AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON DECEMBER 18, 2001
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 5
HSBC INVESTOR PORTFOLIOS
(formerly Republic Portfolios)
(Exact name of registrant as specified in charter)
3435 Stelzer Road
Columbus, Ohio 43219-3035
(Address of principal executive offices)
Registrant's Telephone Number, including area code: (617) 470-8000
Walter B. Grimm
3435 Stelzer Road
Columbus, Ohio 43219-3035
(Name and address of agent for service)
Please send copies of all
communications to:
Allan S. Mostoff, Esq.
Dechert
1775 Eye Street, N.W.
Washington, D.C. 20006-2401
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EXPLANATORY NOTE
This Amendment No. 5 (the "Amendment") to the Registration Statement
has been filed by Republic Portfolios (the "Registrant") pursuant to Section
8(b) of the Investment Company Act of 1940, as amended. However, beneficial
interests in the Registrant are not being registered under the Securities Act of
1933 (the "1933 Act") because such interests will be issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Registrant may only
be made by investment companies, insurance company separate accounts, common or
comingled trust funds or similar organizations or entities that are "accredited
investors" within the meaning of Regulation D of the 1933 Act. The Registration
Statement does not constitute an offer to sell, or the solicitation of an offer
to buy, any beneficial interests in the Registrant. This Amendment is being
filed to add a new series of beneficial interests in the Registrant, the HSBC
Investor Limited Maturity Portfolio.
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PART A
HSBC INVESTOR LIMITED MATURITY PORTFOLIO
HSBC Investor Portfolios (the "Portfolio Trust") is a diversified,
open-end management investment company that was organized as a trust under the
law of the State of New York on November 1, 1994. Beneficial interests of the
Trust are divided into actual and potential series, of which the Limited
Maturity Portfolio (the "Portfolio") is described herein. Additional series may
be established in the future.
Beneficial interests in the Trust are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the "1933
Act"). Investments in the Portfolio may only be made by investment companies,
insurance separate accounts, common or commingled trust funds or similar
organizations or entities that are "accredited investors" within the meaning of
Regulation D under the 1933 Act. This Registration Statement does not constitute
an offer to sell, or the solicitation of an offer to buy, any "security" within
the meaning of the 1933 Act.
INVESTMENT OBJECTIVES AND STRATEGIES
The following Portfolio summary describes the investment objectives and
principal investment strategies of the Portfolio. A more detailed "Summary of
Investment Strategies and Principal Risks" describing the Portfolio's principal
investments and risks begins after this section.
There can be no assurance that the Portfolio will achieve its
investment objective. The investment objective of the Portfolio may be changed
without investor approval. If there is a change in the investment objective of
the Portfolio, investors should consider whether the Portfolio remains an
appropriate investment in light of their then-current financial position and
needs. Shareholders will receive at least 30 days prior written notice of any
change in the investment objective of the Portfolio.
Investment Objective. The Portfolio's investment objective is to
realize above-average total return, consistent with reasonable risk, through
investment primarily in a diversified investment grade portfolio of U.S.
Government securities, corporate bonds, mortgage-backed securities and other
fixed income securities.
Investment Policies. The Portfolio will normally invest at least 65% of
its total assets in investment grade fixed income securities, which may include
U. S. Government securities, corporate debt securities and commercial paper,
mortgage-backed and asset-backed securities, obligations of foreign governments
or international entities, and foreign currency exchange-related securities. The
Portfolio may invest more than 50% of its assets in mortgage-backed securities
including mortgage pass-through securities, mortgage-backed bonds and CMOs, that
carry a guarantee of timely payment. The Portfolio may lend it securities to
brokers, dealers, and other financial institutions for the purpose of realizing
additional income. The Portfolio may also borrow money for temporary or
emergency purposes. The Portfolio may invest in derivative instruments,
including but not limited to, financial futures, foreign currency futures,
foreign currency contracts, options on futures contracts, options on securities,
and swaps. The Portfolio may engage in repurchase transactions, where the
portfolio purchases a security and simultaneously commits to resell that
security to the seller at an agreed upon price on an agreed upon date. The
Portfolio may invest in debt obligations by commercial banks and savings and
loan associations. These instruments would include certificates of deposit,
time, deposits, and bankers' acceptances. The Portfolio may purchase and sell
securities on a when-issued basis, in which a security's price and yield are
fixed on the date of commitment but payment and delivery are scheduled for a
future date.
HSBC Asset Management (Americas) Inc. ("Investment Adviser" or
"Adviser") selects securities for the Portfolio based on various factors,
including the outlook for the economy, and anticipated changes in interest rates
and inflation. The Adviser may sell securities when it believes that expected
risk-adjusted return is low compared to other investment opportunities.
SUMMARY OF INVESTMENT STRATEGIES AND PRINCIPAL RISKS
This section provides more detailed information about the Portfolio's
principal investments and risks. This Prospectus does not disclose all the types
of securities or investment strategies that the Portfolio may use. The
Portfolio's Statement of Additional Information ("SAI") provides more detailed
information about the securities, investment strategies, and risks described in
this Prospectus.
Fixed Income Securities
To the extent the Portfolio invests in fixed income securities, the net
asset value of the Portfolio may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of fixed income securities can
be expected to rise. Conversely, when interest rates rise, the value of fixed
income securities can be expected to decline. The Portfolio has no restrictions
with respect to the maturities or duration of the fixed income securities it
holds. The Portfolio's investments in fixed income securities with longer terms
to maturity or greater duration are subject to greater volatility than the
Portfolio's shorter-term obligations.
Fixed income securities in which the Portfolio may invest include bonds
(including zero coupon bonds, deferred interest bonds and payable in-kind
bonds), debentures, mortgage securities, notes, bills, commercial paper,
obligations issued or guaranteed by a government or any of its political
subdivisions, agencies or instrumentalities, and certificates of deposit, as
well as debt obligations which may have a call on common stock by means of a
conversion privilege or attached warrants.
U.S. Government Securities
The Portfolio may invest in Government securities, including: (1) U.S.
Treasury obligations, which differ only in their interest rates, maturities and
times of issuance, including U.S. Treasury bills (maturities of one year or
less), U.S. Treasury notes (maturities of one to ten years), and U.S. Treasury
bonds (generally maturities of greater than ten years), all of which are backed
by the full faith and credit of the U.S. Government; and (2) obligations issued
or guaranteed by U.S. Government agencies, authorities or instrumentalities,
some of which are backed by the full faith and credit of the U.S. Treasury,
e.g., direct pass-through certificates of the Government National Mortgage
Association ("GNMA"), and some of which are supported by the right of the issuer
to borrow from the U.S. Government, e.g., obligations of Federal Home Loan
Banks; and some of which are backed only by the credit of the issuer itself,
e.g., obligations of the Student Loan Marketing Association (collectively, "U.S.
Government Securities").
Derivatives
The Portfolio may invest in various instruments that are commonly known
as derivatives. Generally, a derivative is a financial arrangement the value of
which is based on, or "derived" from, a traditional security, asset, or market
index. A mutual fund, of course, derives its value from the value of the
investments it holds and so might even be called a "derivative." Some
"derivatives" such as mortgage-related and other asset-backed securities are in
many respects like any other investment, although they may be more volatile or
less liquid than more traditional debt securities. There are, in fact, many
different types of derivatives and many different ways to use them. There are a
range of risks associated with those uses. Futures and options are commonly used
for traditional hedging purposes to attempt to protect a fund from exposure to
changing interest rates, securities prices, or currency exchange rates and for
cash management purposes as a low cost method of gaining exposure to a
particular securities market without investing directly in those securities. The
Portfolio may use derivatives for hedging purposes, cash management purposes, as
a substitute for investing directly in fixed income instruments, and to enhance
return when the Portfolio's investment Adviser believes the investment will
assist the Portfolio in achieving its investment objective. A description of the
derivatives that the Portfolio may use and some of their associated risks
follows.
Options And Futures Transactions
The Portfolio may invest in options, futures contracts, and options on
futures contracts (collectively, "futures and options"). Futures contracts
provide for the sale by one party and purchase by another party of a specified
amount of a specific security at a specified future time and price. An option is
a legal contract that gives the holder the right to buy or sell a specified
amount of the underlying security or futures contract at a fixed or determinable
price upon the exercise of the option. A call option conveys the right to buy
and a put option conveys the right to sell a specified quantity of the
underlying security. The Portfolio will segregate assets or "cover" its
positions consistent with requirements under the Investment Company Act of 1940,
as amended ("1940 Act").
There are several risks associated with the use of futures and options
for hedging purposes. There can be no guarantee that there will be a correlation
between price movements in the hedging vehicle and in the portfolio securities
being hedged. An incorrect correlation could result in a loss on both the hedged
securities in the portfolio and the hedging vehicle so that the portfolio return
might have been greater had hedging not been attempted. There can be no
assurance that a liquid market will exist at a time when the Portfolio seeks to
close out a futures contract or a futures option position. Most futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. Lack of a
liquid market for any reason may prevent the Portfolio from liquidating an
unfavorable position and the Portfolio would remain obligated to meet margin
requirements until the position is closed.
The Portfolio will use financial futures contracts and related options
only for hedging purposes, or, with respect to positions in financial futures
and related options that do not qualify as "bona fide hedging" positions, will
enter such non-hedging positions only to the extent that assets committed to
initial margin deposits on such instruments, plus premiums paid for open futures
options positions, less the amount by which any such positions are
"in-the-money," do not exceed 5% of the Portfolio's net assets.
Foreign Securities
The Portfolio may invest in foreign (non-U.S.) securities. Investing in
securities issued by companies whose principal business activities are outside
the United States may involve significant risks not present in domestic
investments. For example, there is generally less publicly available information
about foreign companies, particularly those not subject to the disclosure and
reporting requirements of the U.S. securities laws. Foreign issuers are
generally not bound by uniform accounting, auditing, and financial reporting
requirements and standards of practice comparable to those applicable to
domestic issuers. Investments in foreign securities also involve the risk of
possible adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, other taxes imposed by the foreign
country on the Portfolio's earnings, assets, or transactions, limitation on the
removal of cash or other assets of the Portfolio, political or financial
instability, or diplomatic and other developments which could affect such
investments. Further, economies of particular countries or areas of the world
may differ favorably or unfavorably from the economy of the United States.
Changes in foreign exchange rates will affect the value of securities
denominated or quoted in currencies other than the U.S. dollar. Foreign
securities often trade with less frequency and volume than domestic securities
and therefore may exhibit greater price volatility. Additional costs associated
with an investment in foreign securities may include higher custodial fees than
apply to domestic custodial arrangements, and transaction costs of foreign
currency conversions. Dividends from foreign securities may be withheld at the
source.
Forward Foreign Currency Contracts And Options On Foreign Currencies
Forward foreign currency exchange contracts ("forward contracts") are
intended to minimize the risk of loss to the Portfolio from adverse changes in
the relationship between the U.S. dollar and foreign currencies. The Portfolio
may not enter into such contracts for speculative purposes. The Portfolio has no
specific limitation on the percentage of assets it may commit to forward
contracts, subject to its stated investment objective and policies, except that
the Portfolio will not enter into a forward contract if the amount of assets set
aside to cover the contract would impede portfolio management.
A forward contract is an obligation to purchase or sell a specific
currency for an agreed price at a future date which is individually negotiated
and privately traded by currency traders and their customers. A forward contract
may be used, for example, when the Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency in order to
"lock in" the U.S. dollar price of the security. The Portfolio may also purchase
and write put and call options on foreign currencies for the purpose of
protecting against declines in the dollar value of foreign portfolio securities
and against increases in the U.S. dollar cost of foreign securities to be
acquired.
There is a risk in adopting a synthetic investment position to the
extent that the value of a security denominated in U.S. dollars or other foreign
currency is not exactly matched with the Portfolio's obligation under the
forward contract. On the date of maturity the Portfolio may be exposed to some
risk of loss from fluctuations in that currency. Although the Adviser will
attempt to hold such mismatching to a minimum, there can be no assurance that
the Adviser will be able to do so. When the Portfolio enters into a forward
contract for purposes of creating a synthetic security, it will generally be
required to hold high-grade, liquid securities or cash in a segregated account
with a daily value at least equal to its obligation under the forward contract.
Sovereign And Supranational Debt Obligations
Debt instruments issued or guaranteed by foreign governments, agencies,
and supranational organizations ("sovereign debt obligations"), especially
sovereign debt obligations of developing countries, may involve a high degree of
risk, and may be in default or present the risk of default. The issuer of the
obligation or the governmental authorities that control the repayment of the
debt may be unable or unwilling to repay principal and interest when due, and
may require renegotiation or rescheduling of debt payments. In addition,
prospects for repayment of principal and interest may depend on political as
well as economic factors.
High Yield/High Risk Securities
The Portfolio may invest in high yield/high risk securities ("junk
bonds"). Securities rated lower than Baa by Moody's or lower than BBB by S&P are
sometimes referred to as "high yield" or "junk" bonds. In addition, securities
rated Baa (Moody's) and BBB (S&P) are considered to have some speculative
characteristics.
Investing in high yield securities involves special risks in addition
to the risks associated with investments in higher rated debt securities. High
yield securities may be regarded as predominately speculative with respect to
the issuer's continuing ability to meet principal and interest payments.
Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities, and the ability of
the Portfolio to achieve its investment objective may, to the extent of its
investments in high yield securities, be more dependent upon such
creditworthiness analysis than would be the case if the Portfolio were investing
in higher quality securities.
High yield securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than higher grade
securities. The prices of high yield securities have been found to be less
sensitive to interest rate changes than more highly rated investments, but more
sensitive to adverse economic downturns or individual corporate developments.
The secondary markets on which high yield securities are traded may be
less liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause large fluctuations in
the daily net asset value of the Portfolio. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities, especially in a thinly traded
market.
The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit ratings
in a timely fashion to reflect events since the security was last rated.
Mortgage-and Asset-Backed Securities
The Portfolio may invest in mortgage and asset-backed securities.
A mortgage-backed bond is a collateralized debt security issued by a
thrift or financial institution. The bondholder has a first priority perfected
security interest in collateral consisting usually of agency mortgage
pass-through securities, although other assets including U.S. treasuries
(including zero coupon Treasury bonds), agencies, cash equivalent securities,
whole loans and corporate bonds may qualify. The amount of collateral must be
continuously maintained at levels from 115% to 150% of the principal amount of
the bonds issued, depending on the specific issue structure and collateral type.
Investment in mortgage-backed securities poses several risks, including
prepayment, market, and credit risk. Prepayment risk reflects the risk that
borrowers may prepay their mortgages faster than expected, thereby affecting the
investment's average life and perhaps its yield. Whether or not a mortgage loan
is prepaid is almost entirely controlled by the borrower. Borrowers are most
likely to exercise prepayment options at the time when it is least advantageous
to investors, generally prepaying mortgages as interest rates fall, and slowing
payments as interest rates rise. Besides the effect of prevailing interest
rates, the rate of prepayment and refinancing of mortgages may also be affected
by home value appreciation, ease of the refinancing process and local economic
conditions.
Market risk reflects the risk that the price of the security may
fluctuate over time. The price of mortgage-backed securities may be particularly
sensitive to prevailing interest rates, the length of time the security is
expected to be outstanding, and the liquidity of the issue. In a period of
unstable interest rates, there may be decreased demand for certain types of
mortgage-backed securities, and the Portfolio invested in such securities
wishing to sell them may find it difficult to find a buyer, which may in turn
decrease the price at which they may be sold.
Credit risk reflects the risk that the Portfolio may not receive all or
part of its principal because the issuer or credit enhancer has defaulted on its
obligations. Obligations issued by U.S. government-related entities are
guaranteed as to the payment of principal and interest, but are not backed by
the full faith and credit of the U.S. government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on
the financial health of those institutions.
The Portfolio may invest in mortgage-backed certificates and other
securities representing ownership interests in mortgage pools, including CMOs.
Interest and principal payments on the mortgages underlying mortgage-backed
securities are passed through to the holders of the mortgage-backed securities.
Mortgage-backed securities currently offer yields higher than those available
from many other types of fixed-income securities, but because of their
prepayment aspects, their price volatility and yield characteristics will change
based on changes in prepayment rates.
Other Asset-Backed Securities. The Portfolio may also invest in
securities representing interests in other types of financial assets, such as
automobile-finance receivables or credit-card receivables. Such securities are
subject to many of the same risks as are mortgage-backed securities, including
prepayment risks and risks of foreclosure. They may or may not be secured by the
receivables themselves or may be unsecured obligations of their issuers.
Eurodollar And Yankee Bank Obligations
The Portfolio may invest in Eurodollar bank obligations and Yankee bank
obligations. Eurodollar bank obligations are dollar-denominated certificates of
deposit and time deposits issued outside the U.S. capital markets by foreign
branches of U.S. banks and by foreign banks. Yankee bank obligations are
dollar-denominated obligations issued in the U.S. capital markets by foreign
banks. Eurodollar and Yankee obligations are subject to the same risks that
pertain to domestic issues, notably credit risk, market risk and liquidity risk.
Additionally, Eurodollar (and to a limited extent Yankee bank) obligations are
subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of dollars, from freely
flowing across its borders. Other risks include: adverse political and economic
developments, the extent and qualify of government regulation of financial
markets and institutions, the imposition of foreign withholding taxes, and the
expropriation or nationalization of foreign issuers.
Repurchase Agreements
The Portfolio may invest in repurchase agreements collateralized by
U.S. Government securities, certificates of deposit and certain bankers'
acceptances. Repurchase agreements are transactions by which the Portfolio
purchases a security and simultaneously commits to resell that security to the
seller (a bank or securities dealer) at an agreed upon price on an agreed upon
date (usually within seven days of purchase). The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated to
the coupon rate or date of maturity of the purchased security. The Adviser will
continually monitor the value of the underlying securities to ensure that their
value, including accrued interest, always equals or exceeds the repurchase
price. Repurchase agreements are considered to be loans collateralized by the
underlying security under the 1940 Act, and therefore will be fully
collateralized.
The use of repurchase agreements involves certain risks. For example,
if the seller of an agreement defaults on its obligation to repurchase the
underlying securities at a time when the value of these securities has declined,
the Portfolio may incur a loss upon disposition of those securities. If the
seller of the agreement becomes insolvent and subject to liquidation or
reorganization under the Bankruptcy Code or other laws, a bankruptcy court may
determine that the underlying securities are collateral not within the control
of the Portfolio and therefore subject to sale by the trustee in bankruptcy.
