "Investment Advisory Fees" in this Statement
of Additional Information.
(8) The Portfolio Management Contracts between Deutsche and the Trust relating
to The Fixed Income and Intermediate Term Municipal Bond Portfolios provide that
Deutsche's indemnification obligation with respect to information provided to
the Trust by Deutsche in connection with certain filings made by the Trust with
the SEC will not apply unless Deutsche has had an opportunity to review such
filings for a specified period of time prior to the date on which they are filed
and unless the Deutsche
6
<PAGE>
is notified in writing of any claim for indemnification within specified
periods.
(9) The Portfolio Management Contracts between MAS and the Trust relating to
The Fixed Income II and High Yield Bond Portfolios each provide that MAS's
indemnification obligation with respect to information provided to the Trust by
MAS in connection with certain filings made by the Trust with the SEC will not
apply unless MAS has had an opportunity to review such filings for a specified
period of time prior to the date on which they are filed and unless the MAS is
notified in writing of any claim for indemnification within specified periods.
7
<PAGE>
Investment Advisory Fees: Hirtle Callaghan. The table below sets forth the
------------------------------------------
advisory fees received by Hirtle Callaghan from each of the Portfolios,
calculated at an annual rate of .05%, during the periods indicated.
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
June 30, 2000 June 30, 1999 June 30, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
The Value Equity Portfolio $106,974 $ 88,824 $74,299
The Growth Equity Portfolio $145,244 $112,075 $96,094
The Small Capitalization Portfolio $120,203 $ 79,263 $69,076
The International Equity Portfolio $163,389 $116,041 $87,636
The Intermediate Municipal Bond Portfolio $ 70,408 $ 31,966 N/A
The Fixed Income Portfolio $ 58,825 $ 46,707 N/A
</TABLE>
Investment Advisory Fees: Specialist Managers. In addition to the fee paid by
the Trust to Hirtle Callaghan, each of the Portfolios pays a fee to its
Specialist Manager(s). In the case of The Value Equity, Small Capitalization
Equity, Intermediate Term Municipal Bond, Fixed Income, Fixed Income II and High
Yield Portfolios, the Specialist Managers receive a fee based on a specified
percentage of that portion of the Portfolio's assets allocated to that
Specialist Manager. The rate at which these fees are calculated is set forth in
the Trust's prospectus.
In the case of The Growth Equity Portfolio and The International Equity
Portfolio, the Trust's Board and the shareholders of each of these Portfolios
have approved arrangements whereby one or more of the Specialist Managers may,
under certain circumstances, receive performance-based compensation. Such
arrangements are designed to increase a Specialist Manager's fee with respect
to those periods in which superior investment performance is achieved and to
reduce that fee when the performance achieved falls below a specified
performance index. This type of fee structure is know as a "fulcrum fee."
Shareholders should be aware that each of these fulcrum fee arrangements could
increase or decrease the fee payable to the Specialist Manager involved and that
such increases could occur in declining markets if the decline in the investment
return achieved by the Specialist Manager is less than the decline in the total
return of the applicable performance index. These performance-based fee
arrangements are described below.
GSAM. GSAM is entitled to receive a compensation for its services based in part
on the performance achieved by that portion of the assets of The Growth Equity
Portfolio assigned to GSAM ("GSAM Account"). This performance fee arrangement
is set forth in an amendment to the GSAM Contract (Performance Amendment") which
first became effective on October 1, 1999, following the receipt of an exemptive
order from the SEC. That order, in effect, permits the performance of the GSAM
Account to be measured without regard to those expenses incurred in the
operation of The Growth Equity Portfolio, but over which GSAM, as a Specialist
Manager, has no control. The arrangement is designed to reward GSAM for
performance that exceeds the Russell 1000 Growth Index ("Russell 1000 Growth")
by a factor of at least .30% (30 basis points) and to reduce GSAM's compensation
with respect to periods during which lesser performance is achieved.
Under the terms of the Performance Amendment, GSAM is entitled to receive a
quarterly fee. The quarterly fee will consist of a base fee ("Base Fee")
calculated at the annual rate of .30% (or 30 basis points) of the average net
assets of the GSAM Account that is subject to adjustment by a factor referred
to as the "Performance Component."
8
<PAGE>
Each such quarterly payment will consist of 7.5 basis points (.075%) plus or
minus 1/4 of the Performance Component multiplied by the average net assets of
the GSAM Account for the immediately preceding 12 month period, on a "rolling
basis." ("Rolling Basis" means that, at each quarterly fee calculation, the
Gross Total Return of the GSAM Account, the Index Return and the average net
assets of the GSAM Account for the most recent quarter will be substituted for
the corresponding values of the earliest quarter included in the prior fee
calculation.) The Performance Component is equal to 25% of the difference
between (i) the total return of the GSAM Account calculated without regard to
expenses incurred in the operation of the GSAM Account ("Gross Total Return")
and (ii) the total return of the Russell 1000 Growth plus a performance hurdle
of .30% (or 30 basis points).
Under the Performance Amendment, the maximum fee to payable to GSAM with
respect to any 12 month period is .50% (50 basis points) and the minimum fee for
any such period is .10% (10 basis points.) Because the Performance Amendment
requires that no performance adjustment will be paid until the arrangement has
been in effect for 12 months, it is possible that payments of the base fee made
to GSAM during the first 9 months of such period may exceed the appropriate
performance adjusted fee. To address this possibility, the Performance
Amendment provides for a "recoupment feature" with respect to the first 12
months during which the Performance Amendment is in effect. This feature will
be applicable only if the aggregate of the payments to GSAM made with respect to
the 12 month initial period exceeds the performance adjusted fee to which GSAM
would be entitled with respect to such period. In this event, advisory fees
payable to GSAM with respect to each succeeding quarter will be reduced until
the difference between the aggregate quarterly fees received by GSAM with
respect to the initial 12 month period and such performance adjusted fee is
fully recouped by the GSAM Account.
The following tables illustrates the above-described fee structure; the
highlighted entry is the "fulcrum point" -- the performance that GSAM must
achieve in order to receive an unadjusted base fee:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
If the 12 month performance of the GSAM Account -- GSAM's fee for such period will be:
==================================================-----------------------===================================
<S> <C>
is less than the Russell 1000 Growth by: -0.50% or more 0.10000%
------------------------------------------------------------------------------------------------------------
is less than the Russell 1000 Growth by: -0.40% 0.12500%
------------------------------------------------------------------------------------------------------------
is less than the Russell 1000 Growth by: -0.30% 0.15000%
------------------------------------------------------------------------------------------------------------
is less than the Russell 1000 Growth by: -0.20% 0.17500%
------------------------------------------------------------------------------------------------------------
is less than the Russell 1000 Growth by: -0.10% 0.20000%
------------------------------------------------------------------------------------------------------------
equals the Russell 1000 Growth 0.22500%
------------------------------------------------------------------------------------------------------------
exceeds than the Russell 1000 Growth by: 0.10% 0.25000%
------------------------------------------------------------------------------------------------------------
exceeds than the Russell 1000 Growth by: 0.20% 0.27500%
------------------------------------------------------------------------------------------------------------
exceeds than the Russell 1000 Growth by: 0.30% 0.30000%
==================================================-----------------------========---------------------------
exceeds than the Russell 1000 Growth by: 0.40% 0.32500%
------------------------------------------------------------------------------------------------------------
exceeds than the Russell 1000 Growth by: 0.50% 0.35000%
------------------------------------------------------------------------------------------------------------
exceeds than the Russell 1000 Growth by: 0.60% 0.37500%
------------------------------------------------------------------------------------------------------------
exceeds than the Russell 1000 Growth by: 0.70% 0.40000%
------------------------------------------------------------------------------------------------------------
exceeds than the Russell 1000 Growth by: 0.80% 0.42500%
------------------------------------------------------------------------------------------------------------
exceeds than the Russell 1000 Growth by: 0.90% 0.45000%
------------------------------------------------------------------------------------------------------------
exceeds than the Russell 1000 Growth by: 1.00% 0.47500%
------------------------------------------------------------------------------------------------------------
exceeds than the Russell 1000 Growth by: 1.10% or more 0.50000%
------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
* The Russell 1000 Growth Index is an unmanaged index of securities. Its
performance does not reflect management fees and other expenses associated with
an investment in The Growth Equity Portfolio.
