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M FUND
PROSPECTUS
JANUARY 1, 1996
M Fund, Inc. (the "Company") is an investment company consisting of four
separate diversified investment portfolios or funds (the "Funds"). These Funds
are available through the purchase of variable life insurance and variable
annuity policies issued by certain insurance companies ("Participating
Insurance Companies"). The Funds are intended to be offered in addition to
other portfolios offered by the Participating Insurance Companies. Shares of
the Funds may also be sold to qualified pension and retirement plans.
Each of the Funds seeks long-term capital appreciation or total return, and
each Fund will invest primarily in stocks and other equity securities.
However, the Funds will use different investment techniques or strategies, and
each Fund's Portfolio Manager has a different investment style.
EDINBURGH OVERSEAS EQUITY FUND invests outside of the United States, and
when appropriate will focus on small- to medium-capitalization companies and
emerging markets.
TURNER CORE GROWTH FUND emphasizes common stocks of U.S. companies that show
strong earnings potential and also have reasonable valuations.
FRONTIER CAPITAL APPRECIATION FUND invests in common stock of U.S. companies
of all sizes, with emphasis on stocks of small- to medium-capitalization
companies.
ENHANCED U.S. EQUITY FUND invests primarily in common stock of U.S.
companies perceived to provide an opportunity for higher rates of return than
the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500" or the
"Index") while maintaining risk characteristics which approximate those of the
Index.
This Prospectus briefly describes the information that investors should know
before investing in these Funds, including the risks associated with investing
in each. Investors should read and retain this Prospectus for future
reference. A Statement of Additional Information dated January 1, 1996 (the
"SAI"), has been filed with the Securities and Exchange Commission (the "SEC")
and is incorporated herein by reference. The SAI is available without charge,
upon request by writing to the Company at River Park Center, 205 S.E. Spokane
Street, Portland, Oregon 97202, Attn: M Fund Administrator, or by calling
(503) 232-6960.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE
INSURANCE POLICIES.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
INTRODUCTION................................................................ 3
INVESTMENT OBJECTIVES AND POLICIES.......................................... 3
Edinburgh Overseas Equity Fund............................................ 4
Turner Core Growth Fund................................................... 4
Frontier Capital Appreciation Fund........................................ 5
Enhanced U.S. Equity Fund................................................. 5
INVESTMENT RESTRICTIONS..................................................... 6
PORTFOLIO TURNOVER.......................................................... 6
MANAGEMENT.................................................................. 7
Directors and Officers.................................................... 7
Investment Adviser........................................................ 7
Portfolio Managers........................................................ 8
INVESTMENT METHODS AND RISKS................................................ 10
Foreign Investments....................................................... 10
Investing in Small-Capitalization Companies............................... 11
Start-Up Period........................................................... 12
Securities Lending........................................................ 12
Other Investments......................................................... 12
PERFORMANCE INFORMATION..................................................... 13
DETERMINATION OF NET ASSET VALUE............................................ 13
OFFERING, PURCHASE AND REDEMPTION OF SHARES................................. 14
INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................ 14
TAXES....................................................................... 15
OTHER INFORMATION........................................................... 16
Reports................................................................... 16
Voting and Other Rights................................................... 16
Administrative and Other Services......................................... 16
</TABLE>
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INTRODUCTION
The M Fund investment portfolios are available to the public through the
purchase of variable life insurance and variable annuity policies offered by
members of M Financial Group and issued by certain life insurance companies
affiliated with M Financial Group. M Financial Group is an independent life
insurance producer group, specializing in the distribution of life insurance
to persons of substantial financial means. The M Fund investment portfolios
can be selected by policyholders in addition to other portfolios offered by
the participating insurance companies. The M Fund portfolio managers have been
selected, and are reviewed and monitored, by M Financial Investment Advisers,
Inc., whose Board of Directors consists of members from M Financial Group.