Finally, it is possible that the Portfolio may not be able to substantiate its
interest in the underlying securities. While the Portfolio acknowledges these
risks, it is expected that they can be controlled through stringent security
selection criteria and careful monitoring procedures.
Illiquid Investments and Restricted Securities
The Portfolio may invest up to 15% of its net assets in securities that
are illiquid by virtue of the absence of a readily available market, or because
of legal or contractual restrictions on resale. This policy does not limit the
acquisition of securities (i) eligible for resale to qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933 or (ii) commercial
paper issued pursuant to Section 4(2) under the Securities Act of 1933 that are
determined to be liquid in accordance with guidelines established by the Trust's
Board of Trustees. There may be delays in selling these securities and sales may
be made at less favorable prices.
Factors that the Portfolio must consider in determining whether a
particular Rule 144A security is liquid include the frequency of trades and
quotes for the security, the number of dealers willing to purchase or sell the
security and the number of other potential purchasers, dealer undertakings to
make a market in the security, and the nature of the security and the nature of
the market for the security (i.e., the time needed to dispose of the security,
the method of soliciting offers and the mechanics of transfer). Investing in
Rule 144A securities could have the effect of increasing the level of the
Portfolio's illiquidity to the extent that qualified institutions might become,
for a time, uninterested in purchasing these securities.
The Portfolio has a policy that no more than 25% of its assets may be
invested in securities which are restricted as to re-sale, including Rule 144A
and Section 4(2) securities.
Brady Bonds
A portion of the Portfolio's portfolio may be invested in certain debt
obligations customarily referred to as Brady Bonds, which are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
former Treasury Secretary Nicholas F. Brady (the "Brady Plan"). Brady Bonds have
been issued only recently and, accordingly, do not have a long payment history.
They may be collateralized or uncollateralized and issued in various currencies
(although most are dollar-denominated) and are actively traded in the
over-the-counter secondary market. Brady Bonds have been issued by the
governments of Argentina, Costa Rica, Mexico, Nigeria, Uruguay, Venezuela,
Brazil and the Philippines, as well as other emerging markets countries. Most
Brady Bonds are currently rated below BBB by S&P or Baa by Moody's. In light of
the risk characteristics of Brady Bonds (including uncollateralized repayment of
principal at maturity for some instruments) and, among other factors, the
history of default with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds, investments in Brady Bonds should be
viewed as speculative.
Floating And Variable Rate Obligations
Certain obligations that the Portfolio may purchase may have a floating
or variable rate of interest, i.e., the rate of interest varies with changes in
specified market rates or indices, such as the prime rates, and at specified
intervals. Certain floating or variable rate obligations that may be purchased
by the Portfolio may carry a demand feature that would permit the holder to
tender them back to the issuer of the underlying instrument, or to a third
party, at par value prior to maturity. The demand features of certain floating
or variable rate obligations may permit the holder to tender the obligations to
foreign banks, in which case the ability to receive payment under the demand
feature will be subject to certain risks, as described under "Foreign
Securities," above.
Inverse Floating Rate Obligations
The Portfolio may invest in inverse floating rate obligations ("inverse
floaters"). Inverse floaters have coupon rates that vary inversely at a multiple
of a designated floating rate, such as LIBOR (London Inter-Bank Offered Rate).
Any rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates) causes a drop in the coupon rate while any drop in
the reference rate of an inverse floater causes an increase in the coupon rate.
In addition, like most other fixed-income securities, the value of inverse
floaters will generally decrease as interest rates increase. Inverse floaters
may exhibit substantially greater price volatility than fixed rate obligations
having similar credit quality, redemption provisions and maturity, and inverse
floater CMOs exhibit greater price volatility than the majority of mortgage
pass-through securities or CMOs. In addition, some inverse floater CMOs exhibit
extreme sensitivity to changes in prepayments. As a result, the yield to
maturity of an inverse floater CMO is sensitive not only to changes in interest
rates, but also to changes in prepayment rates on the related underlying
mortgage assets.
Loans of Portfolio Securities
The Portfolio may lend its securities to qualified brokers, dealers,
banks and other financial institutions for the purpose of realizing additional
income. Loans of securities will be collateralized by cash, letters of credit,
or securities issued or guaranteed by the U.S. Government or its agencies. The
collateral will equal at least 100% of the current market value of the loaned
securities. In addition, the Portfolio will not loan its portfolio securities to
the extent that greater than one-third of its total assets, at fair market
value, would be committed to loans at that time.
Firm Commitment Agreements And When-Issued Securities
The Portfolio may purchase and sell securities on a when-issued or
firm-commitment basis, in which a security's price and yield are fixed on the
date of the commitment but payment and delivery are scheduled for a future date.
On the settlement date, the market value of the security may be higher or lower
than its purchase or sale price under the agreement. If the other party to a
when-issued or firm-commitment transaction fails to deliver or pay for the
security, the Portfolio could miss a favorable price or yield opportunity or
suffer a loss. The Portfolio will not earn interest on securities until the
settlement date. The Portfolio will maintain in a segregated account with the
custodian cash or liquid, high grade debt securities equal (on a daily
marked-to-market basis) to the amount of its commitment to purchase the
securities on a when-issued basis.
Swaps, Caps, Floors And Collars
The Portfolio may enter into swap contracts and other similar
instruments in accordance with its policies. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The payment streams are calculated by reference to a specified index
and agreed upon notional amount. The term "specified index" includes currencies,
fixed interest rates, prices and total return on interest rate indices,
fixed-income indices, stock indices and commodity indices (as well as amounts
derived from arithmetic operations on these indices). For example, the Portfolio
may agree to swap the return generated by a fixed-income index for the return
generated by a second fixed-income index. The currency swaps in which the
Portfolio may enter will generally involve an agreement to pay interest streams
calculated by reference to interest income linked to a specified index in one
currency in exchange for a specified index in another currency. Such swaps may
involve initial and final exchanges that correspond to the agreed upon notional
amount.
The swaps in which the Portfolio may engage also include rate caps,
floors and collars under which one party pays a single or periodic fixed
amount(s) (or premium) and the other party pays periodic amounts based on the
movement of a specified index.
The use of swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values, interest rates and currency exchange rates, the investment
performance of the Portfolio would be less favorable than it would have been if
this investment technique were not used.
Temporary Investments
The Portfolio may invest in the following instruments on a temporary
basis when economic or market conditions are such that the Adviser deems a
temporary defensive position to be appropriate: time deposits, certificates of
deposit and bankers' acceptances issued by a commercial bank or savings and loan
association; commercial paper rated at the time of purchase by one or more
NRSROs in one of the two highest categories or, if not rated, issued by a
corporation having an outstanding unsecured debt issue rated high-grade by a
NRSRO; short-term corporate obligations rated high-grade by a NRSRO; U.S.
Government obligations; Government agency securities issued or guaranteed by
U.S. Government sponsored instrumentalities and federal agencies; and repurchase
agreements collateralized by the securities listed above. The Portfolio will
limit its investment in time deposits maturing from two business days through
seven calendar days to 15% of its total assets.
<PAGE>
MANAGEMENT OF THE TRUST
The Investment Adviser
HSBC Asset Management (Americas) Inc., a wholly owned subsidiary of
HSBC Bank USA ("HSBC"), is the investment adviser for the Portfolio pursuant to
an Investment Advisory Contract with the Portfolio Trust. HSBC, 452 Fifth
Avenue, New York, New York 10018, is a wholly owned subsidiary of HSBC USA,
Inc., a registered bank holding company. HSBC currently provides investment
advisory services for individuals, trusts, estates and institutions. HSBC
manages more than $80 billion in assets. Through its portfolio management team,
the Adviser makes the day-to-day investment decisions and continuously reviews,
supervises and administers the Portfolio's investment programs. For these
management services, the Portfolio will pay the Adviser 0.40% based on the
Portfolio's average net assets.
No management fees for the Portfolio are shown because it did not offer
shares prior to January 18, 2001.
Portfolio Manager
The portfolio manager of the Portfolio is Edward Merkle. Mr. Merkle is
responsible for the day-to-day management of the Portfolio. Mr. Merkle joined
HSBC in 1984 and is responsible for managing institutional and retail fixed
income portfolios.
The Administrator
BISYS Fund Services ("BISYS"), whose address is 3435 Stelzer Road,
Columbus, Ohio 43219-3035, serves as the Portfolio's administrator. Management
and administrative services of BISYS include providing office space, equipment
and clerical personnel to the Portfolio and supervising custodial, auditing,
valuation, bookkeeping, legal and dividend dispersing services. For its services
to the Portfolio, BISYS will receive from the Portfolio fees payable monthly
equal on an annual basis (for the Portfolio's then-current fiscal year) to 0.05%
of the Portfolio's average daily net assets when the average daily net assets of
all the investment companies that are advised by HSBC for which BISYS or any of
its affiliates serves as fund administrator ("HSBC-advised Investment
Companies") are less than $1 billion; 0.04% of the Portfolio's average daily net
assets when the average daily net assets of the HSBC-advised Investment
Companies are in excess of $1 billion but less than $2 billion; and 0.035% of
the Portfolio's average daily net assets when the average daily net assets of
the HSBC-advised Investment Companies are in excess of $2 billion.
The Portfolio's SAI has more detailed information about the Investment
Adviser, Administrator, and other service providers.
Placement Agent
The Portfolio has not retained the services of a principal underwriter
or distributor, since interests in the Portfolio are offered solely in private
placement transactions. BISYS Fund Services (Ireland), Limited ("BISYS
Ireland"), acting as agent for the Portfolio, serves as the placement agent of
interests in the Portfolio. BISYS Ireland receives no compensation for serving
as placement agent.
Portfolio Accounting Agent
Pursuant to a fund accounting agreement, BISYS also serves as portfolio
accounting agent to the Portfolio.
PRICING, PURCHASE AND REDEMPTION OF SHARES
Pricing of Portfolio Shares
The net income and realized capital gains and losses, if any, of the
Portfolio are determined at 4:00 p.m. New York time on each business day. Net
income for days other than business days is determined as of 4:00 p.m. New York
time on the immediately preceding business day. All the net income, as defined
below, and capital gains and losses, if any, so determined are allocated pro
rata among the investors in the Portfolio at the time of such determination. For
this purpose, the net income of the Portfolio (from the time of the immediately
preceding determination thereof) consists of (i) accrued interest, accretion of
discount and amortization of premium on securities held by the Portfolio, less
(ii) all actual and accrued expenses of the Portfolio (including the fees
payable to the Investment Adviser and Administrator of the Portfolio).
Each investor in the Portfolio, may add to or reduce its investment in
the Portfolio on the Portfolio Business Day. At 4:00 p.m., New York time on the
Portfolio Business Day, the value of each investor's beneficial interest in the
Portfolio is determined by multiplying the net asset value of the Portfolio by
the percentage, effective for that day, which represents that investor's share
of the aggregate beneficial interests in the Portfolio. Any additions or
withdrawals, which are to be effected on that day, are then effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio is
then recomputed as the percentage equal to the fraction (i) the numerator of
which is the value of such investor's investment in the Portfolio as of 4:00
p.m., New York time on such day plus or minus, as the case may be, the amount of
any additions to or withdrawals from the investor's investment in the Portfolio
effected on such day, and (ii) the denominator of which is the aggregate net
asset value of the Portfolio as of 4:00 p.m., New York time on such day plus or
minus, as the case may be, the amount of the net additions to or withdrawals
from the aggregate investments in the Portfolio by all investors in the
Portfolio. The percentage so determined is then applied to determine the value
of the investor's interest in the Portfolio as of 4:00 p.m., New York time on
the following the Portfolio Business Day.
Purchase of Portfolio Shares
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act.
An investment in the Portfolio may be made without a sales load. All
investments are made at net asset value next determined after an order is
received in "good order" by the Portfolio. The net asset value of the Portfolio
is determined once on each business day.
There is no minimum initial or subsequent investment in the Portfolio.
However, because the Portfolio intends to be as fully invested at all times as
is reasonably practicable in order to enhance the yield on its assets,
investments must be made in federal funds (i.e., monies credited to the account
of the Custodian by a Federal Reserve Bank).
The Portfolio and BISYS reserve the right to cease accepting
investments at any time or to reject any investment order.
Redemption of Portfolio Shares
An investor in the Portfolio may withdraw all or any portion of its
investment at the net asset value next determined if a withdrawal request in
proper form is furnished by the investor to the Trust by the designated cutoff
time for each accredited investor. The proceeds of a reduction or withdrawal
will be paid by the Trust in federal funds normally on the Portfolio Business
Day the withdrawal is effected, but in any event within seven days. The Trust,
on behalf of the Portfolio, reserves the right to pay redemptions in kind.
Investments in the Portfolio may not be transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds postponed
during any period in which the New York Stock Exchange ("NYSE") is closed (other
than weekends or holidays) or trading on the NYSE is restricted or, to the
extent otherwise permitted by the 1940 Act, if an emergency exists.
Dividends, Distributions and Taxes
o The following information is meant as a general summary for U.S. taxpayers.
Please see the Portfolio's SAI for more information. Because everyone's tax
situation is unique, each shareholder should rely on its own tax advisor
for advice about the particular federal, state and local tax consequences
of investing in the Portfolio.
o It is intended that the Portfolio's assets, income and distributions will
be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the
investor invested all of its assets in the Portfolio.
o The Portfolio generally will not have to pay income tax on amounts it
distributes to shareholders, although shareholders may be taxed on
distributions they receive.
o Any income the Portfolio receives in the form of interest and dividends is
paid out, less expenses, to its shareholders. Shares begin accruing
interest and dividends on the day they are purchased.
o Dividends on the Portfolio are paid monthly. Capital gains for the
Portfolio are distributed at least annually. Unless a shareholder elects to
receive dividends in cash, dividends will be automatically invested in
additional shares of the Portfolio.
o Dividends and distributions are treated in the same manner for federal
income tax purposes whether you receive them in cash or in additional
shares.
o Dividends are taxable in the year in which they are paid, even if they
appear on a shareholder's account statement the following year. If the
Portfolio declares a dividend in October, November or December of a year
and distributes the dividend in January of the next year, shareholders may
be taxed as if they received it in the year declared rather than the year
received.
o There may be tax consequences to a shareholder if the shareholder disposes
of its shares in the Portfolio, for example, through redemption, exchange
or sale. The amount of any gain or loss and the rate of tax will depend
mainly upon how much the shareholder pays for the shares, how much they are
sold for, and how long they are held.
o Shareholders will be notified in January each year about the federal tax
status of distributions made by the Portfolio. The notice will tell each
shareholder which dividends and redemptions must be treated as taxable
ordinary income and which (if any) are short-term or long-term capital
gain. Depending on a shareholder's residence for tax purposes,
distributions also may be subject to state and local taxes, including
withholding taxes.
o Foreign shareholders may be subject to special withholding requirements.
<PAGE>
APPENDIX
The characteristics of corporate debt obligations rated by Moody's are
generally as follows:
AAA -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
BAA -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA -- Bonds which are rated Ba are judged to have speculative elements.
The future of such bonds cannot be considered as well assured.
B -- Bonds which are rated B generally lack characteristics of a
desirable investment.
CAA -- Bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA -- Bonds rated Ca are speculative to a high degree.
C -- Bonds rated C are the lowest rated class of bonds and are regarded
as having extremely poor prospects.
The characteristics of corporate debt obligations rated by S&P are
generally as follows:
AAA -- This is the highest rating assigned by S&P to a debt obligation
and indicates an extremely strong capacity to pay principal and interest.
AA -- Bonds rated AA also qualify as high quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB -- Debt rated BB is predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with terms of the
obligation. BB indicates the lowest degree of speculation; CC indicates the
highest degree of speculation.
BB, B, CCC AND CC -- Debt in these ratings is predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
terms of the obligation. BB indicates the lowest degree of speculation and CC
the highest.
A bond rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by the rating services from other sources which they consider reliable.
The ratings may be changed, suspended or withdrawn as a result of changes in or
unavailability of, such information, or for other reasons.
The characteristics of corporate debt obligations rated by Fitch are
generally as follows:
AAA -- Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Because bonds rated in
the AAA and AA categories are not significantly vulnerable to foreseeable future
developments, short term debt of these issuers is generally rated "- +".
A -- Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB -- Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B -- Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of continued
timely payments of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity throughout
the life of the issue.
CCC -- Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC -- Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C -- Bonds are in imminent default in payment of interest or principal.
DDD, DD AND D -- Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the basis
of their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
Plus (+) Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the DDD, DD, or D categories.
RATINGS OF COMMERCIAL PAPER
Commercial paper rated A-1 by S&P has the following characteristics:
liquidity ratios are adequate to meet cash requirements; the issuer's long-term
debt is rated A or better; the issuer has access to at least two additional
channels of borrowing; and basic earnings and cash flow have an upward trend
with allowances made for unusual circumstances. Typically, the issuer's industry
is well established and the issuer has a strong position within the industry.
Commercial paper rated Prime-1 by Moody's is the highest commercial
paper assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and consumer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. Relative strength or
weakness of the above factors determine how the issuer's commercial paper is
rated within various categories.
<PAGE>
PART B
HSBC INVESTOR LIMITED MATURITY PORTFOLIO
References in this Statement of Additional Information to the
"Prospectus" are to the Prospectus, dated January 18, 2001 of the Trust by which
shares of the Portfolio are offered. Unless the context otherwise requires,
terms defined in the Prospectus have the same meaning in this Statement of
Additional Information as in the Prospectus.
January 18, 2001
<PAGE>
TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVE AND POLICIES AND RESTRICTIONS.............................
PORTFOLIO TURNOVER.............................................................
PORTFOLIO MANAGEMENT...........................................................
PORTFOLIO TRANSACTIONS.........................................................
INVESTMENT RESTRICTIONS........................................................
MANAGEMENT OF THE PORTFOLIO TRUST..............................................
INVESTMENT ADVISORY AND OTHER SERVICES.........................................
CUSTODIAN, TRANSFER AGENT AND FUND ACCOUNTING AGENT............................
CAPITAL STOCK AND OTHER SECURITIES.............................................
PURCHASE, REDEMPTION AND PRICING OF SECURITIES.................................
TAXATION
OTHER INFORMATION..............................................................
FINANCIAL STATEMENTS...........................................................
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES AND RESTRICTIONS
The following supplements the information contained in the prospectus
concerning the investment objectives, policies and restrictions of the
Portfolio.