CapGuardian. CapGuardian is entitled to receive a compensation for its services
based in part on the performance achieved by that portion of the assets of The
International Equity Portfolio assigned to CapGuardian ("CapGuardian Account").
This performance fee arrangement is set forth in the CapGuardian Contract
approved by the shareholders of the Portfolio on July 26, 2000. The arrangement
is designed to reward CapGuardian for performance that exceeds the total return
of the MSCI EAFE Index ("EAFE Index Return") by a factor of at least .40% (40
basis points) and to reduce CapGuardian's compensation with respect to periods
during which lesser performance is achieved.
Under the performance arrangement, CapGuardian is entitled to receive a
quarterly fee. The quarterly fee will consist of a base fee ("Base Fee")
calculated at the annual rate of .40% (or 40 basis points) of the average net
assets of the CapGuardian Account and is subject to adjustment by a factor
referred to as the "Performance Component." Each such quarterly payment will
consist of .10% (or 10 basis points) plus or minus 1/4 of the Performance
Component multiplied by the average net assets of the CapGuardian Account for
the immediately preceding 12 month period, on a "rolling basis." ("Rolling
Basis" means that, at each quarterly fee calculation, the Gross Total Return of
the CapGuardian Account, the EAFE Index Return and the average net assets of the
CapGuardian Account for the most recent quarter will be substituted for the
corresponding values of the earliest quarter included in the prior fee
calculation.) The Performance Component is equal to 12.5% of the difference
between (i) the total return of the CapGuardian Account calculated without
regard to expenses incurred in the operation of the CapGuardian Account ("Gross
Total Return") and (ii) EAFE Index Return plus a performance hurdle of .40% (or
40 basis points).
Under this fee arrangement, the maximum fee to payable to CapGuardian with
respect to any 12 month period is .60% (60 basis points) and the minimum fee for
any such period is .20% (20 basis points.) Because the performance
arrangement requires that no performance adjustment will be paid until the
arrangement has been in effect for 12 months, it is possible that payments of
the base fee made to CapGuardian during the first 9 months of such period may
exceed the appropriate performance adjusted fee. To address this possibility,
the Performance Amendment provides for a "recoupment feature" with respect to
the first 12 months during which the Performance Amendment is in effect. This
feature will be applicable only if the aggregate of the payments to CapGuardian
made with respect to the 12 month initial period exceeds the performance
adjusted fee to which CapGuardian would be entitled with respect to such period.
In this event, advisory fees payable to CapGuardian with respect to each
succeeding quarter will be reduced until the difference between the aggregate
quarterly fees received by CapGuardian with respect to the initial 12 month
period and such performance adjusted fee is fully recouped by the CapGuardian
Account.
The following tables illustrates the above-described fee structure; the
highlighted entry is the "fulcrum point" -- the performance that CapGuardian
must achieve in order to receive an unadjusted base fee:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
If the 12 month performance of the CapGuardian Account -- CapGuardian's fee for such period will be:
================================================================== ==========================================
<S> <C> <C>
is lower than the EAFE Index by: -1.20% or more 0.20000%
--------------------------------------------------------------------------------------------------------------
is lower than the EAFE Index by: -1.00% 0.22500%
--------------------------------------------------------------------------------------------------------------
is lower than the EAFE Index by: -0.80% 0.25000%
--------------------------------------------------------------------------------------------------------------
is lower than the EAFE Index by: -0.60% 0.27500%
--------------------------------------------------------------------------------------------------------------
is lower than the EAFE Index by: -0.40% 0.30000%
--------------------------------------------------------------------------------------------------------------
is lower than the EAFE Index by: -0.20% 0.32500%
--------------------------------------------------------------------------------------------------------------
equals to the EAFE Index: 0.00% 0.35000%
--------------------------------------------------------------------------------------------------------------
exceeds the EAFE Index by: 0.20% 0.37500%
--------------------------------------------------------------------------------------------------------------
exceeds the EAFE Index by: 0.40% 0.40000%
--------------------------------------------------------------------------------------------------------------
exceeds the EAFE Index by: 0.60% 0.42500%
--------------------------------------------------------------------------------------------------------------
exceeds the EAFE Index by: 0.80% 0.45000%
--------------------------------------------------------------------------------------------------------------
exceeds the EAFE Index by: 1.00% 0.47500%
--------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C>
--------------------------------------------------------------------------------------------------------------------------
exceeds the EAFE Index by: 1.20% 0.50000%
--------------------------------------------------------------------------------------------------------------------------
exceeds the EAFE Index by: 1.40% 0.52500%
--------------------------------------------------------------------------------------------------------------------------
exceeds the EAFE Index by: 1.60% 0.55000%
--------------------------------------------------------------------------------------------------------------------------
exceeds the EAFE Index by: 1.80% 0.57500%
--------------------------------------------------------------------------------------------------------------------------
exceeds the EAFE Index by: 2.00% or more 0.60000%
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
The EAFE Index is an unmanaged index of securities comprising most of the
developed nations of the world except Canada and the United States. Its
performance does not reflect management fees and other expenses associated with
an investment in The International Equity Portfolio.
CapGuardian is not currently required to register under the Investment Advisers
Act and is thus not subject to the restrictions imposed by that Act on the
receipt of incentive based compensation. Under the express terms of the
CapGuardian Agreement, the performance fee arrangement would be suspended in the
event that CapGuardian (or any division within CapGuardian) becomes subject to
that Act. Such suspension, if it occurs, would be lifted when and if CapGuardian
obtains appropriate assurances from the SEC that the receipt by CapGuardian of
performance based compensation calculated in accordance with the performance fee
arrangement is appropriate. If requested, there can be no assurance that such
relief will be granted by the SEC. Under the CapGuardian Agreement, if the
performance fee arrangement is suspended, CapGuardian will receive an annual
fee, calculated daily and payable quarterly, of .40% of the assets in the
Account, until such time as such SEC assurances are obtained.
Artisan. The performance fee arrangement described below is designed to operate
in much the same way as the above-described arrangement with Cap Guardian and
GSAM. As noted in the prospectus, the performance fee arrangement with Artisan
was approved by the Trust's Board and the shareholders of The International
Equity Portfolio. This performance fee arrangement will not be implemented
unless and until an order of the SEC is obtained that would permit the
contemplated performance fee to be calculated as described below. Under the
performance fee arrangement relating to Artisan, Artisan would be entitled to
receive an advisory fee that will increase or decrease based on the performance
achieved by Artisan in that portion of the International Portfolio allocated to
it by the Board from time to time ("Artisan Account"). Specifically, Artisan
would be entitled to receive each quarter, a fee ("Base Fee") calculated at an
annual rate equal to .40% (or 40 basis points) of the average net assets of the
Artisan Account. Each quarterly payment, however, would be adjusted to reflect
the performance achieved by Artisan. This "Performance Adjusted Fee" would be
arrived at by adding or subtracting a specified adjustment ("Performance
Component") from the Base Fee. The Performance Component will be calculated by
(a) computing the difference between (i) the total return of the Artisan Account
without regard to expenses incurred in the operation of the Artisan Account
("Gross Total Return") during the relevant period, and (ii) the return of the
EAFE Index ("Index Return") during the same period plus .40% (or 40 basis
points); and (b) multiplying the resulting factor by 25%. Under the Artisan
performance fee arrangement, Artisan's fee would be adjusted to reflect the
performance of the Account only after the Artisan performance fee arrangement
has been in effect for 12 months ("Initial Period") following the date
("Effective Date") on which the Artisan performance fee arrangement becomes
effective. For the first three quarters of the Initial Period, Artisan would be
entitled to receive a Base Fee of .10 % of the average net assets of the Artisan
Account (or 10 basis points). At the end of the fourth quarter of the Initial
Period, Artisan would be entitled to receive a fee equal to .10 % of the average
net assets of the Artisan Account plus or minus the applicable performance
adjustment for the Initial Period. This adjustment would be calculated by
multiplying the average net assets of the Artisan Account for the Initial Period
by a factor ("Performance Component") equal to 25% of the difference between (i)
the total return of the Artisan Account, calculated without regard to expenses
incurred in the operation of the Artisan Account ("Gross Total Return") during
the Initial Period, and (ii) the total return of the EAFE Index ("Index Return")
during the Initial Period plus a performance hurdle of .40% (or 40 basis
points). For each quarter following the fourth quarter of the Initial Period,
Artisan would receive a quarterly fee of .10% (or 10 basis points plus) or minus
25% of the Performance Component multiplied by the average net assets of the
Artisan Account for the immediately preceding 12 month period, on a "rolling
basis." This means that, at each quarterly fee calculation, the Gross Total
Return of the Artisan Account, the Index Return and the average net assets of
the Artisan Account for the most recent quarter will be substituted for the
corresponding values of the earliest quarter included in the prior fee
calculation.