M Fund, Inc. (the "Company") is an open-end management investment company,
commonly known as a mutual fund. The Company consists of four separate
investment portfolios or funds (the "Funds" or a "Fund"), each of which is, in
effect, a separate mutual fund. (Additional Funds may be created from time to
time.) By investing in a Fund, an investor becomes entitled to a pro rata
share of all dividends and distributions arising from the net income and
capital gains on the investments of that Fund. Likewise, an investor shares
pro rata in any losses of that Fund.
Pursuant to an investment advisory agreement and subject to the authority of
the Company's board of directors (the "Board of Directors"), M Financial
Investment Advisers, Inc. (the "Adviser") serves as the Company's investment
adviser and conducts the business and affairs of the Company. The Adviser has
engaged the following Portfolio Managers to act as sub-advisers to provide the
day-to-day portfolio management for the respective Funds.
<TABLE>
<CAPTION>
FUND PORTFOLIO MANAGER
---- -----------------
<S> <C>
Edinburgh Overseas Equity Fund Edinburgh Fund Managers plc
Turner Core Growth Fund Turner Investment Partners, Inc.
Frontier Capital Appreciation
Fund Frontier Capital Management Company, Inc.
Enhanced U.S. Equity Fund Franklin Portfolio Associates Trust
</TABLE>
The Company currently offers its shares to separate accounts of
Participating Insurance Companies as funding vehicles for certain variable
life insurance or variable annuity policies (the "Policies"). The Company may
also offer its shares to qualified pension and retirement plans. The Company
does not offer its shares directly to the general public. A separate
prospectus, which accompanies this Prospectus, describes the applicable
Policies and the separate account through which they are funded.
The Fund's shares are sold with no sales load, no redemption fees, and no
"12b-1" or other distribution fees. However, various fees and charges
(possibly including sales loads) are imposed with respect to each Policy, as
described in the prospectus for the applicable Policy.
INVESTMENT OBJECTIVES AND POLICIES
Each Fund has an investment objective and related investment policies and
uses various investment techniques to pursue its objective and policies. THERE
CAN BE NO ASSURANCE THAT ANY FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE.
Investors should not consider any one Fund alone to be a complete investment
program. Each of the Funds is subject to the risk of changing economic
conditions, as well as the risk inherent in the ability of the Portfolio
Manager to make changes in the portfolio composition of the Fund in
anticipation of changes in economic, business, and financial conditions. As
with any security, a risk of loss is inherent in an investment in the shares
of any of the Funds.
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The different types of securities, investments, and investment techniques
used by each Fund all have attendant risks of varying degrees. For example,
with respect to equity securities, there can be no assurance of capital
appreciation and there is a substantial risk of decline. With respect to debt
securities, there exists the risk that the issuer of the security may not be
able to meet its obligations on interest or principal payments at the time
required by the instrument. In addition, the value of debt instruments
generally rises and falls inversely with prevailing current interest rates. As
described below, an investment in certain of the Funds entails additional
risks as a result of the Funds' ability to invest a substantial portion of
their assets in either foreign investments or small-capitalization issuers or
both. See "Investment Methods and Risks."
Certain types of investments and investment techniques common to one or more
Funds are described in greater detail, including the risks of each, under
"Investment Methods and Risks" below and in the SAI. The Funds are also
subject to certain investment restrictions that are described under the
caption "Investment Restrictions" in either this Prospectus or the SAI.
The investment objective of each Fund, as well as investment policies that
are not fundamental, may be changed by the Board of Directors without
shareholder approval. See "Investment Restrictions."
EDINBURGH OVERSEAS EQUITY FUND
The Edinburgh Overseas Equity Fund's investment objective is long-term
capital appreciation with reasonable investment risk through active management
and investment in common stock and common stock equivalents of foreign
issuers. Current income, if any, is incidental.
The Fund seeks to achieve this objective by focusing on areas of the market
that the Portfolio Manager believes are inefficiently priced. These include
smaller, often emerging markets, and smaller companies.