Fixed Income Securities
The Portfolio may invest in fixed income securities. To the extent the
Portfolio invests in fixed income securities, the net asset value of the
Portfolio may change as the general levels of interest rates fluctuate. When
interest rates decline, the value of fixed income securities can be expected to
rise. Conversely, when interest rates rise, the value of fixed income securities
can be expected to decline. The Portfolio's investments in fixed income
securities with longer terms to maturity or greater duration are subject to
greater volatility than the Portfolio's shorter-term obligations.
U.S. Government Securities
The Portfolio may invest in U.S. Government Securities. U.S. Government
securities include bills, notes, and bonds issued by the U.S. Treasury and
securities issued or guaranteed by agencies or instrumentalities of the U.S.
Government.
Some U.S. Government securities are supported by the direct full faith
and credit pledge of the U.S. Government; others are supported by the right of
the issuer to borrow from the U.S. Treasury; others, such as securities issued
by the Federal National Mortgage Association ("FNMA"), are supported by the
discretionary authority of the U.S. Government to purchase the agencies'
obligations; and others are supported only by the credit of the issuing or
guaranteeing instrumentality. There is no assurance that the U.S. Government
will provide financial support to an instrumentality it sponsors when it is not
obligated by law to do so.
High Yield/High Risk Securities
The Portfolio may invest in lower rated, high-yield, "junk" bonds.
These securities are generally rated lower than Baa by Moody's or lower than BBB
by S&P. In general, the market for lower rated, high-yield bonds is more limited
than the market for higher rated bonds, and because their markets may be thinner
and less active, the market prices of lower rated, high-yield bonds may
fluctuate more than the prices of higher rated bonds, particularly in times of
market stress. In addition, while the market for high-yield, corporate debt
securities has been in existence for many years, the market in recent years
experienced a dramatic increase in the large-scale use of such securities to
fund highly leveraged corporate acquisitions and restructurings. Accordingly,
past experience may not provide an accurate indication of future performance of
the high-yield bond market, especially during periods of economic recession.
Other risks that may be associated with lower rated, high-yield bonds
include their relative insensitivity to interest-rate changes; the exercise of
any of their redemption or call provisions in a declining market which may
result in their replacement by lower yielding bonds; and legislation, from time
to time, which may adversely affect their market. Since the risk of default is
higher among lower rated, high-yield bonds, the Adviser's research and analyses
are important ingredients in the selection of lower rated, high-yield bonds.
Through portfolio diversification, good credit analysis and attention to current
developments and trends in interest rates and economic conditions, investment
risk can be reduced, although there is no assurance that losses will not occur.
The Portfolio does not have any minimum rating criteria applicable to the
fixed-income securities in which they invests.
Investing in high yield securities involves special risks in addition
to the risks associated with investments in higher rated debt securities. High
yield securities may be regarded as predominately speculative with respect to
the issuer's continuing ability to meet principal and interest payments.
Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities, and the ability of
the Portfolio to achieve its investment objective may, to the extent of its
investments in high yield securities, be more dependent upon such
creditworthiness analysis than would be the case if the Portfolio were investing
in higher quality securities.
High yield securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than higher grade
securities. The prices of high yield securities have been found to be less
sensitive to interest rate changes than more highly rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in high yield security prices because the advent
of a recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of high
yield securities defaults, the Portfolio may incur additional expenses to seek
recovery. In the case of high yield securities structured as zero coupon or
payment-in-kind securities, the market prices of such securities are affected to
a greater extent by interest rate changes and, therefore, tend to be more
volatile than securities which pay interest periodically and in cash.
The secondary markets on which high yield securities are traded may be
less liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause large fluctuations in
the daily net asset value of the Portfolio. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities, especially in a thinly traded
market.
The Adviser does not rely solely on credit ratings when selecting
securities for the Portfolio, and the Adviser develops its own independent
analysis of issuer credit quality. If a credit rating agency changes the rating
of a security held by the Portfolio, the Portfolio may retain the security if
the Adviser deems it in the best interest of investors.
Variable Rate Instruments
The Portfolio may invest in variable rate instruments. Variable rate
instruments that the Adviser may purchase on behalf of the Portfolio provide for
a periodic adjustment in the interest rate paid on the instrument and permit the
holder to receive payment upon a specified number of days' notice of the unpaid
principal balance plus accrued interest either from the issuer or by drawing on
a bank letter of credit, a guarantee or an insurance policy issued with respect
to such instrument or by tendering or "putting" such instrument to a third
party.
Investments in floating or variable rate securities normally involve
industrial development or revenue bonds which provide that the rate of interest
is set as a specific percentage of a designated base rate, such as rates on
Treasury bonds or bills or the prime rate at a major commercial bank, and that a
bondholder can demand payment of the obligations on short notice at par plus
accrued interest. While there is usually no established secondary market for
issues of this type of security, the dealer that sells an issue of such
securities frequently also offers to repurchase such securities at any time, at
a repurchase price which varies and may be more or less than the amount the
bondholder paid for them.
Because of the variable rate nature of the instruments, during periods
when prevailing interest rates decline, the Portfolio's yield will decline and
its shareholders will forgo the opportunity for capital appreciation. On the
other hand, during periods when prevailing interest rates increase, the
Portfolio's yield will increase and its shareholders will have reduced risk of
capital depreciation.
Certain floating or variable rate obligations that may be purchased by
the Portfolio may carry a demand feature that would permit the holder to tender
them back to the issuer of the underlying instrument, or to a third party, at
par value prior to maturity. The demand features of certain floating or variable
rate obligations may permit the holder to tender the obligations to foreign
banks, in which case the ability to receive payment under the demand feature
will be subject to certain risks, as described under "Foreign Securities,"
below.
The maturity of floating or variable rate obligations (including
participation interests therein) is deemed to be the longer of (i) the notice
period required before the Portfolio is entitled to receive payment of the
obligation upon demand, or (ii) the period remaining until the obligation's next
interest rate adjustment. If not redeemed for the Portfolio through the demand
feature, an obligation matures on a specified date which may range up to 30
years from the date of issuance.
Inverse Floating Rate Obligations
The Portfolio may invest in inverse floating rate obligations ("inverse
floaters"). Inverse floaters have coupon rates that vary inversely at a multiple
of a designated floating rate, such as LIBOR (London Inter-Bank Offered Rate).
Any rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates) causes a drop in the coupon rate while any drop in
the reference rate of an inverse floater causes an increase in the coupon rate.
In addition, like most other fixed-income securities, the value of inverse
floaters will generally decrease as interest rates increase. Inverse floaters
may exhibit substantially greater price volatility than fixed rate obligations
having similar credit quality, redemption provisions and maturity, and inverse
floater CMOs exhibit greater price volatility than the majority of mortgage
pass-through securities or CMOs. In addition, some inverse floater CMOs exhibit
extreme sensitivity to changes in prepayments. As a result, the yield to
maturity of an inverse floater CMO is sensitive not only to changes in interest
rates, but also to changes in prepayment rates on the related underlying
mortgage assets
Foreign Securities
The Portfolio may invest in foreign securities. Investing in securities
issued by companies whose principal business activities are outside the United
States may involve significant risks not present in domestic investments. For
example, there is generally less publicly available information about foreign
companies, particularly those not subject to the disclosure and reporting
requirements of the U.S. securities laws. Foreign issuers are generally not
bound by uniform accounting, auditing, and financial reporting requirements and
standards of practice comparable to those applicable to domestic issuers.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, other taxes imposed by the foreign country on the
Portfolio's earnings, assets, or transactions, limitation on the removal of cash
or other assets of the Portfolio, political or financial instability, or
diplomatic and other developments which could affect such investments. Further,
economies of particular countries or areas of the world may differ favorably or
unfavorably from the economy of the United States. Changes in foreign exchange
rates will affect the value of securities denominated or quoted in currencies
other than the U.S. dollar. Currencies in which the Portfolio's assets are
denominated may be devalued against the U.S. dollar, resulting in a loss to the
Portfolio. Foreign securities often trade with less frequency and volume than
domestic securities and therefore may exhibit greater price volatility.
Furthermore, dividends and interest payments from foreign securities may be
withheld at the source. Additional costs associated with an investment in
foreign securities may include higher custodial fees than apply to domestic
custodial arrangements, and transaction costs of foreign currency conversions.
The holdings of the Portfolio may be in as few as one foreign currency
bond market (such as the United Kingdom gilt market), or be spread across
several foreign bond markets; however, the Portfolio does not intend to invest
in the securities of Eastern European countries.
Zero Coupon Obligations
The Portfolio may invest in zero coupon obligations, which are
fixed-income securities that do not make regular interest payments. Instead,
zero coupon obligations are sold at substantial discounts from their face value.
The Portfolio accrues income on these investments for tax and accounting
purposes, which is distributable to shareholders and which, because no cash is
received at the time of accrual, may require the liquidation of other portfolio
securities to satisfy the Portfolio's distribution obligations, in which case
the Portfolio will forego the purchase of additional income-producing assets
with these funds. The difference between a zero coupon obligation's issue or
purchase price and its face value represents the imputed interest an investor
will earn if the obligation is held until maturity. Zero coupon obligations may
offer investors the opportunity to earn higher yields than those available on
ordinary interest-paying obligations of similar credit quality and maturity.
However, zero coupon obligation prices may also exhibit greater price volatility
than ordinary fixed-income securities because of the manner in which their
principal and interest are returned to the investor.
Mortgage-Related And Other Asset-Backed Securities
The Portfolio may invest in mortgage-backed certificates and other
securities representing ownership interests in mortgage pools, including CMOs.
Interest and principal payments on the mortgages underlying mortgage-backed
securities are passed through to the holders of the mortgage-backed securities.
Mortgage-backed securities currently offer yields higher than those available
from many other types of fixed-income securities, but because of their
prepayment aspects, their price volatility and yield characteristics will change
based on changes in prepayment rates.
There are two methods of trading mortgage-backed securities. A specific
pool transaction is a trade in which the pool number of the security to be
delivered on the settlement date is known at the time the trade is made. This is
in contrast with the typical mortgage transaction, called a TBA (to be
announced) transaction, in which the type of mortgage securities to be delivered
is specified at the time of trade but the actual pool numbers of the securities
that will be delivered are not known at the time of the trade. For example, in a
TBA transaction an investor could purchase $1 million 30-year FNMA 9's and
receive up to three pools on the settlement date. The pool numbers of the pools
to be delivered at settlement will be announced shortly before settlement takes
place. The terms of the TBA trade may be made more specific if desired. For
example, an investor may request pools with particular characteristics, such as
those that were issued prior to January 1, 1990. The most detailed specification
of the trade is to request that the pool number be known prior to purchase. In
this case the investor has entered into a specific pool transaction. Generally,
agency pass-through mortgage-backed securities are traded on a TBA basis. The
specific pool numbers of the securities purchased do not have to be determined
at the time of the trade.
Mortgage-backed securities have yield and maturity characteristics that
are dependent on the mortgages underlying them. Thus, unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on these securities include both
interest and a partial payment of principal. In addition to scheduled loan
amortization, payments of principal may result from the voluntary prepayment,
refinancing or foreclosure of the underlying mortgage loans. Such prepayments
may significantly shorten the effective durations of mortgage-backed securities,
especially during periods of declining interest rates. Similarly, during periods
of rising interest rates, a reduction in the rate of prepayments may
significantly lengthen the effective durations of such securities.
Investment in mortgage-backed securities poses several risks, including
prepayment, market, and credit risk. Prepayment risk reflects the risk that
borrowers may prepay their mortgages faster than expected, thereby affecting the
investment's average life and perhaps its yield. Whether or not a mortgage loan
is prepaid is almost entirely controlled by the borrower. Borrowers are most
likely to exercise prepayment options at the time when it is least advantageous
to investors, generally prepaying mortgages as interest rates fall, and slowing
payments as interest rates rise. Besides the effect of prevailing interest
rates, the rate of prepayment and refinancing of mortgages may also be affected
by home value appreciation, ease of the refinancing process and local economic
conditions.
Market risk reflects the risk that the price of the security may
fluctuate over time. The price of mortgage-backed securities may be particularly
sensitive to prevailing interest rates, the length of time the security is
expected to be outstanding, and the liquidity of the issue. In a period of
unstable interest rates, there may be decreased demand for certain types of
mortgage-backed securities, and a fund invested in such securities wishing to
sell them may find it difficult to find a buyer, which may in turn decrease the
price at which they may be sold.
Credit risk reflects the risk that the Portfolio may not receive all or
part of its principal because the issuer or credit enhancer has defaulted on its
obligations. Obligations issued by U.S. government-related entities are
guaranteed as to the payment of principal and interest, but are not backed by
the full faith and credit of the U.S. government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on
the financial health of those institutions.
Mortgage Pass-Through Securities. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential or
commercial mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying property, refinancing or foreclosure,
net of fees or costs which may be incurred. Some mortgage-related securities
(such as securities issued by the Government National Mortgage Association) are
described as "modified pass-through." These securities entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
certain fees, at the scheduled payment dates regardless of whether or not the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the U.S. Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages. Government-related guarantors (i.e., not backed by the
full faith and credit of the U.S. Government) include the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA but are not backed by the
full faith and credit of the U.S. Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a government-
sponsored corporation formerly owned by the 12 Federal Home Loan Banks and now
owned entirely by private stockholders. FHLMC issues participation certificates
("PCs") which represent interests in conventional mortgages from FHLMC's
national portfolio. FHLMC guarantees the timely payment of interest and ultimate
collection of principal, but PCs are not backed by the full faith and credit of
the U.S. Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Portfolio's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. Although the market for
such securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable. The Portfolio will not
purchase mortgage-related securities or other assets which in the Adviser's
opinion are illiquid if, as a result, more than 15% of the value of the
Portfolio's net assets will be illiquid.
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Portfolio
industry concentration restrictions, set forth below under "Investment
Restrictions," by virtue of the exclusion from that test available to all U.S.
Government securities. In the case of privately issued mortgage- related
securities, the Portfolio takes the position that mortgage-related securities do
not represent interests in any particular "industry" or group of industries. The
assets underlying such securities may be represented by a portfolio of first
lien residential mortgages (including both whole mortgage loans and mortgage
participation interests) or portfolios of mortgage pass-through securities
issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a
mortgage-related security may in turn be insured or guaranteed by the Federal
Housing Administration or the Department of Veterans Affairs. In the case of
private issue mortgage-related securities whose underlying assets are neither
U.S. Government securities nor U.S. Government-insured mortgages, to the extent
that real properties securing such assets may be located in the same
geographical region, the security may be subject to a greater risk of default
than other comparable securities in the event of adverse economic, political or
business developments that may affect such region and, ultimately, the ability
of residential homeowners to make payments of principal and interest on the
underlying mortgages.
Collateralized Mortgage Obligations ("CMOS"). A CMO is a hybrid between
a mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semiannually. CMOs may be
collateralized by whole mortgage loans, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
FHLMC CMOS. FHLMC CMOs are debt obligations of FHLMC issued in multiple
classes having different maturity dates which are secured by the pledge of a
pool of conventional mortgage loans purchased by FHLMC. Unlike FHLMC PCs,
payments of principal and interest on the CMOs are made semiannually, as opposed
to monthly. The amount of principal payable on each semiannual payment date is
determined in accordance with FHLMC's mandatory sinking fund schedule, which, in
turn, is equal to approximately 100% of FHA prepayment experience applied to the
mortgage collateral pool. All sinking fund payments in the CMOs are allocated to
the retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as additional sinking fund payments.
Because of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Other Mortgage-Related Securities. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
CMO Residuals. CMO residuals are derivative mortgage securities issued
by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks
and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Other
Mortgage-Related Securities --Stripped Mortgage-Backed Securities." In addition,
if a series of a CMO includes a class that bears interest at an adjustable rate,
the yield to maturity on the related CMO residual will also be extremely
sensitive to changes in the level of the index upon which interest rate
adjustments are based. As described below with respect to stripped mortgage-
backed securities, in certain circumstances the Portfolio may fail to recoup
fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has only very recently developed and CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended (the "1933
Act"). CMO residuals, whether or not registered under the 1933 Act, may be
subject to certain restrictions on transferability and may be deemed "illiquid"
and subject to the Portfolio's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities ("SMBS"). SMBS are derivative
multi-class mortgage securities. SMBS may be issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose entities of the
foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
IO class), while the other class will receive all of the principal (the
principal-only or PO class). The cash flow and yields on IO and PO classes can
be extremely sensitive to the rate of principal payments (including prepayments)
on the related underlying mortgage assets, and a rapid rate of principal
payments may have a material adverse effect on the Portfolio's yield to maturity
from these securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Portfolio may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to the Portfolio's limitations on investment in illiquid securities.
Other Asset-Backed Securities. The Portfolio may also invest in
asset-backed securities unrelated to mortgage loans. Asset-backed securities
present certain risks that are not presented by mortgage-backed securities.
Primarily, these securities do not have the benefit of the same type of security
interest in the related 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, many of which give such debtors the right to
avoid payment of certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicer to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
Types of Credit Support. Mortgage-backed securities and asset-backed
securities are often backed by a pool of assets representing the obligations of
a number of different parties. To lessen the effect of failure by obligors on
underlying assets to make payments, such securities may contain elements of
credit support. Such credit support falls into two categories: (i) liquidity
protection and (ii) protection against losses resulting from ultimate default by
an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the pass-through of payments due on the underlying pool occurs in
a timely fashion. Protection against losses resulting from ultimate default
enhances the likelihood of ultimate payment of the obligations on at least a
portion of the assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches. The U.S. Bond Index Portfolio will
not pay any additional fees for such credit support, although the existence of
credit support may increase the price of a security.
The ratings of mortgage-backed securities and asset-backed securities
for which third-party credit enhancement provides liquidity protection or
protection against losses from default are generally dependent upon the
continued creditworthiness of the provider of the credit enhancement. The
ratings of such securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider even in
cases where the delinquency and loss experience on the underlying pool of assets
is better than expected.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments, sometimes funded from a
portion of the payments on the underlying assets, are held in reserve against
future losses) and "over-collateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceed those required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information with respect to the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that which is anticipated
could adversely affect the return on an investment in such a security.
Lending of Portfolio Securities
The Portfolio may seek to increase their income by lending portfolio
securities to entities deemed creditworthy by the Adviser. The Portfolio may
lend securities to qualified brokers, dealers, banks and other financial
institutions for the purpose of realizing additional income. Loans of securities
will be collateralized by cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The collateral will equal at
least 100% of the current market value of the loaned securities.