Under the Artisan performance fee arrangement, the Base Fee, as adjusted by
application of the Performance Component is limited such that the annual
advisory fee received by Artisan will not exceed .80% of the average net assets
(or 80 basis points) of the Artisan Account. Due to the performance hurdle noted
above, this maximum fee level would be attained only to the extent that the
Artisan Account outperforms the EAFE Index by a factor of at least 200 basis
points (2%). The maximum payment to Artisan for any quarter (other than the
fourth quarter of the Initial Period) will be limited to not more than .20% of
the average net assets of the Artisan Account (or 20 basis points). There is no
minimum fee payable to Artisan under the Artisan performance fee arrangement.
Stated another way, Artisan could, under certain circumstances, receive no fee
at all for a given period. This would occur, however, only in the event that the
Artisan Account underperforms the EAFE Index by a factor of at least 120
basis
12
<PAGE>
points (1.2%). The Artisan performance fee arrangement provides for a
"recoupment feature" with respect to the Initial Period. If the aggregate of the
payments to Artisan made with respect to the first four quarters following the
Effective Date exceed the performance adjusted fee to which Artisan would be
entitled with respect to the Initial Period, advisory fees payable to Artisan
with respect to each succeeding quarter will be reduced until the difference
between the aggregate quarterly fees received by Artisan with respect to the
Initial Period and such Performance Adjusted Fee is fully recouped by the
Artisan Account. Artisan could, therefore, not be entitled to receive any
advisory fee payment following the Initial Period, depending on the performance
actually achieved by the Artisan Account during such period.
The following table sets forth the actual investment advisory fee received from
the specified Portfolio by each of its respective Specialist Managers during the
fiscal years ended June 30, 2000, June 30, 1999 and June 30, 1998, respectively:
<TABLE>
<CAPTION>
Specialist Manager Portfolio Advisory Fee Rate/(1)/ Actual Fee Paid for fiscal year ended
------------------ --------- --------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998
---- ---- ----
Institutional Capital Corp. Value Equity .35% of average net assets/(2)/ $449,718 $391,335 $174,556
Geewax, Terker & Co. Value Equity .30% of average net assets 256,377 65,021 NA
Hotchkis & Wiley/(3)/ Value Equity .30% of average net assets 132,479 292,181
Jennison Associates LLC Growth Equity .30% of average net assets 581,880 455,190 379,252
GSAM/(4)/ Growth Equity .30% of average net assets 289,592 217,242 150,526
Frontier Small Cap .45% of average net assets 624,660 386,207 346,569
Geewax, Terker/(5)/ Small Cap .30% of average net assets 304,790 218,095 47,439
CapGuardian/(6)/ International .40% of average net assets 121,994 912,160 698,930
Artisan/(7)/ International .40% of average net assets 494,601 NA NA
Deutsche Intermediate Term .20% of average net assets 387,247 175,807 NA
Deutsche Fixed Income .20% of average net assets 323,541 256,883 NA
</TABLE>
(1) Rate shown applies to that portion of the indicated portfolio's assets
allocated to the specified Specialist 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 March 8, 1999, Geewax Terker & Co. replaced Hotchkis & Wiley as
an Specialist Manager of The Value Equity Portfolio. For the fiscal years
ended June 30, 1998 and 1997, The Value Equity Portfolio paid advisory fees
to Hotchkis & Wiley in the amount of $292,181 and $118,592, respectively.
(4) Under its Portfolio Management Contract with the Trust, GSAM is entitled to
receive performance fee compensation under certain circumstances; no such
compensation was paid, however, during the periods shown.
(5) Effective April 1, 1998, Geewax, Terker & Co. replaced Clover Capital
Management, Inc. For the fiscal years ended June 30, 1998, The Small
Capitalization Equity Portfolio paid advisory fees to Clover Capital
Management in the amount of $203,946.
(6) Effective April 28, 2000, CapGuardian replaced Brinson Partners, Inc. For
the fiscal years ended June 30, 1998, 1999 and 2000, The International
Equity Portfolio paid advisory fees to Brinson Partners, Inc. of $698,930,
$912,160 and 683,433, respectively. Prior to May 6, 1998, Brinson was
compensated at an annual rate of .40% of those assets of the International
Equity Portfolio allocated to it. As of May 6, 1998, such fee rate was
decreased at asset levels over $200 million. Under its Portfolio Management
Contract with the Trust, CapGuardian is entitled to receive performance fee
compensation under certain circumstances; no such compensation was paid,
however, during the periods shown.
(7) Artisan Partners Limited Partnership became an Specialist Manager for The
International Equity Portfolio, effective July 26, 1999. Under its
Portfolio Management Contract with the Trust, Artisan is entitled to
receive performance fee compensation under certain circumstances; no such
compensation was paid, however, during the periods shown.
Administration, Distribution, and Related Services. BISYS Fund Services, L.P.
("BISYS") 3435 Stelzer Road, Columbus, Ohio 43219 has been retained, pursuant to
a separate Administrative Services Contract with the Trust, to
13
<PAGE>
serve as the Trust's administrator. BISYS performs similar services for mutual
funds other than the Trust. BISYS 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.
Services performed by BISYS include: (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 SEC 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 or its affiliates
also serve 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 0.115% 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 0.095% of the aggregate average daily net assets of
each of the Income Portfolios and of any additional portfolios that invest
primarily in debt securities that may be created in the future by the Trust.
For the fiscal year ended June 30, 2000, BISYS received for such services fees
from each of the Portfolios as follows: The Value Equity Portfolio, $246,045;
The Growth Equity Portfolio, $334,068; The Small Capitalization Portfolio,
$276,474; The International Equity Portfolio, $375,804; The Fixed Income
Portfolio, $111,767; The Intermediate Term Municipal Bond Portfolio, $133,775.
For the fiscal year ended June 30, 1999, BISYS received for such services, fees
from each of the Portfolios, as follows: The Value Equity Portfolio, $198,105;
The Growth Equity Portfolio, $250,033; The Small Capitalization Portfolio,
$177,211; The International Equity Portfolio, $258,552; The Intermediate Term
Municipal Bond Portfolio, $79,611 and The Fixed Income Portfolio, $85,423. These
figures reflect voluntary fee waivers by BISYS for The Intermediate Municipal
Bond Portfolio. 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. BISYS Fund Services, Inc. is the Trust's principal underwriter
pursuant to an agreement approved by the Board on July 19, 1996, and last
approved on June 8, 1999. Deutschebank, NA (formerly, Bankers Trust Company) is
the Trust's custodian and is an affiliate of Deutsche Asset Management, Inc.,
which serves as the Specialist Manager for The Intermediate Term Municipal Bond
Portfolio and The Fixed Income Portfolio. The custodian is responsible for the
safekeeping of the domestic and foreign assets of each of the Trust's
portfolios. The custodian is compensated at the rate of .025% of the Trust's
domestic assets and .08% of the Trust's foreign assets. The offices of the
custodian are located at 16 Wall Street, New York, New York 10007.