The investment process utilized by the Portfolio Manager, Edinburgh Fund
Managers plc, combines decisions on country weightings, sector allocations,
and stock selection strategies. Sector weightings are based on research into
demand and supply factors and external independent studies. The stock
selection process is fundamentally driven and focuses on four factors: quality
of management, financial health, long-term industry prospects and valuation
relative to the stock's market price. Research is generally on less-followed
small- to medium-sized companies and, when economic conditions are deemed
appropriate, the Fund may hold up to 30% of its assets in small-cap stocks
(i.e., stocks of companies capitalized at less than $500 million).
When its assets are at a sufficient level, the Edinburgh Overseas Equity
Fund will have on average 60 to 80 different stocks. Under normal market
conditions, it will have at least 90% of the value of its total assets
invested in at least four different countries outside the United States, but
it may "concentrate" its investments by investing a substantial portion of its
assets (e.g., more than 25%) in only one or a few countries or regions.
Securities issued by U.S. based companies will ordinarily not be purchased by
the Fund. The Fund expects generally to be fully invested with less than 10%
cash or cash equivalents.
TURNER CORE GROWTH FUND
The Turner Core Growth Fund's investment objective is long-term capital
appreciation through a diversified portfolio of common stocks that show strong
earnings potential with reasonable market prices. The Portfolio Manager's
style is core "growth at a reasonable price" and is based on the philosophy
that earnings expectations are the primary determinant of stock prices.
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The Portfolio Manager, Turner Investment Partners, Inc., uses a bottom-up
discipline (i.e., an individual stock selection process, rather than a top-
down industry sector selection process) utilizing sophisticated analytical
tools to screen over 3,500 securities for both attractive growth and value
characteristics. Growth factors include increasing earnings estimates and
results, while value measures include price/earnings ratio to growth rate,
ratio of market price to book value, and dividend yield. The first step is a
computer ranking based upon a proprietary model: stocks ranked in the 35th
percentile or above qualify for purchase, while those ranked in the 55th
percentile or below generally will be sold sometime thereafter.
Stocks eligible for purchase are then subjected to rigorous fundamental and
technical analyses. The fundamental analysis focuses on a company's earnings
prospects relative to analysts' consensus expectations, while the technical
analysis evaluates support for a stock based on price and volume patterns.
The Fund purchases stocks with favorable rankings, earnings prospects, and
positive technical indicators. Conversely, stocks are sold when earnings
prospects are deteriorating, as indicated by a ranking below the 55th
percentile (i.e., below 55% of the stocks screened), deteriorating earnings
forecasts, or a worsening of technical indicators.
Generally, the Turner Core Growth Fund will be fully invested (no more than
3% cash or cash equivalents), with an individual security constituting no more
than 2% of the net asset value of the Fund, and when its assets have reached a
sufficient level will generally contain 130 to 140 holdings.
FRONTIER CAPITAL APPRECIATION FUND
The Frontier Capital Appreciation Fund's investment objective is maximum
capital appreciation through investment in common stock of companies of all
sizes, with emphasis on stocks of small- to medium-capitalization companies
(i.e., companies with market capitalization of less than $3 billion).
Importance is placed on an evaluation of earnings per share growth and
expectations of stock price appreciation, rather than income.
The Portfolio Manager, Frontier Capital Management Company, Inc., seeks to
identify companies with unrecognized earnings potential. The investment
process emphasizes earnings growth potential and valuation of those companies
which tend to be less well followed by Wall Street analysts and have a
relatively low level of ownership by other institutional investors. The
process combines traditional fundamental research with a valuation model that
screens dividend valuation, equity valuation, earnings growth, earnings
momentum, and earnings that have the potential to exceed market expectation.
The portfolio is not restricted to any one segment of the market; however,
generally a majority of the portfolio will consist of stocks of small- to
medium-capitalization companies. The portfolio will typically consist of 80 to
120 stocks (when its asset size is sufficient) and generally will be fully
invested (no more than 7% cash or cash equivalents).
Stocks are sold if earnings growth potential is realized, when the
fundamental reasons for purchase are no longer valid, or when a more
attractive situation is identified.