By lending portfolio securities, the Portfolio can increase its income
by continuing to receive interest on the loaned securities as well as by either
investing the cash collateral in permissible investments, such as U.S.
Government Securities or obtaining yield in the form of interest paid by the
borrower when such U.S. Government Securities are used as collateral. The
Portfolio will comply with the following conditions whenever it loans
securities: (i) the Portfolio must receive at least 100% collateral from the
borrower; (ii) the borrower must increase the collateral whenever the market
value of the securities loaned rises above the level of the collateral; (iii)
the Portfolio must be able to terminate the loan at any time; (iv) the Portfolio
must receive reasonable compensation with respect to the loan, as well as any
dividends, interest or other distributions on the loaned securities; (iv) the
Portfolio may pay only reasonable fees in connection with the loaned securities
(no fee will be paid to affiliated persons of the Portfolio); and (vi) voting
rights on the loaned securities may pass to the borrower except that, if a
material event adversely affecting the investment in the loaned securities
occurs, the Trust's Board of Trustees must terminate the loan and regain the
right to vote the securities.
Although the Portfolio would not have the right to vote any securities
having voting rights during the existence of the loan, but would call the loan
in anticipation of an important vote to be taken among holders of the securities
or of the giving or withholding of their consent on a material matter affecting
the investment. As with other extensions of credit there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. However, the loans would be made only to firms
deemed by the Adviser to be of good standing, and when, in the judgment of the
Adviser, the consideration which could be earned currently from securities loans
of this type justifies the attendant risk.
Repurchase Agreements
The Portfolio may invest in repurchase agreements, which are
transactions in which the Portfolio purchases a security and simultaneously
commits to resell that security to the seller (a bank or securities dealer) at
an agreed upon price on an agreed upon date (usually within seven days of
purchase). The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or date of
maturity of the purchased security.
The repurchase agreement provides that in the event the seller fails to
pay the price agreed upon on the agreed upon delivery date or upon demand, as
the case may be, the Portfolio will have the right to liquidate the securities.
If at the time the Portfolio is contractually entitled to exercise its right to
liquidate the securities, the seller is subject to a proceeding under the
bankruptcy laws or its assets are otherwise subject to a stay order, the
Portfolio's exercise of its right to liquidate the securities may be delayed and
result in certain losses and costs to the Portfolio. The Portfolio has adopted
and follows procedures which are intended to minimize the risks of repurchase
agreements. For example, the Portfolio only enters into repurchase agreements
after the Adviser has determined that the seller is creditworthy, and the
Adviser monitors that seller's creditworthiness on an ongoing basis. Moreover,
under such agreements, the value of the securities (which are marked to market
every business day) is required to be greater than the repurchase price, and the
Portfolio has the right to make margin calls at any time if the value of the
securities falls below the agreed upon margin.
In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Portfolio but only constitute collateral for the seller's obligation to
pay the repurchase price. Therefore, the Portfolio may suffer time delays and
incur costs in connection with the disposition of the collateral. The Board of
Trustees believes that the collateral underlying repurchase agreements may be
more susceptible to claims of the seller's creditors than would be the case with
securities owned by the Portfolio. The Adviser will continually monitor the
value of the underlying securities to ensure that their value, including accrued
interest, always equals or exceeds the repurchase price.
Options and Futures
The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase the return of the Portfolio. While the use of these
instruments by the Portfolio may reduce certain risks associated with owning its
portfolio securities, these techniques themselves entail certain other risks. If
the Adviser applies a strategy at an inappropriate time or judges market
conditions or trends incorrectly, options and futures strategies may lower the
Portfolio's return. Certain strategies limit the potential of the Portfolio to
realize gains as well as limit their exposure to losses. The Portfolio could
also experience losses if the prices of its options and futures positions were
poorly correlated with its other investments. There can be no assurance that a
liquid market will exist at a time when the Portfolio seeks to close out a
futures contract or a futures option position.
Options on Securities. The Portfolio may write (sell) covered call and
put options on securities ("Options") and purchase call and put Options. A "call
option" is a contract sold for a price (the "premium") giving its holder the
right to buy a specific number of shares of stock at a specific price prior to a
specified date. A "covered call option" is a call option issued on securities
already owned by the writer of the call option for delivery to the holder upon
the exercise of the option. The Portfolio may write options for the purpose of
attempting to increase its return and for hedging purposes. In particular, if
the Portfolio writes an option which expires unexercised or is closed out by the
Portfolio at a profit, the Portfolio retains the premium paid for the option
less related transaction costs, which increases its gross income and offsets in
part the reduced value of the portfolio security in connection with which the
option is written, or the increased cost of portfolio securities to be acquired.
In contrast, however, if the price of the security underlying the option moves
adversely to the Portfolio's position, the option may be exercised and the
Portfolio will then be required to purchase or sell the security at a
disadvantageous price, which might only partially be offset by the amount of the
premium.
The Portfolio may write options in connection with buy-and-write
transactions; that is, the Portfolio may purchase a security and then write a
call option against that security. The exercise price of the call option the
Portfolio determines to write depends upon the expected price movement of the
underlying security. The exercise price of a call option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the
current value of the underlying security at the time the option is written.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options may be used by the
Portfolio in the same market environments in which call options are used in
equivalent buy-and-write transactions.
The Portfolio may also write combinations of put and call options on
the same security, a practice known as a "straddle." By writing a straddle, the
Portfolio undertakes a simultaneous obligation to sell or purchase the same
security in the event that one of the options is exercised. If the price of the
security subsequently rises sufficiently above the exercise price to cover the
amount of the premium and transaction costs, the call will likely be exercised
and the Portfolio will be required to sell the underlying security at a below
market price. This loss may be offset, however, in whole or in part, by the
premiums received on the writing of the two options. Conversely, if the price of
the security declines by a sufficient amount, the put will likely be exercised.
The writing of straddles will likely be effective, therefore, only where the
price of a security remains stable and neither the call nor the put is
exercised. In an instance where one of the options is exercised, the loss on the
purchase or sale of the underlying security may exceed the amount of the
premiums received.
By writing a call option on a portfolio security, the Portfolio limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, the Portfolio assumes the risk that it may be required to purchase the
underlying security for an exercise price above its then current market value,
resulting in a loss unless the security subsequently appreciates in value. The
writing of options will not be undertaken by the Portfolio solely for hedging
purposes, and may involve certain risks which are not present in the case of
hedging transactions. Moreover, even where options are written for hedging
purposes, such transactions will constitute only a partial hedge against
declines in the value of portfolio securities or against increases in the value
of securities to be acquired, up to the amount of the premium.
The Portfolio may also purchase put and call options. Put options are
purchased to hedge against a decline in the value of securities held in the
Portfolio's portfolio. If such a decline occurs, the put options will permit the
Portfolio to sell the securities underlying such options at the exercise price,
or to close out the options at a profit. The Portfolio will purchase call
options to hedge against an increase in the price of securities that the
Portfolio anticipates purchasing in the future. If such an increase occurs, the
call option will permit the Portfolio to purchase the securities underlying such
option at the exercise price or to close out the option at a profit. The premium
paid for a call or put option plus any transaction costs will reduce the
benefit, if any, realized by the Portfolio upon exercise of the option, and,
unless the price of the underlying security rises or declines sufficiently, the
option may expire worthless to the Portfolio. In addition, in the event that the
price of the security in connection with which an option was purchased moves in
a direction favorable to the Portfolio, the benefits realized by the Portfolio
as a result of such favorable movement will be reduced by the amount of the
premium paid for the option and related transaction costs.
The staff of the SEC has taken the position that purchased
over-the-counter options and certain assets used to cover written
over-the-counter options are illiquid and, therefore, together with other
illiquid securities, cannot exceed a certain percentage of the Portfolio's
assets (the "SEC illiquidity ceiling"). The Adviser intends to limit the
Portfolio's writing of over-the-counter options in accordance with the following
procedure. Except as provided below, the Portfolio intends to write
over-the-counter options only with primary U.S. Government securities dealers
recognized by the Federal Reserve Bank of New York. Also, the contracts the
Portfolio has in place with such primary dealers will provide that the Portfolio
has the absolute right to repurchase an option it writes at any time at a price
which represents the fair market value, as determined in good faith through
negotiation between the parties, but which in no event will exceed a price
determined pursuant to a formula in the contract. Although the specific formula
may vary between contracts with different primary dealers, the formula will
generally be based on a multiple of the premium received by the Portfolio for
writing the option, plus the amount, if any, of the option's intrinsic value
(i.e., the amount that the option is in-the-money). The formula may also include
a factor to account for the difference between the price of the security and the
strike price of the option if the option is written out-of-the-money. The
Portfolio will treat all or a portion of the formula as illiquid for purposes of
the SEC illiquidity ceiling imposed by the SEC staff. The Portfolio may also
write over-the-counter options with non-primary dealers, including foreign
dealers, and will treat the assets used to cover these options as illiquid for
purposes of such SEC illiquidity ceiling.
Options on Securities Indices. The Portfolio that may invest in options
may write (sell) covered call and put options and purchase call and put options
on securities indices. The Portfolio may cover call options on securities
indices by owning securities whose price changes, in the opinion of the Adviser,
are expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities in its
portfolio. Where the Portfolio covers a call option on a securities index
through ownership of securities, such securities may not match the composition
of the index and, in that event, the Portfolio will not be fully covered and
could be subject to risk of loss in the event of adverse changes in the value of
the index. The Portfolio may also cover call options on securities indices by
holding a call on the same index and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Portfolio in cash or
cash equivalents in a segregated account with its custodian. The Portfolio may
cover put options on securities indices by maintaining cash or cash equivalents
with a value equal to the exercise price in a segregated account with its
custodian, or else by holding a put on the same security and in the same
principal amount as the put written where the exercise price of the put held (a)
is equal to or greater than the exercise price of the put written or (b) is less
than the exercise price of the put written if the difference is maintained by
the Portfolio in cash or cash equivalents in a segregated account with its
custodian. Put and call options on securities indices may also be covered in
such other manner as may be in accordance with the rules of the exchange on
which, or the counterparty with which, the option is traded and applicable laws
and regulations.
The Portfolio will receive a premium from writing a put or call option
on a securities index, which increases the Portfolio's gross income in the event
the option expires unexercised or is closed out at a profit. If the value of an
index on which the Portfolio has written a call option falls or remains the
same, the Portfolio will realize a profit in the form of the premium received
(less transaction costs) that could offset all or a portion of any decline in
the value of the securities it owns. If the value of the index rises, however,
the Portfolio will realize a loss in its call option position, which will reduce
the benefit of any unrealized appreciation in the Portfolio's investment. By
writing a put option, the Portfolio assumes the risk of a decline in the index.
To the extent that the price changes of securities owned by the Portfolio
correlate with changes in the value of the index, writing covered put options on
indices will increase the Portfolio's losses in the event of a market decline,
although such losses will be offset in part by the premium received for writing
the option.
The Portfolio may also purchase put options on securities indices to
hedge its investments against a decline in value. By purchasing a put option on
a stock index, the Portfolio will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of the
Portfolio's investments does not decline as anticipated, or if the value of the
option does not increase, the Portfolio's loss will be limited to the premium
paid for the option plus related transaction costs. The success of this strategy
will largely depend on the accuracy of the correlation between the changes in
value of the index and the changes in value of the Portfolio's security
holdings.
The purchase of call options on securities indices may be used by the
Portfolio to attempt to reduce the risk of missing a broad market advance, or an
advance in an industry or market segment, at a time when the Portfolio holds
uninvested cash or short-term debt securities awaiting investment. When
purchasing call options for this purpose, the Portfolio will also bear the risk
of losing all or a portion of the premium paid if the value of the index does
not rise. The purchase of call options on securities indices when the Portfolio
is substantially fully invested is a form of leverage, up to the amount of the
premium and related transaction costs, and involves risks of loss and of
increased volatility similar to those involved in purchasing calls on securities
the Portfolio owns.
Futures Contracts. The Portfolio may enter into contracts for the
purchase or sale for future delivery of securities or foreign currencies or
contracts based on indexes of securities as such instruments become available
for trading ("Futures Contracts"). The Portfolio will not enter into futures
contracts to the extent that its outstanding obligations to purchase securities
under these contracts in combination with its outstanding obligations with
respect to options transactions would exceed 35% of its total assets.
This investment technique is designed to hedge (i.e., to protect)
against anticipated future changes in interest or exchange rates which otherwise
might adversely affect the value of the Portfolio's portfolio securities or
adversely affect the prices of long-term bonds or other securities which the
Portfolio intends to purchase at a later date. Futures Contracts may also be
entered into for non-hedging purposes to the extent permitted by applicable law.
A "sale" of a Futures Contract means a contractual obligation to deliver the
securities or foreign currency called for by the contract at a fixed price at a
specified time in the future. A "purchase" of a Futures Contract means a
contractual obligation to acquire the securities or foreign currency at a fixed
price at a specified time in the future.
While Futures Contracts provide for the delivery of securities or
currencies, such deliveries are very seldom made. Generally, a Futures Contract
is terminated by entering into an offsetting transaction. The Portfolio will
incur brokerage fees when it purchases and sells Futures Contracts. At the time
such a purchase or sale is made, the Portfolio must allocate cash or securities
as a margin deposit ("initial deposit"). It is expected that the initial deposit
will vary but may be as low as 5% or less of the value of the contract. The
Futures Contract is valued daily thereafter and the payment of "variation
margin" may be required to be paid or received, so that each day the Portfolio
may provide or receive cash that reflects the decline or increase in the value
of the contract.
The purpose of the purchase or sale of a Futures Contract, for hedging
purposes in the case of a portfolio holding long-term debt securities, is to
protect the Portfolio from fluctuations in interest rates without actually
buying or selling long-term debt securities. For example, if the Portfolio owned
long-term bonds and interest rates were expected to increase, the Portfolio
might enter into Futures Contracts for the sale of debt securities. If interest
rates did increase, the value of the debt securities in the portfolio would
decline, but the value of the Portfolio's Futures Contracts should increase at
approximately the same rate, thereby keeping the net asset value of the
Portfolio from declining as much as it otherwise would have. The Portfolio could
accomplish similar results by selling bonds with long maturities and investing
in bonds with short maturities when interest rates are expected to increase or
by buying bonds with long maturities and selling bonds with short maturities
when interest rates are expected to decline. However, since the futures market
is more liquid than the cash market, the use of Futures Contracts as an
investment technique allows the Portfolio to maintain a defensive position
without having to sell its portfolio securities. Transactions entered into for
non-hedging purposes include greater risk, including the risk of losses which
are not offset by gains on other portfolio assets.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to hedge against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of Futures Contracts
should be similar to that of long-term bonds, the Portfolio could take advantage
of the anticipated rise in the value of long-term bonds without actually buying
them until the market had stabilized. At that time, the Futures Contracts could
be liquidated and the Portfolio could buy long-term bonds on the cash market.
Purchases of Futures Contracts would be particularly appropriate when the cash
flow from the sale of new shares of the Portfolio could have the effect of
diluting dividend earnings. To the extent the Portfolio enters into Futures
Contracts for this purpose, the assets in the segregated asset account
maintained to cover the Portfolio's obligations with respect to such Futures
Contracts will consist of cash, cash equivalents or short-term money market
instruments from the portfolio of the Portfolio in an amount equal to the
difference between the fluctuating market value of such Futures Contracts and
the aggregate value of the initial and variation margin payments made by the
Portfolio with respect to such Futures Contracts, thereby assuring that the
transactions are unleveraged.
Futures Contracts on foreign currencies may be used in a similar
manner, in order to protect against declines in the dollar value of portfolio
securities denominated in foreign currencies, or increases in the dollar value
of securities to be acquired.
A Futures Contract on an index of securities provides for the making
and acceptance of a cash settlement based on changes in value of the underlying
index. The Portfolio may enter into stock index futures contracts in order to
protect the Portfolio's current or intended stock investments from broad
fluctuations in stock prices and for non-hedging purposes to the extent
permitted by applicable law. For example, the Portfolio may sell stock index
Futures Contracts in anticipation of or during a market decline to attempt to
offset the decrease in market value of the Portfolio's securities portfolio that
might otherwise result. If such decline occurs, the loss in value of portfolio
securities may be offset, in whole or in part, by gains on the futures position.
When the Portfolio is not fully invested in the securities market and
anticipates a significant market advance, it may purchase stock index Futures
Contracts in order to gain rapid market exposure that may, in part or in whole,
offset increases in the cost of securities that investor intends to purchase. As
such acquisitions are made, the corresponding positions in stock index futures
contracts will be closed out. In a substantial majority of these transactions,
the Portfolio will purchase such securities upon the termination of the futures
position, but under unusual market conditions, a long futures position may be
terminated without a related purchase of securities. Futures Contracts on other
securities indexes may be used in a similar manner in order to protect the
portfolio from broad fluctuations in securities prices and for non-hedging
purposes to the extent permitted by applicable law.
Risk Factors: Imperfect Correlation of Hedging Instruments with the
Portfolio's Portfolio. The Portfolio's ability effectively to hedge all or a
portion of its portfolio through transactions in options, futures contracts, and
forward contracts will depend on the degree to which price movements in the
underlying instruments correlate with price movements in the relevant portion of
the Portfolio's portfolio. If the values of portfolio securities being hedged do
not move in the same amount or direction as the instruments underlying options,
futures contracts or forward contracts traded, the Portfolio's hedging strategy
may not be successful and the Portfolio could sustain losses on its hedging
strategy which would not be offset by gains on its portfolio. It is also
possible that there may be a negative correlation between the instrument
underlying an option, future contract or forward contract traded and the
portfolio securities being hedged, which could result in losses both on the
hedging transaction and the portfolio securities. In such instances, the
Portfolio's overall return could be less than if the hedging transaction had not
been undertaken. In the case of futures and options based on an index of
securities or individual fixed income securities, the portfolio will not
duplicate the components of the index, and in the case of futures contracts and
options on fixed income securities, the portfolio securities which are being
hedged may not be the same type of obligation underlying such contracts. As a
result, the correlation probably will not be exact. Consequently, the Portfolio
bears the risk that the price of the portfolio securities being hedged will not
move in the same amount or direction as the underlying index or obligation. In
addition, where the Portfolio enters into Forward Contracts as a "cross hedge"
(i.e., the purchase or sale of a Forward Contract on one currency to hedge
against risk of loss arising from changes in value of a second currency), the
Portfolio incurs the risk of imperfect correlation between changes in the values
of the two currencies, which could result in losses.