FURTHER INFORMATION ABOUT THE TRUST'S INVESTMENT POLICIES
As stated in the prospectus, the Trust currently consists of eight portfolios,
each with its own investment objectives and policies. These portfolios are The
Equity Portfolios --The Value Equity, Growth Equity, Small Capitalization Equity
and International and the Income Portfolios --The Fixed Income, Intermediate
Municipal Bond, High Yield, and Fixed Income II 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 fixed
income securities and other instruments in which the respective Portfolios may
invest. The table below summarizes the types of securities and other instruments
that the several Portfolios may acquire. The table is, however, only a summary
list and is qualified in its entirety by the more detailed discussion
immediately following it.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Investment Instrument Value Growth Small Cap Intern'l Interm. Fixed High Yld. Fixed II.
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1) ADRs and EDRs x x x
------------------------------------------------------------------------------------------------------------
2) Agencies * * * * * x x x
------------------------------------------------------------------------------------------------------------
3) Asset-Backed Securities x x x
------------------------------------------------------------------------------------------------------------
4) Brady Bonds x x
------------------------------------------------------------------------------------------------------------
5) Cash Equivalents * * * * * x x x
------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Investment Instrument Value Growth Small Cap Intern'l Interm. Fixed High Yld. Fixed II.
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
6) Collateralized Mortgage x x x
Obligations
--------------------------------------------------------------------------------------------------------
7) Commercial Paper * * * * * x x x
--------------------------------------------------------------------------------------------------------
8) Common Stock x x x x
--------------------------------------------------------------------------------------------------------
9) Convertibles x x x x x
--------------------------------------------------------------------------------------------------------
10) Corporates x x x
--------------------------------------------------------------------------------------------------------
11) Emerging Markets x x x
Securities
--------------------------------------------------------------------------------------------------------
12) Depositary Receipt x x
--------------------------------------------------------------------------------------------------------
13) Floaters x x
--------------------------------------------------------------------------------------------------------
14) Foreign Currency x x x
--------------------------------------------------------------------------------------------------------
15) Foreign Equity (US $) x x x x x
--------------------------------------------------------------------------------------------------------
16) Foreign Equity (on-US $) x x x
--------------------------------------------------------------------------------------------------------
17) Foreign Fixed Income x x
Securities
--------------------------------------------------------------------------------------------------------
18) Mortgage Securities x x x
--------------------------------------------------------------------------------------------------------
19) Forwards ** ** ** x x x x
--------------------------------------------------------------------------------------------------------
20) Futures ** ** ** ** x x
--------------------------------------------------------------------------------------------------------
21) High Yield Securities x x
--------------------------------------------------------------------------------------------------------
22) Inverse Floaters x x
--------------------------------------------------------------------------------------------------------
23) Investment Companies x x x x x x x x
(incl. SPDRs)
--------------------------------------------------------------------------------------------------------
24) Investment Funds
--------------------------------------------------------------------------------------------------------
25) Loan (Participations. x x
and Assignments.)
--------------------------------------------------------------------------------------------------------
26) Municipals x x x x
--------------------------------------------------------------------------------------------------------
27) Options ** ** ** ** x x
--------------------------------------------------------------------------------------------------------
28) Preferred Stock x x x x x
--------------------------------------------------------------------------------------------------------
29) REITS x x x x x x x
--------------------------------------------------------------------------------------------------------
30) Repurchase Agreements * * * * * x x x
--------------------------------------------------------------------------------------------------------
31) Reverse Repurchase * * * * * x x x
Agreements
--------------------------------------------------------------------------------------------------------
32) Rights x x
--------------------------------------------------------------------------------------------------------
33) Stripped Mortgage Backed x x
--------------------------------------------------------------------------------------------------------
34) Securities Lending x x
--------------------------------------------------------------------------------------------------------
35) Short Sales ** ** ** ** x x
--------------------------------------------------------------------------------------------------------
36) Structured Investments
--------------------------------------------------------------------------------------------------------
37) Structured Notes x x
--------------------------------------------------------------------------------------------------------
38) Swaps x x
--------------------------------------------------------------------------------------------------------
39) U.S. Governments * * * * * x x x
--------------------------------------------------------------------------------------------------------
40) Warrants x x
--------------------------------------------------------------------------------------------------------
41) When-Issued Securities x x x x
--------------------------------------------------------------------------------------------------------
42) Yankees and Eurobonds x x x
--------------------------------------------------------------------------------------------------------
43) Zero Coupons Agencies x x
--------------------------------------------------------------------------------------------------------
</TABLE>
* Money market instruments for cash management or temporary purposes Italics =
derivative investments ** For hedging purposes
Municipal Securities. As stated in the prospectus, The Intermediate Term
Municipal Bond Portfolio and to a lesser extent, each of the other Income
Portfolios, 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
15
<PAGE>
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 Specialist 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.
16
<PAGE>
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) 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 Specialist 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 Specialist 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 Specialist
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
----------------
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.
17
<PAGE>
Tax-Exempt Commercial Paper. Issues of tax-exempt commercial paper typically
---------------------------
represent short-term, 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 Specialist 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 Specialist 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.
18
<PAGE>
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 and Asset-backed Securities.
Mortgage-Backed Securities. As stated in the Prospectus, the Income Portfolios
--------------------------
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
19
<PAGE>
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 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 Specialist 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 Specialist 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 Specialist 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 Specialist
Manager will be the actual average life of such securities.
Asset-Backed Securities. As stated in the Prospectus, the Fixed Income
-----------------------
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.
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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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.
Money Market Instruments.
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 Specialist 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 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.
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.
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The appropriate Specialist 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," below.
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.
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 Specialist 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
Specialist Manager deems the investment to involve minimal credit risk. The
Specialist 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.
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Other Fixed Income Securities and Strategies.
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. 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. 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. No
payment is made by the purchaser, however, until settlement. 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.
Foreign Investments.
--------------------
Foreign Securities and Foreign Government Securities. American Depositary
----------------------------------------------------
Receipts ("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 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,
The Value Equity and The Growth Equity Portfolio are also permitted to invest in
ADRs. Additionally, these portfolios may 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 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. The Portfolio may
invest in foreign government securities in the form of American Depositary
Receipts. Foreign
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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.
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 II 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. Certain of the Portfolios may use
-------------------------------------------
forward contracts to protect against uncertainty in the level of future exchange
rates in connection with specific transactions or for hedging purposes. For
example, when the Portfolio enters into a contract for the purchase or sale of a
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
24
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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 Specialist
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 Specialist 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
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.
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HEDGING INSTRUMENTS
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
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
Specialist 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 Specialist 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
26
<PAGE>
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.
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.
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.
27
<PAGE>
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 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,
28
<PAGE>
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 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
29
<PAGE>
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.
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.
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 Value Equity Portfolio, Growth Equity Portfolio and The Small
Capitalization Portfolio do, however, invest in certain instruments known as
Standard & Poor's Depositary Receipts or "SPDRs" as part of each portfolio's
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.
30
<PAGE>
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 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 and 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.
31
<PAGE>
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.
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 Specialist 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,
a Specialist 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 Specialist Managers may, however,
consistent with the interests of the Portfolios they serve, select brokerage
firms on the basis of the investment research, statistical and pricing services
they provide to the Specialist 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 Specialist Manager
involved determines in good faith that such commission is reasonable in terms
either of that transaction or the overall responsibility of the Specialist
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.
Portfolio 2000 1999 1998
---------- -------- --------
Value Equity $ 321,193 $284,230 $195,023
Growth Equity(1) $ 272,099 $216,194 $401,358
Small Cap $ 594,413 $475,287 $328,917
International Equity(2) $1,776,643 $651,674 $527,518
Intermediate Term -0- -0- NA
Fixed Income -0- -0- NA
(1) During the fiscal year ended 6/30/1998, a new Specialist Manager was
retained by this Portfolio.