ENHANCED U.S. EQUITY FUND
The Enhanced U.S. Equity Fund's investment objective is above-market total
return through investment in common stock of companies perceived to provide a
return higher than that of the S&P 500 at approximately the same level of
investment risk as the S&P 500.
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The Portfolio Manager, Franklin Portfolio Associates Trust, uses a
quantitative process that seeks to identify those stocks with the highest
expected returns. The Portfolio Manager, using proprietary software, will
attempt to construct a portfolio having similar risk characteristics as those
of the S&P 500. The S&P 500 represents a sampling of the largest U.S. and some
foreign stocks publicly traded in the United States.
Valuation models used to rank the universe of stocks focus on fundamental
momentum, relative value, future cash flow, and supplementary factors (e.g.,
trading by officers or directors and short-term price momentum). Stocks which
fall below the median ranking in this process are sold. A proprietary
optimizer is used to construct the portfolio. The optimizer is a risk
management system comprised of proprietary software created by Franklin
Portfolio Associates. It categorizes both the portfolio and the S&P 500 into
55 industry groups and 13 general risk categories. Stocks are then selected
from the top deciles in Franklin's ranking process so that the portfolio
reflects similar characteristics to those of the industry groups and risk
characteristics of the S&P 500. Thus, industry and sector allocations are
actively neutralized, permitting Franklin's investment process to remain
focused on individual stock selection.
Typically cash is expected to be less than 2% of the Fund's total market
value, and when it reaches a sufficient asset size the Fund will contain
approximately 180 stocks. Under normal market conditions, it will have at
least 65% of the value of its total assets invested in equity securities in
U.S. based companies.
INVESTMENT RESTRICTIONS
Each of the Funds is subject to certain investment restrictions which have
been adopted by the Company for each Fund as fundamental policies that cannot
be changed without the approval of a majority of the outstanding votes
attributable to shares of that Fund. Among other restrictions, a Fund may not,
with respect to 75% of the value of its total assets, purchase the securities
of any one issuer (except U.S. Government securities) if more than 5% of the
value of the Fund's assets would be invested in such issuer or if more than
10% of the outstanding voting securities of that issuer would be owned by the
Fund. Similarly, it is a fundamental investment restriction that none of the
Funds may invest more than 25% of its total assets in securities of issuers in
any one industry, except that this limitation does not apply to U.S.
Government securities. For a more complete description of the investment
restrictions to which each Fund is subject, see the SAI.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated for each Fund by dividing the
lesser of the dollar amount of sales or purchases of portfolio securities by
the average monthly value of that Fund's portfolio securities, excluding
securities having a maturity at the date of purchase of one year or less. The
Company anticipates the following annual portfolio turnover rates for the
Funds:
<TABLE>
<CAPTION>
ANTICIPATED
PORTFOLIO
TURNOVER
FUND RATE
---- -----------
<S> <C>
Edinburgh Overseas Equity Fund................................. 70%
Turner Core Growth Fund........................................ 125%
Frontier Capital Appreciation Fund............................. 60-80%
Enhanced U.S. Equity Fund...................................... 70%
</TABLE>
High rates of portfolio turnover involve correspondingly greater expenses
which must be borne by a Fund and may under certain circumstances make it more
difficult for a Fund to qualify as a regulated investment company under the
Internal Revenue Code.
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MANAGEMENT
DIRECTORS AND OFFICERS
The Board of Directors is responsible for deciding matters of general policy
and reviewing the actions of the Adviser and the Portfolio Managers, the
custodian, accounting and administrative services provider and other providers
of services to the Company. The officers of the Company supervise the
Company's daily business operations. The SAI contains information as to the
identity of, and other information about, the directors and officers of the
Company.
INVESTMENT ADVISER
M Financial Investment Advisers, Inc. (the "Adviser") is the investment
adviser of the Company and its Funds. The Adviser is an affiliate of M Life
Insurance Company ("M Life"), a Colorado stock insurance company.