The correlation between prices of securities and prices of options,
futures contracts or forward contracts may be distorted due to differences in
the nature of the markets, such as differences in margin requirements, the
liquidity of such markets and the participation of speculators in the option,
futures contract and forward contract markets. Due to the possibility of
distortion, a correct forecast of general interest rate trends by the Adviser
may still not result in a successful transaction. The trading of options on
futures contracts also entails the risk that changes in the value of the
underlying futures contract will not be fully reflected in the value of the
option. The risk of imperfect correlation, however, generally tends to diminish
as the maturity or termination date of the option, futures contract or forward
contract approaches.
The trading of options, futures contracts and forward contracts also
entails the risk that, if the Adviser's judgment as to the general direction of
interest or exchange rates is incorrect, the Portfolio's overall performance may
be poorer than if it had not entered into any such contract. For example, if the
Portfolio has hedged against the possibility of an increase in interest rates,
and rates instead decline, the Portfolio will lose part or all of the benefit of
the increased value of the securities being hedged, and may be required to meet
ongoing daily variation margin payments.
It should be noted that the Portfolio may purchase and write options
not only for hedging purposes, but also for the purpose of attempting to
increase its return. As a result, the Portfolio will incur the risk that losses
on such transactions will not be offset by corresponding increases in the value
of portfolio securities or decreases in the cost of securities to be acquired.
Potential Lack of a Liquid Secondary Market. Prior to exercise or
expiration, a position in an exchange-traded option, futures contract or option
on a futures contract can only be terminated by entering into a closing purchase
or sale transaction, which requires a secondary market for such instruments on
the exchange on which the initial transaction was entered into. If no such
market exists, it may not be possible to close out a position, and the Portfolio
could be required to purchase or sell the underlying instrument or meet ongoing
variation margin requirements. The inability to close out option or futures
positions also could have an adverse effect on the Portfolio's ability
effectively to hedge its portfolio.
The liquidity of a secondary market in an option or futures contract
may be adversely affected by "daily price fluctuation limits," established by
the exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. Such limits could prevent the Portfolio from liquidating open
positions, which could render its hedging strategy unsuccessful and result in
trading losses. The exchanges on which options and futures contracts are traded
have also established a number of limitations governing the maximum number of
positions which may be traded by a trader, whether acting alone or in concert
with others. Further, the purchase and sale of exchange-traded options and
futures contracts is subject to the risk of trading halts, suspensions, exchange
or clearing corporation equipment failures, government intervention, insolvency
of a brokerage firm, intervening broker or clearing corporation or other
disruptions of normal trading activity, which could make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Options on Futures Contracts. In order to profit from the purchase of
an option on a futures contract, it may be necessary to exercise the option and
liquidate the underlying futures contract, subject to all of the risks of
futures trading. The writer of an option on a futures contract is subject to the
risks of futures trading, including the requirement of initial and variation
margin deposits.
Additional Risks of Transactions Related to Foreign Currencies and
Transactions Not Conducted on the United States Exchanges. The available
information on which the Portfolio will make trading decisions concerning
transactions related to foreign currencies or foreign securities may not be as
complete as the comparable data on which the Portfolio makes investment and
trading decisions in connection with other transactions. Moreover, because the
foreign currency market is a global, 24-hour market, and the markets for foreign
securities as well as markets in foreign countries may be operating during
non-business hours in the United States, events could occur in such markets
which would not be reflected until the following day, thereby rendering it more
difficult for the Portfolio to respond in a timely manner.
In addition, over-the-counter transactions can only be entered into
with a financial institution willing to take the opposite side, as principal, of
the Portfolio's position, unless the institution acts as broker and is able to
find another counterparty willing to enter into the transaction with the
Portfolio. This could make it difficult or impossible to enter into a desired
transaction or liquidate open positions, and could therefore result in trading
losses. Further, over-the-counter transactions are not subject to the
performance guarantee of an exchange clearing house and the Portfolio will
therefore be subject to the risk of default by, or the bankruptcy of, a
financial institution or other counterparty.
Transactions on exchanges located in foreign countries may not be
conducted in the same manner as those entered into on United States exchanges,
and may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may be
present in connection with such transactions. Moreover, the SEC or the
Commodities Futures Trading Commission ("CFTC") has jurisdiction over the
trading in the United States of many types of over-the-counter and foreign
instruments, and such agencies could adopt regulations or interpretations which
would make it difficult or impossible for the Portfolio to enter into the
trading strategies identified herein or to liquidate existing positions.
As a result of its investments in foreign securities, the Portfolio may
receive interest or dividend payments, or the proceeds of the sale or redemption
of such securities, in foreign currencies. The Portfolio may also be required to
receive delivery of the foreign currencies underlying options on foreign
currencies or forward contracts it has entered into. This could occur, for
example, if an option written by the Portfolio is exercised or the Portfolio is
unable to close out a forward contract it has entered into. In addition, the
Portfolio may elect to take delivery of such currencies. Under such
circumstances, the Portfolio may promptly convert the foreign currencies into
dollars at the then current exchange rate. Alternatively, the Portfolio may hold
such currencies for an indefinite period of time if the Adviser believes that
the exchange rate at the time of delivery is unfavorable or if, for any other
reason, the Adviser anticipates favorable movements in such rates.
While the holding of currencies will permit the Portfolio to take
advantage of favorable movements in the applicable exchange rate, it also
exposes the Portfolio to risk of loss if such rates move in a direction adverse
to the Portfolio's position. Such losses could also adversely affect the
Portfolio's hedging strategies. Certain tax requirements may limit the extent to
which the Portfolio will be able to hold currencies.
Restrictions on the Use of Options and Futures. In order to assure that
the Portfolio will not be deemed to be a "commodity pool" for purposes of the
Commodity Exchange Act, regulations of the CFTC require that the Portfolio enter
into transactions in futures contracts and options on futures contracts only (i)
for bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Portfolio's assets. In addition, the Portfolio must comply with the requirements
of various state securities laws in connection with such transactions.
When the Portfolio purchases a futures contract, an amount of cash and
cash equivalents will be deposited in a segregated account with the Portfolio's
custodian so that the amount so segregated will at all times equal the value of
the futures contract, thereby insuring that the leveraging effect of such
futures is minimized.
Forward Foreign Currency Contracts and Options on Foreign Currencies
The Portfolio may invest in forward foreign currency exchange contracts
("forward contracts") are intended to minimize the risk of loss to the Portfolio
from adverse changes in the relationship between the U.S. dollar and foreign
currencies. A forward contract is an obligation to purchase or sell a specific
currency for an agreed price at a future date which is individually negotiated
and privately traded by currency traders and their customers. A forward contract
may be used, for example, when the Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency in order to
"lock in" the U.S. dollar price of the security.
Transactions in forward contracts entered into for hedging purposes
will include forward purchases or sales of foreign currencies for the purpose of
protecting the dollar value of securities denominated in a foreign currency or
protecting the dollar equivalent of interest or dividends to be paid on such
securities. By entering into such transactions, however, the Portfolio may be
required to forego the benefits of advantageous changes in exchange rates. The
Portfolio may also enter into transactions in forward contracts for other than
hedging purposes, which presents greater profit potential but also involves
increased risk of losses which will reduce its gross income. For example, if the
Adviser believes that the value of a particular foreign currency will increase
or decrease relative to the value of the U.S. dollar, the Portfolio may purchase
or sell such currency, respectively, through a forward contract. If the expected
changes in the value of the currency occur, the Portfolio will realize profits
which will increase its gross income. Where exchange rates do not move in the
direction or to the extent anticipated, however, the Portfolio may sustain
losses which will reduce its gross income. Such transactions, therefore, could
be considered speculative.
The Portfolio has no specific limitation on the percentage of assets
they may commit to forward contracts, subject to its stated investment objective
and policies, except that the Portfolio will not enter into a forward contract
if the amount of assets set aside to cover the contract would impede portfolio
management. By entering into transactions in forward contracts, however, the
Portfolio may be required to forego the benefits of advantageous changes in
exchange rates and, in the case of Forward Contracts entered into for
non-hedging purposes, the Portfolio may sustain losses which will reduce its
gross income. Forward contracts are traded over-the-counter and not on organized
commodities or securities exchanges. As a result, such contracts operate in a
manner distinct from exchange-traded instruments and their use involves certain
risks beyond those associated with transactions in futures contracts or options
traded on exchanges.
The Portfolio may also purchase and write put and call options on
foreign currencies for the purpose of protecting against declines in the dollar
value of foreign portfolio securities and against increases in the U.S. dollar
cost of foreign securities to be acquired.
The Portfolio may also combine forward contracts with investments in
securities denominated in other currencies in order to achieve desired credit
and currency exposures. Such combinations are generally referred to as synthetic
securities. For example, in lieu of purchasing a foreign bond, the Portfolio may
purchase a U.S. dollar-denominated security and at the same time enter into a
forward contract to exchange U.S. dollars for the contract's underlying currency
at a future date. By matching the amount of U.S. dollars to be exchanged with
the anticipated value of the U.S. dollar-denominated security, the Portfolio may
be able to lock in the foreign currency value of the security and adopt a
synthetic investment position reflecting the credit quality of the U.S.
dollar-denominated security.
The Portfolio has established procedures consistent with statements by
the SEC and its staff regarding the use of forward contracts by registered
investment companies, which require the use of segregated assets or "cover" in
connection with the purchase and sale of such contracts. In those instances in
which the Portfolio satisfies this requirement through segregation of assets, it
will maintain, in a segregated account, cash, cash equivalents or high grade
debt securities, which will be marked to market on a daily basis, in an amount
equal to the value of its commitments under Forward Contracts.
Brady Bonds
The Portfolio may invest in Brady Bonds. Dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are generally collateralized in full as to principal due at
maturity by U.S. Treasury zero coupon obligations which have the same maturity
as the Brady Bonds. Interest payments on these Brady Bonds generally are
collateralized by cash or securities in an amount that, in the case of fixed
rate bonds, is equal to at least one year of rolling interest payments or, in
the case of floating rate bonds, initially is equal to at least one year's
rolling interest payments based on the applicable interest rate at the time and
is adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to
"value recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Brady Bonds
are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal at final maturity, (ii) the collateralized
interest payments, (iii) the uncollateralized payments, and (iv) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In the event of a default with respect
to collateralized Brady Bonds as a result of which the payment obligations of
the issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the defaulted
Brady Bonds, which will continue to be outstanding, at which time the face
amount of the collateral will equal the principal payments which would have then
been due on the Brady Bonds in the normal course. In addition, in light of the
residual risk of the Brady Bonds and, among other factors, the history of
default with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative.
Brady Plan debt restructurings totaling approximately $73 billion have
been implemented to date in Argentina, Costa Rica, Mexico, Nigeria, the
Philippines, Uruguay and Venezuela, with the largest proportion of Brady Bonds
having been issued to date by Mexico and Venezuela. Brazil has announced plans
to issue Brady Bonds aggregating approximately $35 billion, based on current
estimates. There can be no assurance that the circumstances regarding the
issuance of Brady Bonds by these countries will not change.
Foreign Currency Exchange-Related Securities
The Portfolio may invest in the foreign currency exchange-related
securities described below.
Foreign Currency Warrants. Foreign currency warrants such as Currency
Exchange Warrants (SM) ("CEWs"(SM)) are warrants which entitle the holder to
receive from their issuer an amount of cash (generally, for warrants issued in
the United States, in U.S. dollars) which is calculated pursuant to a
predetermined formula and based on the exchange rate between a specified foreign
currency and the U.S. dollar as of the exercise date of the warrant. Foreign
currency warrants generally are exercisable upon their issuance and expire as of
a specified date and time. Foreign currency warrants have been issued in
connection with U.S. dollar-denominated debt offerings by major corporate
issuers in an attempt to reduce the foreign currency exchange risk which, from
the point of view of prospective purchasers of the securities, is inherent in
the international fixed-income marketplace. Foreign currency warrants may
attempt to reduce the foreign exchange risk assumed by purchasers of a security
by, for example, providing for a supplemental payment in the event that the U.S.
dollar depreciates against the value of a major foreign currency such as the
Japanese yen or German deutsche mark. The formula used to determine the amount
payable upon exercise of a foreign currency warrant may make the warrant
worthless unless the applicable foreign currency exchange rate moves in a
particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required to either sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants) and, in the case the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unaccrued obligations of their issuers and are
not standardized foreign currency options issued by the Options Clearing
Corporation (the "OCC"). Unlike foreign currency options issued by the OCC, the
terms of foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to complex political or economic factors.
Principal Exchange Rate Linked Securities. Principal exchange rate
linked securities ("PERLs"(SM)) are debt obligations the principal on which is
payable at maturity in an amount that may vary based on the exchange rate
between the U.S. dollar and a particular foreign currency at or about that time.
The return on "standard" PERLS is enhanced if the foreign currency to which the
security is linked appreciates against the U.S. dollar, and is adversely
affected by increases in the foreign exchange value of the U.S. dollar;
"reverse" PERLS are like the "standard" securities, except that their return is
enhanced by increases in the value of the U.S. dollar and adversely impacted by
increases in the value of foreign currency. Interest payments on the securities
are generally made in U.S. dollars at rates that reflect the degree of foreign
currency risk assumed or given up by the purchaser of the notes (i.e., at
relatively higher interest rates if the purchaser has assumed some of the
foreign exchange risk, or relatively lower interest rates if the issuer has
assumed some of the foreign exchange risk, based on the expectations of the
current market). PERLS may in limited cases be subject to acceleration of
maturity (generally, not without the consent of the holders of the securities),
which may have an adverse impact on the value of the principal payment to be
made at maturity.
Performance Indexed Paper. Performance indexed paper ("PIPs"(SM)) is
U.S. dollar-denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on PIPs is
established at maturity as a function of the spot exchange rates between the
U.S. dollar and a designated currency as of or about that time (generally, the
index maturity two days prior to maturity). The yield to the investor will be
within a range stipulated at the time of purchase of the obligation, generally
with a guaranteed minimum rate of return that is below, and a potential maximum
rate of return that is above, market yields on U.S. dollar-denominated
commercial paper, with both the minimum and maximum rates of return on the
investment corresponding to the minimum and maximum values of the spot exchange
rate two business days prior to maturity.
The Portfolio has no current intention of investing in CEWs(SM),
PERLs(SM) or PIPs(SM).
Sovereign And Supranational Debt Obligations. The Portfolio may invest
in sovereign and supranational debt obligations. Debt instruments issued or
guaranteed by foreign governments, agencies, and supranational organizations
("sovereign debt obligations"), especially sovereign debt obligations of
developing countries, may involve a high degree of risk, and may be in default
or present the risk of default. The issuer of the obligation or the governmental
authorities that control the prepayment of the debt may be unable to unwilling
to repay principal and interest when due, and may require renegotiation or
rescheduling of debt payments. In addition, prospects for repayment of principal
and interest may depend on political as well as economic factors.
Mortgage Dollar Roll Transactions. The Portfolio may engage in dollar
roll transaction with respect to mortgage securities issued by the Government
National Mortgage Association, the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation. In a dollar roll transaction, the
Portfolio sells a mortgage-backed security and simultaneously agrees to
repurchase a similar security on a specified future date at an agreed upon
price. During the roll period, the Portfolio will not be entitled to receive any
interest or principal paid on the securities sold. The Portfolio is compensated
for the lost interest on the securities sold by the difference between the sales
price and lower price for the future repurchase as well as by the interest
earned on the reinvestment of the sales proceeds. The Portfolio may also be
compensated by receipt of a commitment fee. When the Portfolio enters into a
mortgage dollar roll transaction, liquid assets in an amount sufficient to pay
for the future repurchase are segregated with the Portfolio's custodian.
Mortgage dollar roll transactions are considered reverse repurchase agreements
for purposes of the Portfolio's investment restrictions.
Swaps, Caps, Floors and Collars
The Portfolio will usually enter into swaps on a net basis, i.e., the
two return streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two returns. The Portfolio's
obligations under a swap agreement will be accrued daily (offset against any
amounts owing to the Portfolio) and any accrued but unpaid net amounts owed to a
swap counterparty will be covered by the maintenance of a segregated account
consisting of cash, U.S. Government securities, or other liquid securities, to
avoid any potential leveraging. The Portfolio will not enter into any swap
agreement unless the unsecured commercial paper, senior debt or the
claims-paying ability of the counterparty is rated AA or A-1 or better by S&P or
Aa or P-1 or better by Moody's, rated comparably by another NRSRO or determined
by the Adviser to be of comparable quality.
Interest rate swaps do not involve the delivery of securities, other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Portfolio is contractually obligated to make. If the other party to an interest
rate swap defaults, the Portfolio's risk of loss consists of the net amount of
interest payments that the Portfolio is contractually entitled to receive. In
contrast, currency swaps usually involve the delivery of the entire principal
value of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. If there is a default by the counterparty, the Portfolio may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Banking Industry And Savings And Loan Industry Obligations
The Portfolio will not invest in any obligation of a commercial bank
unless (i) the bank has total assets of at least $1 billion, or the equivalent
in other currencies or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation (the "FDIC"), (ii)
in the case of U.S. banks, it is a member of the FDIC, and (iii) in the case of
foreign branches of U.S. banks, the security is deemed by the Adviser to be of
an investment quality comparable with other debt securities which may be
purchased by the Portfolio.
PORTFOLIO TURNOVER
The Adviser manages the Portfolio generally without regard to
restrictions on portfolio turnover, except those imposed by provisions of the
federal tax laws regarding short-term trading. In general, the Portfolio will
not trade for short-term profits, but when circumstances warrant, investments
may be sold without regard to the length of time held. The primary consideration
in placing portfolio security transactions with broker-dealers for execution is
to obtain, and maintain the availability of, execution at the most favorable
prices and in the most effective manner possible. The Adviser engages in
portfolio trading for the Portfolio if it believes a transaction net of costs
(including custodian charges) will help achieve the investment objective of the
Portfolio. In managing the Portfolio's portfolio, the Adviser seeks to take
advantage of market developments, yield disparities and variations in the
creditworthiness of issuers. Expenses to the Portfolio, including brokerage
commissions, and the realization of capital gains which are taxable to the
Portfolio's shareholders tend to increase as the portfolio turnover increases.
No portfolio turnover rate information for the Portfolio is shown
because it did not offer shares prior to January 18, 2001.