(2) During the fiscal year ended 6/30/00, two new Specialist Managers were
retained by this Portfolio.
32
<PAGE>
The Trust has adopted procedures pursuant to which each Portfolio is permitted
to allocate brokerage transactions to affiliates of the various Specialist
Managers. Under such procedures, commissions paid to any such affiliate must be
fair and reasonable compared to the commission, fees or other remuneration paid
to other brokers in connection with comparable transactions. Several of the
Trust's Specialist Managers are affiliated with brokerage firms to which
brokerage transactions may, from time to time, be allocated. The table below
reflects the aggregate dollar amount of commissions paid to each such firm by
the Portfolios during the period. Information shown is expressed both as a
percentage of the total amount of commission dollars paid by each portfolio and
as a percentage of the total value of all brokerage transactions effected on
behalf of each portfolio. "NA" indicates that during the relevant period,
indicated broker was not considered an affiliate of the specified Portfolio.
<TABLE>
<CAPTION>
Value Equity Growth Equity Small Cap Equity
------------ ------------- ----------------
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000 1999 1998 2000 1999 1998 2000 1999 1998
Prudential Securities Inc.(1)*
Commissions paid ($) -0- 655 3,489 260 1,189 803 -0- 420 228
% of commissions -0- .23% 1.78% 0.09% 0.55% 0.20% -0- .88% .06%
% of transactions -0- .18% .82% 0.05% 0.38% 0.21% -0- .06% .07%
Merrill Lynch & Co.(2)**
Commissions paid ($) 931 10,175 5,305 12,884 10,390 14,901 14,339 1,885 -0-
% of commissions 2.90% 3.58% 2.72% 4.73% 4.80% 3.71% 2.41% .39% -0-
% of transactions 1.58% 1.93% 2.67% 2.30% 4.05% 3.55% 1.60% 2.26% -0-
Union Swiss Bank (3)
Commissions paid ($) -0- -0- -0- -0- -0- -0- -0- -0- -0-
% of commissions -0- -0- -0- -0- -0- -0- -0- -0- -0-
% of transactions -0- -0- -0- -0- -0- -0- -0- -0- -0-
Goldman Sachs & Co. (4)***
Commissions paid ($) 10,034 9,172 12,121 14,138 12,799 6,743 6,608 584 330
% of commissions 3.12% 3.22% 6.21% 5.19% 5.92% 1.68% 1.11% .12% .10%
% of transactions 1.40% 1.64% 3.43% 6.95% 4.94% 6.26% 5.70% .03% .03%
</TABLE>
<TABLE>
<CAPTION>
International Equity Intermediate Term Municipal Bond Fixed Income
-------------------- -------------------------------- ------------
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000 1999 1998 2000 1999 1998 2000 1999 1998
Prudential Securities
Inc.*(1)
Commissions paid ($) -0- -0- -0- NA NA NA NA NA NA
% of commissions -0- -0- -0- NA NA NA NA NA NA
% of transactions -0- -0- -0- NA NA NA NA NA NA
Merrill Lynch & Co.(2)**
Commissions paid ($) 228,135 55,189 26,969 NA NA NA NA NA NA
% of commissions 12.8% 8.46% 5.11% NA NA NA NA NA NA
% of transactions 11.2% 7.55% 5.47% NA NA NA NA NA NA
Union Swiss Bank(3)
Commissions paid ($) 342 -0- 2,743 NA NA NA NA NA NA
% of commissions .01% -0- 0.52% NA NA NA NA NA NA
% of transactions .01% -0- 0.85% NA NA NA NA NA NA
Goldman Sachs & Co.(4)*
Commissions paid ($) 131,399 55,391 16,831 NA NA NA NA NA NA
% of commissions 7.39% 8.49% 3.25% NA NA NA NA NA NA
% of transactions 8.03% 10.77% 5.21% NA NA NA NA NA NA
</TABLE>
________
33
<PAGE>
(1) Both Prudential Securities Incorporated and Jennison Associates LLC, which
serves as an Specialist Manager of The Growth Equity Portfolio, are wholly-owned
subsidiaries of The Prudential Insurance Company of America.
(2) Hotchkis & Wiley, which served as an Specialist Manager of The Value Equity
Portfolio prior to March 8, 1999, is a division of Merrill Lynch Asset
Management, L.P. and an affiliate of Merrill Lynch & Co., Inc.
(3) Both UBS AG and Brinson Partners, Inc. LLC, which served as an Specialist
Manager of The International Equity Portfolio until April 28, 2000, are wholly-
owned subsidiaries of Union Swiss Bank.
(4) Effective October 1, 1997, Goldman Sachs Asset Management served as an
Specialist Manager of the Growth Equity Portfolio. Figures shown figures are
calculated for the period October 1, 1997 through June 30, 2000.
++Other brokers deemed to be affiliated with respect to the Fixed Income
Portfolio and the Intermediate Term Municipal Bond Portfolio are companies
affiliated with Deutschebank, the parent company of Deutsche Asset Management,
Inc. These companies include Bankers Trust Company, and BT Alex Brown. During
the periods in which such affiliations existed, no brokerage transactions were
affected through such companies during the periods reflected in the above table
by the relevant Portfolios.
In no instance will portfolio securities be purchased from or sold to Specialist
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 Specialist 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 respective investment objectives and policies
whenever, in the judgment of the relevant Specialist 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 Specialist 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 rates for each
of the Trust's Portfolios during the last two fiscal years are set forth in the
table below.
<TABLE>
<CAPTION>
Portfolio Fiscal Year Ended Fiscal Year Ended
--------- June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Value Equity Portfolio 128.72% (1) 108.79%(2)
Growth Equity Portfolio 94.37% 70.61%
Small Capitalization Equity Portfolio 111.52% 125.52%(1)
International Portfolio 144.41%* 56.77%
Intermediate Term Municipal Bond Portfolio 51.34% 42.24%
Fixed Income Portfolio (3) 147.65% 146.78%
</TABLE>
(1) Extensive changes in the companies represented in the benchmark index for
this Portfolio occurred during this period and substantial changes were made
in the structure of the Portfolio in light of such changes.
(2) A change in this Portfolio's Specialist Managers occurred during the period.
(3) Cash flows may be invested temporarily pending investment in accordance
with the Portfolios investment objectives.
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
34
<PAGE>
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.
35
<PAGE>
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 Fixed Income
Portfolios 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 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. If a Portfolio fails to
so qualify , that Portfolio may be subject to Federal corporate tax on its
reportable income and capital gain. 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
36
<PAGE>
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 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
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.
37
<PAGE>
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.
HISTORY OF THE TRUST AND OTHER INFORMATION
The Trust was organized as a Delaware business trust on December 15, 1994, and
is registered with the SEC as an open-end diversified, series, management
investment company. The Trust currently offers shares of eight investment
portfolios, each with a different objective and differing investment policies.
The Trust may organize additional investment portfolios in the future. Prior to
June 29, 2000, the Trust also offered shares of an additional short-term
municipal bond portfolio. 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 of the date of this Statement of Additional Information,
the Trust has not made this feature available to any such investment manager.
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.