M Life is an agent-owned reinsurance company in that its capital stock is
owned primarily by independent insurance agents who are engaged primarily in
selling insurance policies, including variable insurance policies which will
be invested in the Funds. M Life, for a fee paid by the insurance carriers,
reinsures a portion of the mortality risk on insurance policies sold by its
shareholder-agents.
The Adviser and M Life are controlled by Management Partnership, a general
partnership which does business under the name M Financial Group. M Financial
Group is engaged in providing product development and marketing support
services for participating insurance agents, most of which are shareholders of
M Life. M Financial Group receives from insurance carriers compensation based,
in part, upon the volume of insurance premiums generated by its participating
agents. A majority interest in M Financial Group is owned by M Corporation, of
which 50% is owned by each of Ellison C. Morgan and Mark I. Solomon. Messrs.
Carl G. Mammel, Peter W. Mullin, and Thomas N. Spitzer, either directly or
through corporations controlled by them, are also partners in M Financial
Group. Mr. Mullin is a director of the Company.
The Adviser, located at River Park Center, 205 S.E. Spokane Street,
Portland, Oregon 97202, is newly organized and therefore has no previous
experience in providing investment advisory services.
The Adviser has entered into an investment advisory agreement, dated
December 5, 1995, with the Company under which the Adviser assumes overall
responsibility, subject to the ongoing supervision of the Company's Board of
Directors, for administering all operations of the Company and for monitoring
and evaluating the management of the assets of each of the Funds by the
Portfolio Manager. The Adviser provides or arranges for the provision of the
overall business management and administrative services necessary for the
Company's operations and furnishes or procures any other services and
information necessary for the proper conduct of the Company's business. The
Adviser also acts as liaison among, and supervisor of, the various service
providers to the Company, including the custodian, transfer agent,
administration agent, and accounting services agent. The Adviser is also
responsible for overseeing the Company's compliance with the requirements of
applicable law and with each Fund's investment objective, policies, and
restrictions.
For its services to the Company, the Adviser receives an advisory fee that
is based on the average daily net assets of each of the Funds, deducted daily
from the assets of each of the Funds, and paid to the Adviser monthly.
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The following annual rates represent total advisory fees for each Fund:
<TABLE>
<CAPTION>
FUND TOTAL ADVISORY FEES
---- -------------------
<S> <C>
Edinburgh Overseas Equity Fund........... 1.05% on the first $10 million
0.90% on the next $15 million
0.75% on the next $75 million
0.60% on amounts above $100 million
Turner Core Growth Fund.................. 0.45%
Frontier Capital Appreciation Fund....... 0.90%
Enhanced U.S. Equity Fund................ 0.55% on the first $25 million
0.45% on the next $75 million
0.30% on amounts above $100 million
</TABLE>
The investment advisory agreement does not place limits on the operating
expenses of the Company or of any Fund. However, the Adviser has voluntarily
undertaken to pay any such expenses (but not including brokerage or other
portfolio transaction expenses or expenses of litigation, indemnification,
taxes or other extraordinary expenses) to the extent that such expenses, as
accrued for each Fund, through December 31, 1996, exceed 0.25% of that Fund's
estimated average daily net assets on an annualized basis.
PORTFOLIO MANAGERS
EDINBURGH FUND MANAGERS PLC ("Edinburgh") is the Portfolio Manager of the
Edinburgh Overseas Equity Fund. Edinburgh's principal business address is
Donaldson House, 97 Haymarket Terrace, Edinburgh EH12 5HD, Scotland, and
Edinburgh maintains a non-investment branch at 600 Peachtree Street, N.E.,
Suite 3820, Atlanta, Georgia 30308. Edinburgh was formed in 1969 and
registered as an investment adviser with the Securities and Exchange
Commission in 1984. As of September 30, 1995, Edinburgh managed approximately
$5.213 billion of assets.