It is expected that the annual turnover rate for the Portfolio will
generally not exceed 250% in subsequent fiscal years. If the Portfolio has a
portfolio turnover rate of 100% or more, transaction costs incurred by the
Portfolio, and the realized capital gains and losses of the Portfolio, may be
greater than those of a fund with a lesser portfolio turnover rate. See
"Portfolio Transactions" and "Tax Matters" below.
PORTFOLIO MANAGEMENT
The Adviser's investment strategies for achieving the Portfolio's
investment objective have two basic components: maturity and duration management
and value investing.
Maturity and Duration Management. Maturity and duration management
decisions are made in the context of an intermediate maturity orientation. The
maturity structure of the Portfolio is adjusted in anticipation of cyclical
interest rate changes. Such adjustments are not made in an effort to capture
short-term, day-to-day movements in the market, but instead are implemented in
anticipation of longer term, secular shifts in the levels of interest rates
(i.e., shifts transcending and/or not inherent to the business cycle).
Adjustments made to shorten portfolio maturity and duration are made to limit
capital losses during periods when interest rates are expected to rise.
Conversely, adjustments made to lengthen maturity are intended to produce
capital appreciation in periods when interest rates are expected to fall. The
foundation for the Adviser's maturity and duration strategy lies in analysis of
the U.S. and global economies, focusing on levels of real interest rates,
monetary and fiscal policy actions, and cyclical indicators.
Value Investing. The second component of the Adviser's investment
strategy for the Portfolio is value investing, whereby the Adviser seeks to
identify undervalued sectors and securities through analysis of credit quality,
option characteristics and liquidity. Quantitative models are used in
conjunction with judgment and experience to evaluate and select securities with
embedded put or call options which are attractive on a risk- and option-adjusted
basis. Successful value investing will permit the portfolio to benefit from the
price appreciation of individual securities during periods when interest rates
are unchanged.
PORTFOLIO TRANSACTIONS
The Adviser is primarily responsible for portfolio decisions and the
placing of portfolio transactions. The Trust has no obligation to deal with any
dealer or group of dealers in the execution of transactions in portfolio
securities for the Portfolio. Allocation of transactions, including their
frequency, to various dealers is determined by the Adviser in its best judgment
and in a manner deemed to be in the best interest of the Portfolio's
shareholders rather than by any formula. In placing orders for the Portfolio,
the primary consideration is prompt execution of orders in an effective manner
at the most favorable price, although the Portfolio does not necessarily pay the
lowest spread or commission available. Other factors taken into consideration
are the dealer's general execution and operational facilities, the type of
transaction involved and other factors such as the dealer's risk in positioning
the securities. To the extent consistent with applicable legal requirements, the
Adviser may place orders for the purchase and sale of portfolio investments for
the Portfolio with a broker-dealer affiliate of the Adviser.
The Adviser may, in circumstances in which two or more dealers are in a
position to offer comparable results, give preference to a dealer which has
provided statistical or other research services to the Adviser. By allocating
transactions in this manner, the Adviser is able to supplement its research and
analysis with the views and information of securities firms. These services,
which in some cases may also be purchased for cash, include such matters as
general economic and security market reviews, industry and company reviews,
evaluations of securities and recommendations as to the purchase and sale of
securities. Some of these services are of value to the Adviser in advising
various of its clients (including the Portfolio), although not all of these
services are necessarily useful and of value in managing the Portfolio. The
management fee paid from the Portfolio is not reduced because the Adviser and
its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
the Adviser may cause the Portfolio to pay a broker-dealer which provides
"brokerage and research services" (as defined in the Act) to the Adviser an
amount of commission for effecting a securities transaction for the Portfolio in
excess of the commission which another broker-dealer would have charged for
effecting that transaction, provided the Adviser determines in good faith that
the greater commission is reasonable in relation to the value of the brokerage
and research services provided by the executing broker-dealer viewed in terms of
either a particular transaction or their respective overall responsibilities to
the Portfolio or to their other clients. Not all of such services are useful or
of value in advising the Portfolio.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or of purchasers or sellers of
securities; furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts; and effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement. Although commissions paid
on every transaction will, in the judgment of the Adviser, be reasonable in
relation to the value of the brokerage services provided, commissions exceeding
those which another broker might charge may be paid to broker-dealers who were
selected to execute transactions on behalf of the Portfolio and the Adviser's
other clients in part for providing advice as to the availability of securities
or of purchasers or sellers of securities and services in effecting securities
transactions and performing functions incidental thereto, such as clearance and
settlement.
Broker-dealers may be willing to furnish statistical, research and
other factual information or services ("Research") to the Adviser for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold through such broker-dealers, but at present, unless otherwise
directed by the Portfolio, a commission higher than one charged elsewhere will
not be paid to such a firm solely because it provided such Research.
No information for the Portfolio is shown because it did not offer
shares prior to January 18, 2001.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and such other policies as the Trustees may
determine, and subject to seeking the most favorable price and execution
available, the Adviser may consider sales of shares of the Portfolio as a factor
in the selection of broker-dealers to execute portfolio transactions for the
Portfolio.
Investment decisions for the Portfolio and for the other investment
advisory clients of the Adviser are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved.
Thus, a particular security may be bought for certain clients even though it
could have been sold for other clients at the same time, and a particular
security may be sold for certain clients even though it could have been bought
for other clients at the same time. Likewise, a particular security may be
bought for one or more clients when one or more other clients are selling that
same security. In some instances, one client may sell a particular security to
another client. Two or more clients may simultaneously purchase or sell the same
security, in which event each day's transactions in that security are, insofar
as practicable, averaged as to price and allocated between such clients in a
manner which in the Adviser's opinion is equitable to each and in accordance
with the amount being purchased or sold by each. In addition, when purchases or
sales of the same security for the Portfolio and for other clients of the
Adviser occur contemporaneously, the purchase or sale orders may be aggregated
in order to obtain any price advantage available to large denomination purchases
or sales. There may be circumstances when purchases or sales of portfolio
securities for one or more clients will have an adverse effect on other clients
in terms of the price paid or received or of the size of the position
obtainable. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the
Portfolio is concerned. In other cases, however, the Adviser believes that the
Portfolio's ability to participate in volume transactions will produce better
executions for the Portfolio.
Because the Portfolio invests primarily in fixed-income securities, it
is anticipated that most purchases and sales will be with the issuer or with
underwriters of or dealers in those securities, acting as principal.
Accordingly, the Portfolio would not ordinarily pay significant brokerage
commissions with respect to securities transactions.
In the United States and in some other countries debt securities are
traded principally in the over-the-counter market on a net basis through dealers
acting for their own account and not as brokers. In other countries both debt
and equity securities are traded on exchanges at fixed commission rates. The
cost of securities purchased from underwriters includes an underwriter's
commission or concession, and the prices at which securities are purchased and
sold from and to dealers include a dealer's mark-up or mark-down. The Adviser
normally seeks to deal directly with the primary market makers or on major
exchanges unless, in its opinion, better prices are available elsewhere. Subject
to the requirement of seeking execution at the best available price, securities
may, as authorized by the Advisory Agreement, be bought from or sold to dealers
who have furnished statistical, research and other information or services to
the Adviser. At present no arrangements for the recapture of commission payments
are in effect.
INVESTMENT RESTRICTIONS
The Portfolio Trust has adopted the following investment restrictions
which may not be changed without approval by holders of a "majority of the
outstanding voting securities" of the Portfolio, which as used in this Statement
of Additional Information means the vote of the lesser of (i) 67% or more of the
outstanding "voting securities" of the Portfolio present at a meeting, if the
holders of more than 50% of the outstanding "voting securities" are present or
represented by proxy, or (ii) more than 50% of the outstanding "voting
securities". The term "voting securities" as used in this paragraph has the same
meaning as in the Investment Company Act of 1940, as amended (the "1940 Act").
As a matter of fundamental policy the Portfolio will not:
(1) invest in physical commodities or contracts on physical commodities;
(2) purchase or sell real estate, although it may purchase and sell securities
of companies which deal in real estate, other than real estate limited
partnerships, and may purchase and sell marketable securities which are
secured by interest in real estate;
(3) make loans except: (i) by purchasing debt securities in accordance with its
investment objective and policies, or entering into repurchase agreements,
and (ii) by lending its portfolio securities;
(4) with respect to 75% of its assets, purchase a security if, as a result, it
would hold more than 10% (taken at the time of such investment) of the
outstanding voting securities of any issuer;
(5) with respect to 75% of its assets, purchase securities of any issuer if, as
the result, more than 5% of the Portfolio's total assets, taken at market
value at the time of such investment, would be invested in the securities
of such issuer, except that this restriction does not apply to securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities;
(6) underwrite the securities of other issuers (except to the extent that the
Portfolio may be deemed to be an underwriter within the meaning of the 1933
Act in the disposition of restricted securities);
(7) acquire any securities of companies within one industry if as a result of
such acquisition, more than 25% of the value of the Portfolio's total
assets would be invested in securities of companies within such industry;
provided, however, that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, when the Portfolio adopts a temporary defensive
position; and provided further that mortgage-backed securities shall not be
considered a single industry for the purposes of this investment
restriction;
(8) borrow money (including from a bank or through reverse repurchase
agreements or forward dollar roll transactions involving mortgage-backed
securities or similar investment techniques entered into for leveraging
purposes), except that the Portfolio may borrow as a temporary measure to
satisfy redemption requests or for extraordinary or emergency purposes,
provided that the Portfolio maintains asset coverage of at least 300% for
all such borrowings; and
(9) issue senior securities, except as permitted under the 1940 Act.
In applying fundamental policy number seven, mortgage-backed securities
shall not be considered a single industry. Mortgage-backed securities issued by
governmental agencies and government-related organizations shall be excluded
from the limitation in fundamental policy number seven. Private mortgage-backed
securities (i.e., not issued or guaranteed by a governmental agency or
government-related organization) that are backed by mortgages on commercial
properties shall be treated as a separate industry from private mortgage-backed
securities backed by mortgages on residential properties.
The Portfolio is also subject to the following restrictions which may
be changed by the Board of Trustees without investor approval.
As a matter of non-fundamental policy, the Portfolio will not:
(a) borrow money (including from a bank or through reverse repurchase
agreements or forward dollar roll transactions involving mortgage-backed
securities or similar investment techniques entered into for leveraging
purposes), except that the Portfolio may borrow for temporary or emergency
purposes up to 10% of its net assets; provided, however, that the Portfolio
may not purchase any security while outstanding borrowings exceed 5% of net
assets;
(b) invest in futures and/or options on futures to the extent that its
outstanding obligations to purchase securities under any future contracts
in combination with its outstanding obligations with respect to options
transactions would exceed 35% of its total assets;
(c) invest in warrants, valued at the lower of cost or market, in excess of 5%
of the value of its total assets (included within that amount, but not to
exceed 2% of the value of the Portfolio's net assets, may be warrants that
are not listed on the New York Stock Exchange, the American Stock Exchange
or an exchange with comparable listing requirements; warrants attached to
securities are not subject to this limitation);
(d) purchase on margin, except for use of short-term credit as may be necessary
for the clearance of purchases and sales of securities, but it may make
margin deposits in connection with transactions in options, futures, and
options on futures; or sell short unless, by virtue of its ownership of
other securities, it has the right to obtain securities equivalent in kind
and amount to the securities sold and, if the right is conditional, the
sale is made upon the same conditions (transactions in futures contracts
and options are not deemed to constitute selling securities short);
(e) purchase or retain securities of an issuer if those officers and Trustees
of the Portfolio Trust or the Adviser owning more than 1/2 of 1% of such
securities together own more than 5% of such securities;
(f) pledge, mortgage or hypothecate any of its assets to an extent greater than
one-third of its total assets at fair market value;
(g) invest more than an aggregate of 15% of the net assets of the Portfolio,
determined at the time of investment, in securities that are illiquid
because their disposition is restricted under the federal securities laws
or securities for which there is no readily available market; provided,
however that this policy does not limit the acquisition of (i) securities
that have legal or contractual restrictions on resale but have a readily
available market or (ii) securities that are not registered under the 1933
Act, but which can be sold to qualified institutional investors in
accordance with Rule 144A under the 1933 Act and which are deemed to be
liquid pursuant to guidelines adopted by the Board of Trustees ("Restricted
Securities").
(h) invest more than 25% of its assets in Restricted Securities (including Rule
144A Securities);
(i) invest for the purpose of exercising control over management of any
company;
(j) invest its assets in securities of any investment company, except by
purchase in the open market involving only customary brokers' commissions
or in connection with mergers, acquisitions of assets or consolidations and
except as may otherwise be permitted by the 1940 Act; provided, however,
that the Portfolio shall not invest in the shares of any open-end
investment company unless (1) the Portfolio's Adviser waives any investment
advisory fees with respect to such assets and (2) the Portfolio pays no
sales charge in connection with the investment;
(k) invest more than 5% of its total assets in securities of issuers (other
than securities issued or guaranteed by U.S. or foreign government or
political subdivisions thereof) which have (with predecessors) a record of
less than three years' continuous operations; and
(l) write or acquire options or interests in oil, gas or other mineral
explorations or development programs or leases.
Percentage and Rating Restrictions
If a percentage restriction or a rating restriction on investment or
utilization of assets set forth above or referred to in the prospectus is
adhered to at the time an investment is made or assets are so utilized, a later
change in percentage resulting from changes in the value of the securities held
by each Portfolio or a later change in the rating of a security held by each
Portfolio is not considered a violation of policy; however, the Adviser will
consider such change in its determination of whether to hold the security.
MANAGEMENT OF THE PORTFOLIO TRUST
Trustees and Officers
The principal occupations of the Trustees and executive officers of the
Portfolio Trust for the past five years are listed below. Asterisks indicate
that those Trustees and officers are "interested persons" (as defined in the
1940 Act) of the Portfolio Trust. The address of each, unless otherwise
indicated, is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
<TABLE>
<CAPTION>
Name and Address Position with Portfolio Trust Principal Occupation
<S> <C> <C>
Frederick C. Chen, Trustee Management Consultant
126 Butternut Hollow Road,
Greenwish, Connecticut 06830
Alan S. Parsow Trustee General Partner of Parsow
2222 Skyline Drive, Partnership, Ltd. (investments).
Elkhorn, Nebraska 68022
Larry M. Robbins Trustee Director of the Center of Teaching
Wharton Communication Program, and Learning, University of
University of Pennsylvania, 336 Pennsylvania.
Steinberg Hall-Dietrich Hall,
Philadelphia, Pennsylvania 19104
Michael Seely Trustee President of Investor Access
405 Lexington Avenue, Suite 909, Corporation (investor relations
New York, New York 10174 consulting firm)
Leslie E. Bains** Trustee Senior Executive Vice President,
HSBC Bank USA, 1990-present; Senior
Vice President. The Chase Manhattan
Bank, N.A., 1980-1990.
Walter B. Grimm* President Employee of BISYS Fund Services,
Inc., June, 1992 to present; prior
to June, 1992 President of Leigh
Investments Consulting (investment
firm)
Mark L. Suter Vice President Employee of BISYS Fund Services,
Inc., January 2000 to present; VP
Seligman Data Corp., June 1997 to
January 2000; Capital Link
Consulting, February 1997 to June
1997; US Trust NY, June 1986 to
February 1991.
Sue A. Walters* Vice President Employee of BISYS Fund Services,
Inc., July 1990 to present.
Nadeem Yousaf* Treasurer Employee of BISYS Fund Services,
Inc., August 1999 to present;
Director, IBT, Canadian Operations,
May 1995 to March 1997; Assistant
Manager Price Waterhouse.
Lisa M. Hurley* Secretary Senior Vice President and General
Counsel of BISYS Fund Services, May
1998 to present; General Counsel of
Moore Capital Management Inc.,
October 1993 to May 1996, Senior
Vice President and General Counsel
of Northstar Investment Management
Corporation
Alaina Metz* Assistant Secretary Chief Administrator, Administrative
and Regulatory Services, BISYS Fund
Services, Inc., June 1995 to
present; Supervisor, Mutual Fund
Legal Department, Alliance Capital
Management, May 1989 to June 1995
</TABLE>
*Messrs. Grimm and Yousaf and Mss. Walters, Hurley, and Metz, also
are officers of certain other investment companies of which BISYS or an
affiliate is the administrator.
** Ms. Bains is an "interested person" as that term is defined in the
1940 Act.
<PAGE>
Compensation Table
<TABLE>
<CAPTION>
Aggregate Aggregate
Aggregate Compensation From Compensation From
Compensation From International Equity Small Cap Equity Total Compensation
Trustee Fixed Income Portfolio Portfolio Portfolio from Fund Complex(1)
<S> <C> <C> <C> <C>
Frederick C. Chen $ 930 $ 851 $ 1,102 $9,600
Alan S. Parsow 930 851 1,102 9,600
Larry M. Robbins 1,124 1,028 1,332 11,600
Michael Seely 930 851 1,102 9,600
</TABLE>
(1) The Fund Complex includes the Portfolio Trust, HSBC Advisor Funds Trust,
HSBC Investor Funds, offshore feeders into the Portfolio Trust, and three
stand-alone offshore funds. The fees paid by the Fund Complex are allocated pro
rata among the Funds based upon the net assets of each Fund.
The compensation table above reflects the fees received by the Trustees
from the Fund Complex for the year ended October 31, 1999. For the fiscal year
ended October 31, 1999, the Trustees who are not "interested persons" (as
defined in the 1940 Act) of the Trust received from the Fund Complex an annual
retainer of $3,600 and a fee of $1,500 for each meeting of the Board of Trustees
or committee thereof attended, except that Mr. Robbins received an annual
retainer of $4,600 and a fee of $1,725 for each meeting attended. Effective
January 1, 2000, the Lead Trustee, Mr. Larry M. Robbins, will receive an annual
retainer of $11,000, and a per meeting fee of $2,500, and the other Trustees
that are not affiliated with the Adviser will receive an annual retainer of
$10,000, and a per meeting fee of $2,000. The Fund Complex includes the Trust,
HSBC Advisor Funds Trust, HSBC Investor Funds, offshore feeders into the
Portfolio Trust, and three stand-alone offshore funds. The fees paid by the Fund
Complex are allocated pro rata among the Funds based upon the net assets of the
Fund.
The Portfolio Trust's Declaration of Trust provides that obligations of
the Portfolio Trust are not binding upon the Trustees individually but only upon
the property of the Portfolio Trust and that the Trustees will not be liable for
any action or failure to act, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office.