Principal Securityholders. 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 September 18, 2000. Hirtle Callaghan may be
deemed to have, or share, investment and/or voting power with respect to more
than 50% of the shares of the Trust's portfolios, with respect to which shares
Hirtle Callaghan disclaims beneficial ownership.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Intermediate
Small Term
Name and Address of Value Growth Capitalization International Municipal Fixed
Record Holder Equity Equity Equity Equity Bond Income
------------- ------ ------ ------ ------ ---- ------
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Deutsche Bank 67.24%
PO Box 9005 Church St. Station
New York, NY 10008
----------------------------------------------------------------------------------------------------------------------
Deutsche Bank 69.75%
PO Box 9005 Church St. Station
New York, NY 10008
----------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Intermediate
Small Term
Name and Address of Value Growth Capitalization International Municipal Fixed
Record Holder Equity Equity Equity Equity Bond Income
------------- ------ ------ ------ ------ ---- ------
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wilmington Trust Company 5.29%
R&D Simmons Irrev. Trust
P.O. Box 8882
Wilmington, DE 19899
----------------------------------------------------------------------------------------------------------------------
Key Trust Company 5.03%
P.O. Box 94871
Cleveland, OH 44101
----------------------------------------------------------------------------------------------------------------------
Deutsche Bank 63.32%
PO Box 9005
Church St. Station
New York, NY 10008
----------------------------------------------------------------------------------------------------------------------
Mac & Company 14.24%
P.O. Box 3198
Pittsburgh, PA 15230
----------------------------------------------------------------------------------------------------------------------
Saxon & Co. 14.66%
78 PGH Pen. Brinson
PO Box 7780-1888
Philadelphia, PA 19182
----------------------------------------------------------------------------------------------------------------------
Deutsche Bank 59.39%
PO Box 9005
Church St. Station
New York, NY 10008
----------------------------------------------------------------------------------------------------------------------
Batrus & Company 81.77%
P.O. Box 9005
Church St. Station
New York, NY 10008
----------------------------------------------------------------------------------------------------------------------
Infid & Company 7.68%
P.O. Box 9005
Church St. Station
New York, NY 10008
----------------------------------------------------------------------------------------------------------------------
Batrus & Company 49.48%
P.O. Box 9005
Church St. Station
New York, NY 10008
----------------------------------------------------------------------------------------------------------------------
Saxon & Co. 30.32%
PGH Pen. Morgan Grenfell
PO Box 7780-1888
Philadelphia, PA 19182
----------------------------------------------------------------------------------------------------------------------
</TABLE>
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
PricewaterhouseCoopers LLP, serves as the Trust's independent accountants. The
Trust's financial statements as of June 30, 2000, have been audited by
PricewaterhouseCoopers LLP, whose address is Two Commerce Square, 2001 Market
Street, 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.
39
<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 degree This is the highest rating assigned by S&P to a
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 standards; Also qualify as high-quality debt obligations.
together with Aaa group, comprise what are Capacity to pay principal and interest is very
generally known as "high grade bonds" strong.
A A
Possess many favorable investment attributes and Strong capacity to pay principal and interest,
are to be considered as obligations although securities in this category are somewhat
upper medium grade more susceptible to the adverse
effects of changes in circumstances and economic
conditions.
Baa BBB
Medium grade obligations, i.e. they are neither Bonds rated BBB are regarded as having an adequate
highly protected nor poorly secured. Interest capacity to pay principal and interest. Although
payments and principal security appear adequate they normally exhibit adequate protection
for present but certain protective elements may parameters, adverse economic conditions or changing
be lacking or unreliable over time. Lacking in circumstances are more likely to lead to a weakened
outstanding investment characteristics and have capacity to pay principal and interest for bonds in
speculative characteristics as well. this category than for bonds in the A category.
Ba BB
Judged to have speculative elements: their future Bonds rated BB are regarded, on balance, as
cannot be considered as well assured. Often the predominantly speculative with respect to the
protection of interest and principal payments may issuer's capacity to pay interest and repay
every moderate and thereby not well safeguarded principal in accordance with the terms of the
during both good and bad times over the future. obligation. While such bonds will likely have some
Uncertainty of position characterize bonds in quality and protective characteristics, these are
this class. outweighed by large uncertainties or major risk
exposures to adverse conditions.
</TABLE>
40
<PAGE>
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.
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.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment No. 16 to be signed on its behalf by the undersigned, thereto duly
authorized in the City of West Conshohocken and the State of Pennsylvania on
this 21st day of September, 2000.
The Hirtle Callaghan Trust
/s/ Donald E. Callaghan
-----------------------
Donald E. Callaghan
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated.
/s/ Robert J. Zion Treasurer and Vice-President September 21, 2000
------------------------ (Principal Financial Officer)
Robert J. Zion
/s/ Donald E. Callaghan Trustee September 21, 2000
------------------------
Donald E. Callaghan
* Trustee* September 21, 2000
------------------------
Ross H. Goodman
* Trustee* September 21, 2000
------------------------
Jonathan J. Hirtle
* Trustee* September 21, 2000
------------------------
Jarrett Burt Kling
* Trustee* September 21, 2000
------------------------
R. Richard Williams
* Trustee* September 21, 2000
------------------------
Richard W. Wortham, III
* Signed by Donald E. Callaghan, pursuant to powers of attorney dated August 16,
1999.
<PAGE>
Part C: OTHER INFORMATION
Item 23. Exhibits
(a) (1) Certificate of Trust filed on December 15, 1994 with the Secretary of
State of Delaware. (Incorporated herein by reference to corresponding
item contained in Post-Effective Amendment No. 7 filed on January 2,
1998.
(a) (2) Amended and Restated Declaration and Agreement of Trust (as amended
November 9, 1995) (Incorporated herein by reference to Item 1(b)
contained in Post-Effective Amendment No. 4, filed with the
Securities and Exchange Commission on December 16, 1996.)
(b) Amended Bylaws of the Trust (as amended November 9, 1995 and July 15, 1999)
Incorporated herein by reference to Post-Effective Amendment No. 13 filed
with the Securities and Exchange Commission on September 2, 1999)
(c) [instruments defining right of security holders] (All relevant provisions
included in Exhibit (a), as referenced above.)
(d) Investment Advisory Agreements
(1) Consulting Agreement between the Trust and Hirtle, Callaghan & Co.,
Inc. (Incorporated herein by reference to Item 24(b) contained in
Post-Effective Amendment No. 7 filed on January 2, 1998.)
(2) (a) Portfolio Management Contract between the Trust and Institutional
Capital Corporation related to the Value Equity Portfolio.
(Incorporated herein by reference to Item 24(b) contained in
Post-Effective Amendment No. 7 filed on January 2, 1998.)
(2) (b) Amendment to the Portfolio Management Contract between the Trust
and Institutional Capital Corporation related to the Value Equity
Port folio. (Incorporated herein by reference to Item 24(b)
contained in Post-Effective Amendment No. 9 filed on April 13,
1998.)
(3) Portfolio Management Contract between the Trust and Geewax Terker &
Co. related to the Value Equity Portfolio. (Incorporated herein by
reference to Post-effective Amendment No. 13 filed with the Securities
and Exchange Commission on September 2, 1999)
(4) (a) Portfolio Management Contract between the Trust and Goldman Sachs
Asset Management related to the Growth Equity Portfolio.
(Incorporated herein by reference to Item 24(b) contained in
Post-Effective amendment No. 7 filed on January 2, 1998.)
(4) (b) Amendment to Portfolio Management Contract between Goldman Sachs
Asset Management and the Trust relating to the Growth Equity
Portfolio. (Incorporated herein by reference to Post-Effective
Amendment No. 13 filed with the Securities and Exchange
Commission on September 2, 1999)
<PAGE>
(5) Portfolio Management Contracts between the Trust and Jennison
Associates LLC related to the Growth Equity Portfolio. (Incorporated
herein by reference to Item 24(b) contained in Post-Effective
Amendment No. 7 filed on January 2, 1998.)
(6) Portfolio Management Contract between the Trust and Frontier Capital
Management LLC. related to The Small Capitalization Equity Portfolio.
(Incorporated herein by reference to Post-Effective Amendment No. 15
filed with the Securities and Exchange Commission on July 24, 2000.)
(7) Portfolio Management Contract between the Trust and Geewax Terker &
Co. related to The Small Capitalization Equity Portfolio.
(Incorporated herein by reference to corresponding contained in Post-
Effective Amendment No. 9 filed on April 13, 1998.)
(8) (a) Interim Portfolio Management Contract between the Trust and
Capital Guardian Trust Company related to the International
Equity Portfolio. (Incorporated herein by reference to Post-
Effective Amendment No. 15 filed with the Securities and Exchange
Commission on July 24, 2000.)