Edinburgh manages the Fund on a team basis. The Chief Investment Director of
Edinburgh is Michael Balfour, CA (Chartered Accountant). Mr. Balfour holds a
B.Comm. degree from Edinburgh University. He joined Edinburgh in 1985 and
became Manager of the Pacific Rim Department the following year. He was
involved in the launching of Edinburgh Pacific Fund and the Edinburgh Dragon
Trust in 1987. In 1992, he was appointed a director of Edinburgh responsible
for overseas investment, and in 1995 he became Chief Investment Director
responsible for all investment departments and Chair of the asset allocation
committee. In addition, Mr. Balfour is a director of Edinburgh Java Trust plc
(Indonesia) and Edinburgh Inca Trust plc (Latin America), closed-end
investment trusts managed by Edinburgh. He is also a director of Creditcapital
Asset Management, an investment management company in Bombay, India.
TURNER INVESTMENT PARTNERS, INC. ("Turner") is the Portfolio Manager of the
Turner Core Growth Fund. Turner's principal business address is 1235 Westlakes
Drive, Suite 350, Berwyn, Pennsylvania 19312. Turner is a professional
investment management firm founded in 1990. Robert E. Turner is the
controlling shareholder of Turner. Turner has provided investment advisory
services to investment companies since 1992. At September 30, 1995, Turner
managed approximately $2.628 billion of assets.
Mr. Turner, CFA (Chartered Financial Analyst), Chairman and Chief Investment
Officer of Turner, is the person primarily responsible for the day-to-day
management of the Fund's investment portfolio. Mr. Turner holds a B.S. degree
in accounting and an M.B.A. degree in finance from Bradley University and has
over 15 years of investment experience. He is a member of the Association for
Investment Management and Research
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and is active with the following organizations: Board of Directors--Financial
Analysts of Philadelphia; Program Chairman--Financial Analysts of Philadelphia
(Suburban); Advisory Board--Investment Counseling Inc.; and Technology Council
of Greater Philadelphia. Prior to forming Turner, Mr. Turner was employed as
Senior Investment Manager with Meridian Investment Company (1985 to 1990),
Portfolio Manager/Analyst with Integon Corporation (1983 to 1985), and Analyst
with McMillion/Eubanks (1981 to 1983), and he served as a consultant with
Andersen Consulting (1979 to 1981).
FRONTIER CAPITAL MANAGEMENT COMPANY, INC. ("Frontier") is the Portfolio
Manager of the Frontier Capital Appreciation Fund. Frontier's principal
business address is 99 Summer Street, Boston, Massachusetts 02110. Frontier's
investment process combines its fundamental in-depth research effort with a
proprietary computer model to identify areas of investment opportunity.
Frontier was founded in 1980. As of September 30, 1995 Frontier managed a
total of $2.242 billion.
Michael A. Cavaretta, CFA, is the person primarily responsible for the day-
to-day management of the Fund's investment portfolio. Mr. Cavaretta holds a
B.S. degree from the University of Maine and an M.B.A. degree from Harvard
Business School. He joined Frontier in 1988 and has served as sole portfolio
manager for Frontier's capital appreciation portfolios for four of the past
seven years. Prior to attending Harvard Business School, Mr. Cavaretta was
employed as a Financial Analyst with General Electric Company (1981-1986).
FRANKLIN PORTFOLIO ASSOCIATES TRUST ("Franklin") is the Portfolio Manager of
the Enhanced U.S. Equity Fund. Franklin's principal business address is One
Post Office Square, Suite 3660, Boston, Massachusetts 02109. Franklin is a
professional investment counseling firm which specializes in the management of
common stock portfolios through the use of quantitative investment models.
Founded in 1982, Franklin, a Massachusetts business trust, is a wholly-owned
subsidiary of MBC Investments Corporation, which in turn is a wholly-owned
subsidiary of Mellon Bank Corporation. As of September 30, 1995, Franklin
provided investment advisory services with respect to approximately $8.3
billion of client assets. Franklin employs proprietary computer models in
selecting individual equity securities and in structuring investment
portfolios for its clients, including the Fund.