The Portfolio Trust's Declaration of Trust provides that it will
indemnify its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
officers with the Portfolio Trust, unless, as to liability to the Portfolio
Trust or its investors, it is finally adjudicated that they engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in their offices, or unless with respect to any other matter it is
finally adjudicated that they did not act in good faith in the reasonable belief
that their actions were in the best interests of the Portfolio Trust. In the
case of settlement, such indemnification will not be provided unless it has been
determined by a court or other body approving the settlement or other
disposition, or by a reasonable determination, based upon a review of readily
available facts, by vote of a majority of disinterested Trustees or in a written
opinion of independent counsel, that such officers or Trustees have not engaged
in willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
Moreover, HSBC, its officers and employees do not express any opinion
with respect to the advisability of any purchase of such securities.
As of October 31, 1999, the Trustees and officers of the Portfolio
Trust, as a group, owned less than 1% of the outstanding shares of the
Portfolio.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Adviser
HSBC Asset Management (Americas) Inc. ("Adviser") is the investment
adviser to the Portfolio pursuant to an Investment Advisory Contract with the
Portfolio Trust. The Adviser manages the investment and reinvestment of the
assets of the Portfolio and continuously reviews, supervises and administers the
investments of the Portfolio pursuant to the Investment Advisory Contract. The
Adviser also furnishes to the Board of Trustees, which has overall
responsibility for the business and affairs of the Trust, periodic reports on
the investment performance of the Portfolio. Subject to such policies as the
Board of Trustees may determine, the Adviser places orders for the purchase and
sale of the Portfolio's investments directly with brokers or dealers selected by
it in its discretion. See "Portfolio Transactions" above. The Adviser does not
place orders with the Distributor. For its services, the Adviser is entitled to
receive a 0.40% fee from the Portfolio, computed daily and paid monthly, equal
on an annual basis of the Portfolio's average daily net assets of the Portfolio
as follows:
No information is shown for the advisory fees for the Portfolio because
it did not offer shares prior to January 18, 2001.
The Investment Advisory Contract will continue in effect with respect
to the Portfolio, provided such continuance is approved at least annually (i) by
the holders of a majority of the outstanding voting securities of the Portfolio
or by the Portfolio Trust's Board of Trustees, and (ii) by a majority of the
Trustees of the Portfolio Trust who are not parties to the Investment Advisory
Contract or "interested persons" (as defined in the 1940 Act) of any such party.
The Investment Advisory Contract may be terminated with respect to the Portfolio
without penalty by either party on 60 days' written notice and will terminate
automatically if assigned, provided such continuance is approved annually (i) by
the holders of a majority of the outstanding voting securities of the Portfolio
or by the Portfolio Trust's Board of Trustees, and (ii) by a majority of the
Trustees of the Portfolio Trust who are not parties to such Agreement or
"interested persons" (as defined in the 1940 Act) of any such party. The
Agreement may be terminated with respect to the Portfolio without penalty by
either party on 60 days' written notice and will terminate automatically if
assigned.
The Adviser is a wholly owned subsidiary of HSBC Bank USA ("HSBC"),
which is a wholly owned subsidiary of HSBC USA, Inc., a registered bank holding
company, and currently provides investment advisory services for individuals,
trusts, estates and institutions.
HSBC and its affiliates may have deposit, loan and other commercial
banking relationships with issuers of obligations purchased for the Portfolio,
including outstanding loans to such issuers which may be repaid in whole or in
part with the proceeds of obligations so purchased. HSBC and its affiliates
deal, trade and invest for their own accounts in U.S. Government and Municipal
obligations and are dealers of various types of U.S. Government and Municipal
obligations. HSBC and its affiliates may sell U.S. Government and Municipal
obligations to, and purchase them from, other investment companies sponsored by
BISYS Fund Services. There is no restriction on the amount or type of U.S.
Government or Municipal obligations available to be purchased for the Portfolio.
The Adviser has informed the Trust that, in making its investment decisions, it
does not obtain or use material inside information in the possession of any
division or department of HSBC or in the possession of any affiliate of HSBC.
HSBC complies with applicable laws and regulations, including the
regulations and rulings of the U.S. Comptroller of the Currency relating to
fiduciary powers of national banks. These regulations provide, in general, that
assets managed by a national bank as fiduciary shall not be invested in stock or
obligations of, or property acquired from, the bank, its affiliates or their
directors, officers or employees or other persons with substantial connections
with the bank. The regulations further provide that fiduciary assets shall not
be sold or transferred, by loan or otherwise, to the bank or persons connected
with the bank as described above. HSBC, in accordance with federal banking laws,
may not purchase for its own account securities of any investment company the
investment adviser of which it controls, extend credit to any such investment
company, or accept the securities of any such investment company as collateral
for a loan to purchase such securities. Moreover, HSBC, its officers and
employees do not express any opinion with respect to the advisability of any
purchase of such securities.
The investment advisory services of Adviser to the Portfolio are not
exclusive under the terms of the Investment Advisory Contract. The Adviser is
free to and does render investment advisory services to others.
The Investment Advisory Contract will continue in effect with respect
to the Portfolio, provided such continuance is approved annually (i) by the
holders of a majority of the outstanding voting securities of the Portfolio or
by the Board of Trustees, and (ii) by a majority of the Trustees who are not
parties to such Contract or "interested persons" (as defined in the 1940 Act) of
any such party. The Contract may be terminated with respect to the Portfolio
without penalty by either party on 60 days' written notice and will terminate
automatically if assigned. The Contract provides that neither the Adviser nor
its personnel shall be liable for any error of judgment or mistake of law or for
any loss arising out of any investment or for any act or omission in the
execution of portfolio transactions for the Adviser, except for willful
misfeasance, bad faith or gross negligence or of reckless disregard of its or
their obligations and duties under the Contract.
Administrator
The Administration Agreement will remain in effect until March 31,
2000, and automatically will continue in effect thereafter from year to year
unless terminated upon 60 days' written notice to BISYS. The Administration
Agreement will terminate automatically in the event of its assignment. The
Administration Agreement also provides that neither BISYS nor its personnel
shall be liable for any error of judgment or mistake of law or for any act or
omission in the administration or management of the Portfolio Trust except for
willful misfeasance, bad faith or gross negligence in the performance of its or
their duties or by reason of reckless disregard of its or their obligations and
duties under the Administration Agreement.
No information of administrative fees for the Portfolio is provided
because it did not offer shares prior to January 18, 2001.
Underwriters
The exclusive placement agent of the Portfolio Trust is BISYS Fund
Services (Ireland) Limited, which receives no additional compensation for
serving in this capacity. Other investment companies, insurance company separate
accounts, common and commingled trust funds and similar organizations and
entities may continuously invest in each Portfolio.
CUSTODIAN, TRANSFER AGENT AND FUND ACCOUNTING AGENT
Custodian
Pursuant to the Custodian Agreement, Investors Bank & Trust Company ("IBT")
acts as the custodian of the foreign assets of the Portfolio and HSBC acts as
custodian of the domestic assets of the Portfolio (the "Custodians"). The
Portfolio Trust's Custodian Agreement provides that the Custodians may use the
services of sub-custodians with respect to the Portfolio. The Custodians'
responsibilities include safeguarding and controlling the Portfolio's cash and
securities, handling the receipt and delivery of securities, determining income
and collecting interest on the Portfolio's investments, maintaining books of
original entry for portfolio accounting and other required books and accounts,
and calculating the daily net asset value of the Portfolio. Securities held for
the Portfolio may be deposited into the Federal Reserve-Treasury Department Book
Entry System or the Depositary Trust Company. The Custodians do not determine
the investment policies of the Portfolio or decide which securities will be
purchased or sold for the Portfolio. For their services, IBT and HSBC each
receives such compensation as may from time to time be agreed upon by either of
them and the Portfolio Trust.
Transfer Agent
The Portfolio Trust has entered into a Transfer Agency Agreement with
BISYS, pursuant to which BISYS acts as transfer agent ("Transfer Agent") for
shares of the Portfolio. The Transfer Agent maintains an account for each
shareholder of the Portfolio and investors in the Portfolio, performs other
transfer agency functions, and acts as dividend disbursing agent for the
Portfolio. The principal business address of BISYS is 3435 Stelzer Road,
Columbus, OH 43219.
Portfolio Accounting Agent
Pursuant to a fund accounting agreement, BISYS also serves as fund
accounting agent to the Portfolio.
No information on fund accounting fees for the Portfolio is provided
because it did not offer shares prior to January 18, 2001.
Federal Banking Law
The Gramm-Leach-Bliley Act of 1999 repealed certain provisions of the
Glass-Steagall Act that had previously restricted the ability of banks and their
affiliates to engage in certain mutual fund activities. Nevertheless, the
Adviser's activities remain subject to, and may be limited by, applicable
federal banking law and regulations. The Adviser believes that it possesses the
legal authority to perform the services for the Portfolio contemplated by the
Prospectus, this SAI, and the Investment Advisory Agreement without violation of
applicable statutes and regulations. If future changes in these laws and
regulations were to limit the ability of the Adviser to perform these services,
the Board of Trustees would review the Trust's relationship with the Adviser and
consider taking all action necessary in the circumstances, which could include
recommending to shareholders the selection of another qualified advisor or, if
that course of action appeared impractical, that the Portfolio be liquidated.
Expenses
Except for expenses paid by the Adviser, the Portfolio bears all the
costs of its operations. Trust expenses directly related to the Portfolio are
charged to the Portfolio; other expenses are allocated proportionally among all
the portfolios of the Trust in relation to the net asset value of the
portfolios.
CAPITAL STOCK AND OTHER SECURITIES
The Portfolio is a series of HSBC Investor Portfolios (the "Portfolio
Trust"), which is organized as a trust under the laws of the State of New York.
Under the Portfolio Trust' Declaration of Trust, the Trustees are authorized to
issue beneficial interests in one or more series (each a "Series"), including
the Portfolio. Investors in a Series will be held personally liable for the
obligations and liabilities of that Series (and of no other Series), subject,
however, to indemnification by the Portfolio Trust in the event that there is
imposed upon an investor a greater portion of the liabilities and obligations of
the Series than its proportionate beneficial interest in the Series. The
Declaration of Trust also provides that the Portfolio Trust shall maintain
appropriate insurance (for example, a fidelity bond and errors and omissions
insurance) for the protection of the Portfolio Trust, its investors, Trustees,
officers, employees and agents, and covering possible tort and other
liabilities. Thus, the risk of an investor incurring financial loss on account
of investor liability is limited to circumstances in which both inadequate
insurance existed and the Portfolio Trust itself was unable to meet its
obligations.
Investors in a Series are entitled to participate pro rata in
distributions of taxable income, loss, gain and credit of their respective
Series only. Upon liquidation or dissolution of a Series, investors are entitled
to share pro rata in that Series' (and no other Series) net assets available for
distribution to its investors. The Portfolio Trust reserves the right to create
and issue additional Series of beneficial interests, in which case the
beneficial interests in each new Series would participate equally in the
earnings, dividends and assets of that particular Series only (and no other
Series). Any property of the Portfolio Trust is allocated and belongs to a
specific Series to the exclusion of all other Series. All consideration received
by the Portfolio Trust for the issuance and sale of beneficial interests in a
particular Series, together with all assets in which such consideration is
invested or reinvested, all income, earnings and proceeds thereof, and any funds
or payments derived from any reinvestment of such proceeds, is held by the
Trustees in a separate subtrust (a Series) for the benefit of investors in that
Series and irrevocably belongs to that Series for all purposes. Neither a Series
nor investors in that Series possess any right to or interest in the assets
belonging to any other Series.
Neither a Series nor investors in that Series possess any right to or
interest in the assets belonging to any other Series.
Investments in a Series have no preference, preemptive, conversion or
similar rights and are fully paid and nonassessable, except as set forth below.
Investments in a Series may not be transferred. Certificates representing an
investor's beneficial interest in a Series are issued only upon the written
request of an investor.
Each investor is entitled to a vote in proportion to the amount of its
investment in each Series. Investors in a Series do not have cumulative voting
rights, and investors holding more than 50% of the aggregate beneficial
interests in all outstanding Series may elect all of the Trustees if they choose
to do so and in such event other investors would not be able to elect any
Trustees. Investors in each Series will vote as a separate class except as to
voting of Trustees, as otherwise required by the 1940 Act, or if determined by
the Trustees to be a matter which affects all Series. As to any matter which
does not affect the interest of a particular Series, only investors in the one
or more affected Series are entitled to vote. The Portfolio Trust is not
required and has no current intention of holding annual meetings of investors,
but the Portfolio Trust will hold special meetings of investors when in the
judgment of the Portfolio Trust's Trustees it is necessary or desirable to
submit matters for an investor vote. The Portfolio Trust's Declaration of Trust
may be amended without the vote of investors, except that investors have the
right to approve by affirmative majority vote any amendment which would affect
their voting rights, alter the procedures to amend the Declaration of Trust of
the Portfolio Trust, or as required by law or by the Portfolio Trust's
registration statement, or as submitted to them by the Trustees. Any amendment
submitted to investors which the Trustees determine would affect the investors
of any Series shall be authorized by vote of the investors of such Series and no
vote will be required of investors in a Series not affected.
The Portfolio Trust or any Series (including the Portfolio) may enter
into a merger or consolidation, or sell all or substantially all of its assets,
if approved (a) at a meeting of investors by investors representing the lesser
of (i) 67% or more of the beneficial interests in the affected Series present of
represented at such meeting, if investors in more than 50% of all such
beneficial interests are present or represented by proxy, or (ii) more than 50%
of all such beneficial interests; or (b) by an instrument in writing without a
meeting, consented to by investors representing not less than a majority of the
beneficial interests in the affected Series. The Portfolio Trust or any Series
(including each Portfolio) may also be terminated (i) upon liquidation and
distribution of its assets if approved by the vote of two thirds of its
investors (with the vote of each being in proportion to the amount of its
investment), (ii) by the Trustees by written notice to its investors, or (iii)
upon the bankruptcy or expulsion of an investor in the affected Series, unless
the investors in such Series, by majority vote, agree to continue the Series.
The Portfolio Trust will be dissolved upon the dissolution of the last remaining
Series.
PURCHASE, REDEMPTION AND PRICING OF SECURITIES
Beneficial interests in the Portfolio is issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act.
An investor in the Portfolio may add to or reduce its investment in the
Portfolio on the Portfolio Business Day. As of the Valuation Time on each such
day, the value of each investor's beneficial interest in the Portfolio will be
determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, which represents that investor's share of
the aggregate beneficial interests in the Portfolio. Any additions or reductions
which are to be effected on that day will then be effected. The investor's
percentage of the aggregate beneficial interests in each Portfolio will then be
recomputed as the percentage equal to the fraction (i) the numerator of which is
the value of such investor's investment in the Portfolio as of the Valuation
Time on such day plus or minus, as the case may be, the amount of net additions
to or reductions in the investor's investment in the Portfolio effected as of
the Valuation Time, and (ii) the denominator of which is the aggregate net asset
value of the Portfolio as of the Valuation Time on such day, plus or minus, as
the case may be, the amount of net additions to or reductions in the aggregate
investments in the Portfolio by all investors in the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of the Valuation Time on the following the
Portfolio Business Day.
Bonds and other fixed-income securities listed on a foreign exchange
are valued at the latest quoted sales price available before the time when
assets are valued. For purposes of determining each Portfolio's net asset value,
all assets and liabilities initially expressed in foreign currencies will be
converted into U.S. dollars at the bid price of such currencies against U.S.
dollars last quoted by any major bank.
Bonds and other fixed-income securities which are traded
over-the-counter and on a stock exchange will be valued according to the
broadest and most representative market, and it is expected that for bonds and
other fixed-income securities this ordinarily will be the over-the-counter
market. Bonds and other securities (other than short-term obligations but
including listed issues) in the Portfolio's portfolio may be valued on the basis
of valuations furnished by a pricing service, use of which has been approved by
the Board of Trustees of the Portfolio Trust. In making such valuations, the
pricing service utilizes both dealer-supplied valuations and electronic data
processing techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Short-term obligations are valued
at amortized cost, which constitutes fair value as determined by the Board of
Trustees of the Portfolio Trust. Futures contracts are normally valued at the
settlement price on the exchange on which they are traded. Portfolio securities
(other than short-term obligations) for which there are no such valuations are
valued at fair value as determined in good faith under the direction of the
Board of Trustees of the Portfolio Trust.
Interest income on long-term obligations in the Portfolio's portfolio
is determined on the basis of interest accrued plus amortization of "original
issue discount" (generally, the difference between issue price and stated
redemption price at maturity) and premiums (generally, the excess of purchase
price over stated redemption price at maturity). Interest income on short-term
obligations is determined on the basis of interest accrued plus amortization of
premium.
Subject to the Portfolio Trust's compliance with applicable
regulations, the Portfolio Trust has reserved the right to pay the withdrawal
price of beneficial interests in the Portfolio, either totally or partially, by
a distribution in kind of portfolio securities (instead of cash). The securities
so distributed would be valued at the same amount as that assigned to them in
calculating the net asset value for the beneficial interest being sold. If an
investor received a distribution in kind, the investor could incur brokerage or
other charges in converting the securities to cash.
The net asset value of the Portfolio is determined on each day on which
the New York Stock Exchange ("NYSE") is open for trading. As of the date of this
Statement of Additional Information, the NYSE is open every weekday except for
the days on which the following holidays are observed: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
The Adviser typically completes its trading on behalf of the Portfolio
in various markets before 4:00 p.m., and the value of portfolio securities is
determined when the primary market for those securities closes for the day.
Foreign currency exchange rates are also determined prior to 4:00 p.m. However,
if extraordinary events occur that are expected to affect the value of a
portfolio security after the close of the primary exchange on which it is
traded, the security will be valued at fair value as determined in good faith
under the direction of the Board of Trustees of the Portfolio Trust.
Subject to the Portfolio Trust's compliance with applicable
regulations, the Portfolio Trust on behalf of the Portfolio has reserved the
right to pay the redemption or repurchase price of Shares, either totally or
partially, by a distribution in kind of portfolio securities from the Portfolio
(instead of cash). The securities so distributed would be valued at the same
amount as that assigned to them in calculating the net asset value for the
Shares being sold. If an investor received a distribution in kind, the investor
could incur brokerage or other charges in converting the securities to cash. The
Portfolio Trust will redeem an investor's shares in kind only if it has received
a redemption in kind from the Portfolio and therefore investors that receive
redemptions in kind will receive securities of the Portfolio. The Portfolio has
advised the Portfolio Trust that the Portfolio will not redeem in kind except in
circumstances in which the investor is permitted to redeem in kind.