(8) (b) Form of Final Portfolio Management Contract between the Trust and
Capital Guardian Trust Company related to the International
Equity Portfolio. (Incorporated herein by reference to Post-
Effective Amendment No. 15 filed with the Securities and Exchange
Commission on July 24, 2000.)
(8) (c) Portfolio Management Contract between the Trust and Artisan
Partners Limited Partnership related to the International Equity
Portfolio. (Incorporated herein by reference to Post-Effective
Amendment No. 13 filed with the Securities and Exchange
Commission on September 2, 1999)
(9) Portfolio Management Contract between the Trust and Deutsche Asset
Management, Inc. (formerly Morgan Grenfell Capital Management Inc.)
related to the Fixed Income Portfolio. (Incorporated herein by
reference to corresponding item contained in Post-Effective Amendment
No. 7 filed on January 2, 1998.)
(10) Portfolio Management Contract between the Trust and Deutsche Asset
Management, Inc. (formerly Morgan Grenfell Capital Management Inc.)
related to the Intermediate Term Municipal Bond Portfolio Income
Portfolio. (Incorporated herein by reference to corresponding item
contained in Post-Effective Amendment No. 7 filed on January 2, 1998.)
(11) (a) Form of Portfolio Management Contract between the Trust and
Miller Anderson & Sherrerd LLP related to the Fixed Income II
Portfolio. (Incorporated herein by reference to Post-Effective
Amendment No. 15 filed with the Securities and Exchange Commission on
July 24, 2000.)
(11) (b) Form of Portfolio Management Contract between the Trust and Miller
Anderson & Sherrerd LLP related to the High Yield Bond Portfolio.
(Incorporated herein by reference to Post-Effective Amendment No. 15
filed with the Securities and Exchange Commission on July 24, 2000.)
<PAGE>
(e) Distribution Agreement between BISYS Fund Services (Incorporated herein by
reference to Item 1(b) contained in Post-Effective Amendment No 4, filed
with the Securities and Exchange Commission on December 16, 1996.)
(f) [bonus, pension and profit-sharing plans] Not Applicable.
(g) Custodian Agreement between Bankers Trust Company and the Trust
(Incorporated herein by reference to corresponding item contained in
Post-Effective Amendment No. 7 filed on January 2, 1998.)
(h) Registrant's Agreements with BISYS Fund Services
(h)(1) Administration Agreement. (Incorporated by reference to Item 9(b)
of Registrant's Post-Effective Amendment No. 4, filed with the
Securities and Exchange Commission on December 16, 1996.)
(h)(2) Fund Accounting Agreement. (Incorporated by reference to Item
9(b) of Registrant's Post-Effective Amendment No. 4, filed with
the Securities and Exchange Commission on December 16, 1996.)
(h)(3) Transfer Agency Agreement. (Incorporated by reference to Item
9(b) of Registrant's Post-Effective Amendment No. 4, filed with
the Securities and Exchange Commission on December 16, 1996.)
(h)(4) Amendment to Administration Agreement. (Incorporated herein by
reference to Item 9(b) contained in Post-Effective Amendment No.
10, filed with the Securities and Exchange Commission on June 18,
1998.)
(h)(5) Amendment to Transfer Agency Agreement (Incorporated herein by
reference to Item 9(b) contained in Post-Effective Amendment No.
10, filed with the Securities and Exchange Commission on June 18,
1998.)
(h)(6) Amendment to Fund Accounting Agreement. (Incorporated herein by
reference to Item 9(b) contained in Post-Effective Amendment No.
4, filed with the Securities and Exchange Commission on December
16, 1996.)
(h)(7) Omnibus Fee Agreement. (Incorporated herein by reference to
corresponding item contained in Post-Effective Amendment No. 7
filed with the Securities and Exchange Commission on January 2,
1998.
(i) Opinion of Counsel (Incorporated herein by reference to Item 10 contained
in Post-Effective Amendment No. 9, filed with the Securities and Exchange
Commission on April 13, 1998.)
(j) Consent of Accountants. FILED HEREWITH
(k) [Omitted Financial Statements] Not Applicable.
(l) [Agreements regarding initial capital] Not Applicable.
(m) [Rule 12b-1 plan] Not Applicable.
(n) [Plan pursuant to Rule 18f-3] Not Applicable.
<PAGE>
(o) Reserved.
(p) (1) Code of Ethics adopted by Registrant. (Incorporated herein by
reference to Post-Effective Amendment No. 14 filed with the Securities
and Exchange Commission on June 22, 2000.)
(p) (2) Code of Ethics adopted by Hirtle Callaghan & Co., Inc. (Incorporated
herein by reference to Post-Effective Amendment No. 14 filed with the
Securities and Exchange Commission on June 22, 2000.)
(p) (3) Code of Ethics adopted by Goldman Sachs Asset Management (Incorporated
herein by reference to Post-Effective Amendment No. 14 filed with the
Securities and Exchange Commission on June 22, 2000.)
(p) (4) Code of Ethics adopted by Capital Guardian Trust Company (Incorporated
herein by reference to Post-Effective Amendment No. 14 filed with the
Securities and Exchange Commission on June 22, 2000.)
(p) (5) Code of Ethics adopted by Miller Anderson & Sherrerd (Incorporated
herein by reference to Post-Effective Amendment No. 14 filed with the
Securities and Exchange Commission on June 22, 2000.)
(p) (6) Code of Ethics adopted by Artisan Partners Limited Partnership
(Incorporated herein by reference to Post-Effective Amendment No. 14
filed with the Securities and Exchange Commission on June 22, 2000.)
(p) (7) Code of Ethics adopted by Deutsche Asset Management Inc. (Incorporated
herein by reference to Post-Effective Amendment No. 14 filed with the
Securities and Exchange Commission on June 22, 2000.)
(p) (8) Code of Ethics adopted by Frontier Capital Management Company LLC
(Incorporated herein by reference to Post-Effective Amendment No. 14
filed with the Securities and Exchange Commission on June 22, 2000.)
(p) (9) Code of Ethics adopted by Geewax Terker & Company. FILED HEREWITH.
(p) (10) Code of Ethics adopted by Institutional Capital Corporation. FILED
HEREWITH.
(p) (11) Code of Ethics adopted by Jennison Associates LLC. FILED HEREWITH.
Item 24. Persons Controlled by or Under Common Control with the Fund
None.
Item 25. Indemnification
Reference is made to Article VII of the Trust's Amended and Restated
and Declaration of Trust and to Article VI of the Trust's By-Laws,
which are incorporated herein by reference. Pursuant to Rule 484
under the Securities Act of 1933 (the "Act"), as amended, the Trust
furnishes the following undertaking:
Insofar as indemnification for liabilities arising under the Act may
be permitted to trustees, officers and controlling persons of the
Trust pursuant to the foregoing provisions, or otherwise, the Trust
has been advised that in the opinion of the Securities and Exchange
Commission
<PAGE>
such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Trust of expenses incurred or paid by a trustee, officer or
controlling person of the Trust in the successful defense of any
action, suit or proceeding) is asserted by such trustee, officer or
controlling person in connection with the securities being registered,
the Trust will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Item 26. Business and Other Connections of the Investment Adviser
Information relating to the business and other connections of each of
the Specialist Managers listed below and each director, officer or
partner of such managers are hereby incorporated by reference from
each such manager's Form ADV, as filed with the Securities and
Exchange Commission, as follows:
<TABLE>
<CAPTION>
Investment Manager SEC File No. 801- ADV Item No.