John J. Nagorniak, CFA, President of Franklin, is the person primarily
responsible for the day-to-day management of the Fund's investment portfolio;
he will oversee the application of Franklin's quantitative techniques to the
Fund's assets. Mr. Nagorniak and the other investment principals of Franklin
are responsible for the ongoing development and enhancement of Franklin's
quantitative investment techniques. Mr. Nagorniak is a graduate of Princeton
University and has received a M.S. degree from the Sloan School at the
Massachusetts Institute of Technology. Prior to joining Franklin, he was
associated with State Street Bank and Trust Company as Chief Investment
Officer (1979 to 1981). Prior to that, he was Director of Investment
Management Technology for John Hancock Mutual Life Insurance Company (1970 to
1979). He is past President of the Investment Technology Association and has
been on the Council of that organization and the Council of the Quantitative
Discussion Group. Mr. Nagorniak is on the Board of Directors and is past
President of the Boston Security Analysts Society. He has 24 years of
investment experience.
Investment Sub-Advisory Agreements. Each Portfolio Manager has entered into
an investment sub-advisory agreement with the Adviser under which the
Portfolio Manager, subject to the general supervision of the Adviser and the
Company's Board of Directors, manages the investment portfolio of the Fund of
which it is the Portfolio Manager. Under the investment sub-advisory
agreements, the Portfolio Managers are responsible for making investment
decisions for the Funds and for placing the purchase and sale orders for the
portfolio transactions of each Fund. In this capacity, the Portfolio Managers
obtain and evaluate appropriate economic, statistical, timing, and financial
information and formulate and implement investment programs in furtherance of
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each Fund's investment objective. The Portfolio Managers may place orders for
portfolio transactions with any broker including, to the extent and in the
manner permitted by applicable law, affiliated brokers. As compensation for
their services, each Portfolio Manager receives a fee (paid by the Adviser)
based on the average daily net assets of the applicable Fund. See the SAI for
more detailed information about the investment sub-advisory fees and
agreements.
Change of Portfolio Managers. The Company and the Adviser plan to apply for
an exemptive order from the SEC that would permit the Adviser, with the
approval of the Company's Board of Directors, to retain a different Portfolio
Manager for a Fund without submitting the investment sub-advisory agreements
to a vote of the Fund's shareholders. The Company will notify shareholders in
the event of any change in the identity of the Portfolio Manager of a Fund.
Until or unless this exemptive order is granted, if a duly appointed Portfolio
Manager is terminated or otherwise ceases to advise a Fund, the Company will
propose that a new Portfolio Manager be engaged to manage the Fund's assets.
The Company would then be required to submit to the vote of the Fund's
shareholders the approval of an investment sub-advisory agreement with the new
Portfolio Manager.
INVESTMENT METHODS AND RISKS
FOREIGN INVESTMENTS
Investments in the securities of companies organized outside the United
States or of companies whose securities are principally traded outside the
United States ("foreign issuers"), or investments in securities denominated or
quoted in a currency other than the U.S. dollar ("non-dollar securities"), may
present potential benefits and risks not available from investments solely in
securities of domestic issuers or U.S. dollar-denominated securities. The
Edinburgh Overseas Equity Fund and the Enhanced U.S. Equity Fund may invest in
securities of foreign issuers. The Edinburgh Overseas Equity Fund also may
invest in non-dollar securities. (However, the Edinburgh Overseas Equity Fund
may not invest in Canadian government securities, and the Enhanced U.S. Equity
Fund may not invest in any foreign government securities.) Benefits of
investing in foreign issuers or non-dollar securities may include the
opportunity to invest in foreign issuers that appear, in the opinion of the
Portfolio Manager, to offer better opportunity for long-term capital
appreciation or current earnings than investments in domestic issuers, the
opportunity to invest in foreign countries with economic policies or business
cycles different from those of the United States, and the opportunity to
reduce fluctuations in portfolio value by taking advantage of foreign
securities markets that do not necessarily move in a manner parallel to U.S.
markets.