TAXATION
Tax Status
The following is a summary of certain U.S. federal and state income tax
issues concerning the Portfolio and its investors. This discussion does not
purport to be complete or to deal with all relevant aspects of federal, state,
local or foreign taxation. This discussion is based upon present provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be retroactive.
The Portfolio Trust is organized as a New York trust. The Portfolio is
not subject to any income or franchise tax in the State of New York or the
Commonwealth of Massachusetts. However each investor in the Portfolio will be
taxable on its share (as determined in accordance with the governing instruments
of the Portfolio Trust) of the Portfolio's ordinary income and capital gain in
determining its income tax liability. The determination of such share will be
made in accordance with the Code, and regulations promulgated thereunder.
Each year, in order for an investor that is a registered investment
company ("Portfolio") to qualify as a "regulated investment company" ("RIC")
under the Code, at least 90% of the Portfolio's investment company taxable
income (which includes, among other items, interest, dividends and the excess of
net short-term capital gains over net long-term capital losses) must be
distributed to Portfolio shareholders and the Portfolio must meet certain
diversification of assets, source of income, and other requirements. If the
Portfolio does not so qualify, it will be taxed as an ordinary corporation.
The Portfolio Trust has obtained a ruling from the Internal Revenue
Service that the Portfolio will be treated for federal income tax purposes as a
partnership. For purposes of determining whether the Portfolio satisfies the
income and diversification requirements to maintain its status as a RIC, the
Portfolio, as an investor in the Portfolio, will be deemed to own a
proportionate share of the Portfolio's income attributable to that share. The
Portfolio Trust has advised the Portfolios that it intends to manage Portfolio
operations and investments so as to enable the Portfolio to qualify each year as
a RIC.
The Portfolio, since it is taxed as a partnership, is not subject to
federal income taxation. Instead, an investor must take into account, in
computing its federal income tax liability, its share of the Portfolio's income,
gains, losses, deductions, credits and tax preference items, without regard to
whether it has received any cash distributions from the Portfolio.
Withdrawals by investors from the Portfolio generally will not result
in their recognizing any gain or loss for federal income tax purposes, except
that (1) gain will be recognized to the extent that any cash distributed exceeds
the basis of the investor's interest in the Portfolio prior to the distribution,
(2) income or gain will be realized if the withdrawal is in liquidation of the
investor's entire interest in the Portfolio and includes a disproportionate
share of any unrealized receivables held by the Portfolio, and (3) loss will be
recognized if the distribution is in liquidation of that entire interest and
consists solely of cash and/or unrealized receivables. The basis of an
investor's interest in the Portfolio generally equals the amount of cash and the
basis of any property that the investor invests in the Portfolio, increased by
the investor's share of income from the Portfolio and decreased by the amount of
any cash distributions and the basis of any property distributed from the
Portfolio.
There are certain tax issues that will be relevant to only certain of
the investors, specifically investors that are segregated asset accounts and
investors who contribute assets rather than cash to the Portfolio. It is
intended that such segregated asset accounts will be able to satisfy
diversification requirements applicable to them and that such contributions of
assets will not be taxable provided certain requirements are met. Such investors
are advised to consult their own tax advisors as to the tax consequences of an
investment in the Portfolio.
If the Portfolio is the holder of record of any stock on the record
date for any dividends payable with respect to such stock, such dividends are
included in the Portfolio's gross income not as of the date received but as of
the later of (a) the date such stock became ex-dividend with respect to such
dividends (i.e., the date on which a buyer of the stock would not be entitled to
receive the declared, but unpaid, dividends) or (b) the date the Portfolio
acquired such stock. Accordingly, in order to satisfy its income distribution
requirements, an investor may be required to pay dividends based on anticipated
earnings.
Some of the debt securities that may be acquired by the Portfolio may
be treated as debt securities that are originally issued at a discount. Original
issue discount can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash income is actually received by the Portfolio, original issue
discount on a taxable debt security earned in a given year generally is treated
for federal income tax purposes as interest and, therefore, such income would be
subject to the distribution requirements of the Code.
Some of the debt securities may be purchased by the Portfolio at a
discount which exceeds the original issue discount on such debt securities, if
any. This additional discount represents market discount for federal income tax
purposes. Generally, the gain realized on the disposition of any debt security
acquired by the Portfolio will be treated as ordinary income to the extent it
does not exceed the accrued market discount on such debt security.
Under certain circumstances, investors may be taxed on income deemed to
be earned from certain CMO residuals.
Earnings derived by the Portfolio from sources outside the U.S. may be
subject to non-U.S. withholding and possibly other taxes. Such taxes may be
reduced or eliminated under the terms of a U.S. income tax treaty and the
Portfolio would undertake any procedural steps required to claim the benefits of
such a treaty. With respect to any non-U.S. taxes actually paid by the
Portfolio, if more than 50% in value of the Portfolio's total assets at the
close of any taxable year consists of securities of foreign corporations, the
Portfolio will elect to treat its share of any non-U.S. income and similar taxes
the Portfolio pays as though the taxes were paid by the Portfolio's
shareholders.
Options, Futures, Forward Contracts and Swap Contracts
Any regulated futures contracts and certain options (namely, nonequity
options and dealer equity options) in which the Portfolio may invest may be
"section 1256 contracts." Gains (or losses) on these contracts generally are
considered to be 60% long-term and 40% short-term capital gains or losses. Also,
section 1256 contracts held by the Portfolio at the end of each taxable year
(and on certain other dates prescribed in the Code) are "marked to market" with
the result that unrealized gains or losses are treated as though they were
realized.
Transactions in options, futures and forward contracts undertaken by
the Portfolio may result in "straddles" for federal income tax purposes. The
straddle rules may affect the character of gains (or losses) realized by the
Portfolio, and losses realized by the Portfolio on positions that are part of a
straddle may be deferred under the straddle rules, rather than being taken into
account in calculating the taxable income for the taxable year in which the
losses are realized. In addition, certain carrying charges (including interest
expense) associated with positions in a straddle may be required to be
capitalized rather than deducted currently. Certain elections that the Portfolio
may make with respect to its straddle positions may also affect the amount,
character and timing of the recognition of gains or losses from the affected
positions.
Because only a few regulations implementing the straddle rules have
been promulgated, the consequences of such transactions to the Portfolio are not
entirely clear. The straddle rules may increase the amount of short-term capital
gain realized by the Portfolio, which is taxed as ordinary income when
distributed to shareholders. Because application of the straddle rules may
affect the character of gains or losses, defer losses and/or accelerate the
recognition of gains or losses from the affected straddle positions, the amount
which must be distributed to shareholders as ordinary income or long-term
capital gain may be increased or decreased substantially as compared to a fund
that did not engage in such transactions.
Constructive Sales
Under certain circumstances, the Portfolio may recognize gain from a
constructive sale of an "appreciated financial position" it holds if it enters
into a short sale, forward contract or other transaction that substantially
reduces the risk of loss with respect to the appreciated position. In that
event, the Portfolio would be treated as if it had sold and immediately
repurchased the property and would be taxed on any gain (but not loss) from the
constructive sale. The character of gain from a constructive sale would depend
upon the Portfolio's holding period in the property. Loss from a constructive
sale would be recognized when the property was subsequently disposed of, and its
character would depend on the Portfolio's holding period and the application of
various loss deferral provisions of the Code. Constructive sale treatment does
not apply to transactions closed in the 90-day period ending with the 30th day
after the close of the taxable year, if certain conditions are met.
Section 988 Gains or Losses
Gains or losses attributable to fluctuations in exchange rates which
occur between the time the Portfolio accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time the Portfolio actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of some investments, including debt securities and certain forward
contracts denominated in a foreign currency, gains or losses attributable to
fluctuations in the value of the foreign currency between the acquisition and
disposition of the position also are treated as ordinary gain or loss. These
gains and losses, referred to under the Code as "section 988" gains or losses,
increase or decrease the amount of the Portfolio's investment company taxable
income available to be distributed to its shareholders as ordinary income. If
section 988 losses exceed other investment company taxable income during a
taxable year, the Portfolio would not be able to make any ordinary dividend
distributions, or distributions made before the losses were realized would be
recharacterized as a return of capital to shareholders, rather than as an
ordinary dividend, reducing each shareholder's basis in his or her Portfolio
shares.
Investment in Passive Foreign Investment Companies
The Portfolio may invest in shares of foreign corporations that may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC if at least one-half of
its assets constitute investment-type assets, or 75% or more of its gross income
is investment-type income. If the Portfolio receives a so-called "excess
distribution" with respect to PFIC stock, the Portfolio itself may be subject to
a tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Portfolio to shareholders. In general, under the
PFIC rules, an excess distribution is treated as having been realized ratably
over the period during which the Portfolio held the PFIC shares. The Portfolio
will itself be subject to tax on the portion, if any, of an excess distribution
that is so allocated to prior Portfolio taxable years and an interest factor
will be added to the tax, as if the tax had been payable in such prior taxable
years. Certain distributions from a PFIC as well as gain from the sale of PFIC
shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital gain.
The Portfolio may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in some
circumstances, the Portfolio would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions were received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, another election would involve
marking to market the Portfolio's PFIC shares at the end of each taxable year,
with the result that unrealized gains would be treated as though they were
realized and reported as ordinary income. Any mark-to-market losses and any loss
from an actual disposition of PFIC shares would be deductible as ordinary losses
to the extent of any net mark-to-market gains included in income in prior years.
OTHER INFORMATION
Independent Auditors
The Board of Trustees has appointed KPMG LLP as independent auditors of
the Portfolio Trust. The address of KPMG LLP is 2 Nationwide Plaza, Columbus,
Ohio 43215. No financial statements of the Portfolio need to be audited because
the Portfolio did not offer shares prior to January 18, 2001.
Counsel
Dechert, 1775 Eye Street, N.W., Washington, D.C. 20006, passes
upon certain legal matters in connection with the shares offered by the Trust,
and also acts as counsel to the Trust.
Registration Statement
This Statement of Additional Information and the Prospectus do not
contain all the information included in the Trust's registration statement filed
with the Securities and Exchange Commission under the 1933 Act with respect to
shares of the Portfolio, certain portions of which have been omitted pursuant to
the rules and regulations of the Securities and Exchange Commission. The
registration statement, including the exhibits filed therewith, may be examined
at the office of the Securities and Exchange Commission in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of
any contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
which was filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
FINANCIAL STATEMENTS
No current audited financial statements are available because the
Portfolio did not offer shares prior to January 18, 2001.
<PAGE>
PART C
ITEM 23. EXHIBITS
a. Declaration of Trust of the Registrant. 1
b. By-Laws of the Registrant. 1
d(1). Master Investment Management Contract between HSBC Investor Portfolios
and HSBC Bank USA ("HSBC").1
d(2). Investment Advisory Contract between HSBC Investor Portfolios and HSBC
Asset Management (Americas) Inc.*
d(3). Investment Advisory Contract Supplement between HSBC Investor
Portfolios and HSBC Asset Management (Americas) Inc.*
(g). Custodian Agreement between HSBC Investor Portfolios and Investors Bank
& Trust Company. 2
(h)(1). Administration Agreement between HSBC Investor Portfolios and BISYS
(Ireland). 4
(h)(2). Exclusive Placement Agent Agreement between HSBC Investor Portfolios
and BISYS Fund Services (Ireland) Limited ("BISYS (Ireland)"). 4
(p)(1). Code of Ethics for HSBC Bank USA. (to be filed by amendment)
(p)(5). Code of Ethics for BISYS. (to be filed by amendment)
(q). Power of Attorney for Walter Grimm.
----------------------
1. Incorporated herein by reference from amendment No. 1 to the
Registrant's registration statement (the "Registration Statement") on
Form N-1A (File No. 811-8928) as filed with the Securities and Exchange
Commission (the "SEC") on February 26, 1996.
2. Incorporated herein by reference from the Registration Statement as
filed with the SEC on December 21, 1994.
3. Incorporated herein by reference from amendment no. 2 to the
Registration Statement as filed with the SEC on July 1, 1996.
4. Incorporated herein by reference from amendment no. 3 to the
Registration Statement as filed with the SEC on February 28, 1997.
* Filed herewith
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 25. INDEMNIFICATION
Reference is hereby made to Article IV of the Registrant's Declaration
of Trust. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees or officers of the
Registrant by the Registrant pursuant to the Declaration of Trust of otherwise,
the Registrant is aware that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Investment Company Act of 1940, as amended (the "1940 Act") and, therefore, is
unenforceable.
A claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by trustees or officers
of the Registrant in connection with the successful defense of any act, suit or
proceeding) is asserted by such trustees or officers in connection with the
shares being registered, the Registrant will, unless in the opinion of its
Counsel, the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1940 Act and will be governed by the
final adjudication of such issues.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
HSBC Asset Management (Americas) Inc., a wholly owned subsidiary of
HSBC Bank USA ("HSBC"), acts as investment adviser to the Portfolio. HSBC acts
as investment adviser to HSBC Investor Funds and HSBC Advisor Funds Trust, and
is a subsidiary of HSBC USA, Inc. ("HSBC USA"), 452 Fifth Avenue, New York, New
York 10018, a registered bank holding company. HSBC's directors and principal
executive officers, and their business and other connections for at least the
past two years, are as follows (unless otherwise noted, the address of all
directors and officers is 452 Fifth Avenue, New York, New York 10018):
NAME -- BUSINESS AND OTHER CONNECTIONS
Directors - HSBC Bank USA
Mr. Sal H. Alfiero
Chairman of the Board
Mark IV Industries, Inc.
501 John James Audubon Parkway
Amherst, New York 14228
Mr. John R.H. Bond
Chairman
HSBC Holdings plc
10 Lower Thames Street - Floor 10 London EC3R 6AE U.K.
Mr. James H. Cleave
9108 Chickadee Way
Blaine, Washington 98230
Dr. Frances D. Fergusson
President
Vassar College
Office of the President
Box 43
Poughkeepsie, New York 12604-0043
Mr. Douglas J. Flint
Group Finance Director
HSBC Holdings plc
10 Lower Thames Street - Floor 10 London EC3R 6AE U.K.
Mr. Martin J.G. Glynn
President and Chief Executive Officer
HSBC Bank Canada
885 West Georgia Street - Suite 300
Vancouver, BC V6C 3E9
Canada
Mr. Stephen K. Green
Executive Director
Investment Banking and Markets HSBC Holdings plc Thames Exchange 10 Queen Street
Place London EC4R 1BL U.K.
Ambassador Ulric Haynes, Jr.
Executive Dean for International Relations
Office of Admissions
Bernon Hall
Hofstra University
Hempstead, New York 11550
Mr. Richard A. Jalkut
President & Chief Executive Officer
PathNet
1015 31st Street, N.W.
Washington, D.C. 20007
Mr. Bernard J. Kennedy
Chairman of the Board
Chief Executive Officer
National Fuel Gas Company
10 Lafayette Square - Floor 18
Buffalo, New York 14203
Mr. Peter Kimmelman
President
Peter Kimmelman Asset Management Co.
800 Third Avenue -- Suite 3103
New York, New York 10022
Mr. Charles G. Meyer, Jr. President
Cord Meyer Development Company
111-15 Queens Boulevard
Forest Hills, New York 11375
Mr. James L. Morice
30 E. 37th Street -- Apt. 4G
New York, New York 10016
Mr. Youssef A. Nasr
President & Chief Executive Officer
HSBC Bank USA 452 Fifth Avenue -- Floor 10
New York, New York 10018
Mr. Jonathan Newcomb
Chairman and Chief Executive Officer
Simon & Schuster, Inc.
1230 Avenue of the Americas -- Floor 17
New York, New York 10020
Mr. Henry J. Nowak
2312 Cypress Bend Road South -- Apt. C-106
Pompano Beach, FL 33069
Senior Officers - HSBC Bank USA:
Youssef A. Nasr
President and Chief Executive Officer
Leslie Bains
Senior Executive Vice President
Robert M. Butcher
Senior Executive Vice President
A.A. Flockhart
Senior Executive Vice President
Paul L. Lee
Senior Executive Vice President
Vincent J. Mancuso
Senior Executive Vice President
Robert H. Muth
Senior Executive Vice President
Vito S. Portera
Senior Executive Vice President
Elias Saal
Senior Executive Vice President
Iain A. Stewart
Senior Executive Vice President
Philip S. Toohey
Senior Executive Vice President
George T. Wendler
Senior Executive Vice President
ITEM 27. PRINCIPAL UNDERWRITER
Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The account books and other documents required to be maintained by the
Registrant pursuant to Section 31(a) of the 1940 Act and the Rules thereunder
will be maintained at the offices of HSBC Bank USA, 452 Fifth Avenue, New York,
New York 10018, BISYS Fund Services (Ireland) Limited, Floor 2, Block 2,
Harcourt Centre, Dublin 2, Ireland and Investors Bank & Trust Company, N.A., 89
South Street, Boston, Massachusetts 02111.
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
The Registrant undertakes to comply with Section 16(c) of the 1940 Act
as though such provisions of the 1940 Act were applicable to the Registrant
except that the request referred to in the third full paragraph thereof may only
be made by shareholders who hold in the aggregate at least 10% of the
outstanding shares of the Registrant, regardless of the net asset value or
values of shares held by such requesting shareholders.
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, as
amended, the Registrant has duly caused this amendment to its Registration
statement on Form N-1A to be signed on its behalf by the undersigned, thereto
duly authorized on the 13th day of December, 2000.
HSBC INVESTOR PORTFOLIOS
/s/ Walter B Grimm**
---------------------
Walter B. Grimm
President
/s/ Nadeem Yousaf
--------------------
Nadeem Yousaf *
Treasurer
/s/ Alan S. Parsow*
--------------------
Alan S. Parsow
Trustee of the Portfolio Trust
/s/ Larry M. Robbins*
---------------------
Larry M. Robbins
Trustee of the Portfolio Trust
/s/ Michael Seely*
------------------
Michael Seely
Trustee of the Portfolio Trust
/s/ Frederick C. Chen*
----------------------
Frederick C. Chen
Trustee of the Portfolio Trust *
* /s/ David J. Harris
-----------------------
David J. Harris, as attorney-in-fact pursuant to powers of attorney filed as
Exhibit 19 to post-effective amendment No. 40.
** /s/ Jill Mizer
- ----------------------
Jill Mizer, as attorney-in-fact pursuant to powers of attorney.