------------------ ----------------- -----------
<S> <C> <C>
Artisan Partners Limited 48435 Part I (8, 10 & 12)
Partnership Part II (6 - 9, 13)
Frontier Capital Management Co. 15724 Part I (8, 10 & 12)
Part II (6 - 9, 13)
Jennison Associates LLC 5608 Part I (8, 10 & 12)
Part II (6 - 9, 13)
Institutional Capital Corporation 40779 Part I (8, 10 & 12)
Part II (6 - 9, 13)
Goldman Sachs Asset Management 16048 Part I (8, 10 & 12)
Part II (6 - 9, 13)
Geewax Terker & Co. 16965 Part I (8, 10 & 12)
Part II (6 - 9, 13)
Deutsche Asset Management, Inc. 27291 Part I (8, 10 & 12)
(formerly Morgan Grenfell Part II (6 - 9, 13)
Asset Management)
Miller Anderson & Sherrerd, LLP 10437 Part I (8, 10 & 12)
Part II (6 - 9, 13)
</TABLE>
Hirtle, Callaghan & Co., Inc. ("HCCI") has entered into a Consulting
Agreement with the Trust. Although HCCI is a registered investment
adviser, HCCI does not have investment discretion with regard to the
assets of the Trust. Information regarding the business and other
connections of HCCI's officers and directors is incorporated by
reference to Part I (Items 8, 10 and 12) and Part II (Items 6 - 9 and
13) of HCCI's Form ADV, File No. 801-32688 which has been filed with
the Securities and Exchange Commission.
<PAGE>
Capital Guardian Trust Company provides investment advisory services
to The International Equity Portfolio of the Trust. The following
information relates to business and professional connections of the
officers and directors of Capital Guardian Trust Company:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Name/Address Affiliations Within Last Two Years
--------------------------------------------------------------------------------------------------------------------------
<S> <C>
Timothy D. Armour Director, Capital Guardian Trust Company, Capital Research and Management
Company and Capital Management Services, Inc.; Chairman and Chief Executive
Officer, Capital Research Company.
--------------------------------------------------------------------------------------------------------------------------
Donnalisa Barnum Senior Vice President, Capital Guardian Trust Company; Vice President,
Capital International, Inc. and Capital International Limited.
--------------------------------------------------------------------------------------------------------------------------
Andrew F. Barth Director, Capital Guardian Trust Company and, Capital Research and
Management Company; Director and Research Director, Capital International
Research, Inc.; President, Capital Guardian Research Company; Formerly
Director and Executive Vice President, Capital Guardian Research Company.
--------------------------------------------------------------------------------------------------------------------------
Michael D. Beckman Director, Senior Vice President and Treasurer, Capital Guardian Trust
Company; Director, Capital Guardian Trust Company of Nevada; Treasurer,
Capital International Research, Inc. and Capital Guardian Research Company;
Director and Treasurer, Capital Guardian (Canada), Inc.; Formerly Chairman
and Director, Capital International Asia Pacific Management Company.
--------------------------------------------------------------------------------------------------------------------------
Michael A. Burik Senior Counsel, The Capital Group Companies, Inc.; Senior Vice President,
Capital Guardian Trust Company.
--------------------------------------------------------------------------------------------------------------------------
Elizabeth A. Burns Senior Vice President, Capital Guardian Trust Company.
--------------------------------------------------------------------------------------------------------------------------
Larry P. Clemmensen Director, Capital Guardian Trust Company and American Funds Distributors,
Inc.; Chairman and Director, American Funds Service Company; Director and
President, The Capital Group Companies, Inc. and Capital Management
Services, Inc.; Senior Vice President and Director, Capital Research and
Management Company, Treasurer, Capital Strategy, Inc.
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
--------------------------------------------------------------------------------------------------------------------------
Kevin G. Clifford Director and President, American Funds Distributors, Inc.; Director,
Capital Guardian Trust Company
--------------------------------------------------------------------------------------------------------------------------
Roberta A. Conroy Senior Vice President, Director and Counsel, Capital Guardian Trust
Company; Senior Vice President and Secretary, Capital International, Inc.;
Assistant General Counsel, The Capital Group Companies, Inc., Secretary,
Capital Guardian International, Inc.; Formerly, Secretary, Capital
Management Services, Inc.
--------------------------------------------------------------------------------------------------------------------------
Jon B. Emerson Senior Vice President, Capital Guardian Trust Company; Director, Capital
Guardian Trust Company, a Nevada Corporation
--------------------------------------------------------------------------------------------------------------------------
Michael Ericksen Director and Senior Vice President, Capital Guardian Trust Company;
Director and Senior Vice President, Capital International Limited
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
Item 27. Principal Underwriters.
(a) BISYS Fund Services, Inc. ("BISYS") serves as the principal
underwriter for the Trust. BISYS also serves as a principal
underwriter for the following investment companies:
Alpine Equity Trust
American Independence Funds Trust
American Performance Funds
The BB&T Mutual Funds Group
The Coventry Group
The Eureka Funds
Fifth Third Funds
Governor Funds
Hirtle Callaghan Trust
HSBC Funds Trust and HSBC Mutual Funds Trust
The Infinity Mutual Funds, Inc.
Magna Funds
Mercantile Mutual Funds, Inc.
Metamarkets.com
Meyers Investment Trust
MMA Praxis Mutual Funds
M.S.D.&T. Funds
Pacific Capital Funds
Republic Advisor Funds Trust
Republic Funds Trust
Summit Investment Trust
USAllianz Funds
USAllianz Funds Variable Insurance Products Trust
Variable Insurance Funds
The Victory Portfolios
The Victory Variable Insurance Funds
Vintage Mutual Funds, Inc.
WHATIFI Funds
<PAGE>
(b) The following table sets forth the indicated information with respect
to each director and officer of BISYS. Unless otherwise noted, the
business address for each such person is 3435 Stelzer Road, Columbus,
Ohio 43219:
Positions and Offices with
Name Underwriter Positions with Trust
---- ----------- --------------------
WC Subsidiary Corp. Sole Limited Partner None
150 Clove Road
Little Falls, NJ 07424
BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus Ohio 43219 Sole General Partner None
(c) Not Applicable.
Item 28. Location of Accounts and Records.
(a) Deutsche Bank (formerly Bankers Trust Company), 16 Wall Street, New
York, New York 10005 (records relating to its function custodian.)
(b) BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219.
(c) Records relating to the activities of each of the Investment Managers
on behalf of the indicated Portfolio are maintained as follows:
Investment Manager Location of Accounts and Records
------------------ --------------------------------
The International Equity Portfolio
----------------------------------
Capital Guardian Trust Company 333 South Hope Street
Los Angeles, CA 90071
Artisan Partners Limited Partnership 100 Pine Street, Suite 2900
San Francisco, CA 94111
1000 North Water Street
Milwaukee, Wisconsin 53202
The Small Capitalization Equity Portfolio
-----------------------------------------
Geewax, Terker & Co. 99 Starr Street
Phoenixville, PA 19460
Frontier Capital Management 99 Summer Street
Company Boston, MA 02110
The Value Equity Portfolio
--------------------------
Geewax, Terker & Co. 99 Starr Street
Phoenixville, PA 19460
Institutional Capital Corporation 225 West Wacker
Suite 2400
Chicago, IL 60606
<PAGE>
The Growth Equity Portfolio
---------------------------
Jennison Associates LLC 466 Lexington Ave.
New York, NY 10017
Goldman Sachs Asset Management 85 Broad Street
New York, NY 10004
The Fixed Income Portfolio
The Intermediate Term Municipal Bond Portfolio
----------------------------------------------
Deutsche Asset Management, Inc. 885 Third Avenue
New York, NY 10022-4802 and
150 S. Independence Square W.
Suite 726
Philadelphia, PA 19106
The Fixed Income II Portfolio
The High Yield Bond Portfolio
-----------------------------
Miller, Anderson & Sherrerd, LLP One Tower Bridge
West Conshohocken, PA 19428
Item 29. Management Services.
None.
Item 30. Undertakings
Not Applicable.
<PAGE>
EXHIBIT LIST:
Exhibit 1: Consent of Independent Auditors [N-1A Item 23 (j)]
Exhibit 2: Code of Ethics adopted by Geewax Terker & Company [N-1A Item
23(p)(9)]
Exhibit 3: Code of Ethics adopted by Institutional Capital Corporation [N-1A
Item 23 (p) (10)]
Exhibit 4: Code of Ethics adopted by Jennison Associates LLC [N-1A Item 23
(p) (11)]