Investing in non-dollar securities or in the securities of foreign issuers
involves significant risks that are not typically associated with investing in
U.S. dollar-denominated securities or in securities of domestic issuers. Such
investments may be affected by changes in currency rates, changes in foreign
or U.S. laws or restrictions applicable to such investments and in exchange
control regulations (e.g., currency blockage). For example, a decline in the
exchange rate would reduce the value of certain portfolio investments. In
addition, if the exchange rate for the currency in which a Fund receives
dividend or interest payments declines against the U.S. dollar before such
interest is paid as a dividend to the Fund's shareholders, the Fund may have
to sell portfolio securities to obtain sufficient cash to pay the dividend.
The Edinburgh Overseas Equity Fund may engage in forward foreign currency
exchange contracts to hedge its foreign currency exposure; however, such
investments also entail certain risks (described in the State of Additional
Information). Some foreign stock markets may have substantially less volume
than, for example, the New York Stock Exchange, and securities of some foreign
issuers may be less liquid than securities of comparable domestic issuers.
Commissions and dealer mark-ups on transactions in foreign investments may be
higher than for similar transactions in the United States. In addition,
clearance and settlement procedures may be different in foreign countries and,
in certain markets, on certain
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occasions, such procedures have been unable to keep pace with the volume of
securities transactions, thus making it difficult to conduct such
transactions. For example, delays in settlement could result in temporary
periods when a portion of the assets of a Fund are uninvested and no return is
earned thereon. The inability of a Fund to make intended investments due to
settlement problems could cause it to miss attractive investment
opportunities. Inability to dispose of portfolio securities or other
investments due to settlement problems could result either in losses to a Fund
due to subsequent declines in value of the portfolio investment or, if the
Fund has entered into a contract to sell the investment, could result in
possible liability to the purchaser.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to domestic
companies. There may be less publicly available information about a foreign
issuer than about a domestic one. In addition, there is generally less
government regulation of stock exchanges, brokers, and listed and unlisted
issuers in foreign countries than in the United States. Furthermore, with
respect to certain foreign countries, there is a possibility of expropriation
or confiscatory taxation, imposition of withholding taxes on dividend or
interest payments, limitations on the removal of funds or other assets of a
Fund, or political or social instability or diplomatic developments which
could affect investments in those countries. Individual foreign economies also
may differ favorably or unfavorably from the United States economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Many securities of foreign issuers are represented by American Depository
Receipts ("ADRs"), which represent the right to receive securities of foreign
issuers deposited in a domestic bank or foreign correspondent bank. Prices of
ADRs are quoted in U.S. dollars. Additional information regarding ADRs and
other aspects of foreign securities is in the Statement of Additional
Information.
Emerging Market Securities. The Edinburgh Overseas Equity Fund may invest in
countries or regions with relatively low gross national product per capita
compared to the world's major economies, and in countries or regions with the
potential for rapid economic growth (emerging markets). The risks of investing
in foreign securities may be intensified in the case of investments in
emerging markets. Emerging markets may be less liquid and more volatile than
securities of comparable domestic issuers and have different clearance and
settlement procedures that may not keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of
the Fund is uninvested and no return is earned thereon. The inability to
dispose of portfolio securities due to settlement problems could result in
losses to the Fund.
Securities prices in emerging markets can be significantly more volatile
than in the more developed nations of the world, reflecting the greater
uncertainties of investing in less established markets and economies. In
particular, countries with emerging markets may have relatively unstable
governments, present greater risk of nationalization of businesses,
restrictions on foreign ownership, or prohibitions of repatriation of assets,
and may have less protection of property rights than more developed countries.
Also, issuers located in emerging markets may have limited marketability and
may be subject to more abrupt or erratic price movements. A more detailed
discussion of the risks associated with investing in emerging markets can be
found in the Statement of Additional Information.
INVESTING IN SMALL-CAPITALIZATION COMPANIES
All of the Funds may invest in small-capitalization companies (generally
considered to be companies with a capitalization of less than $500 million).
Investing in securities of smaller, lesser-known companies involves greater
risks than investing in larger, more mature, better known issuers, including
an increased possibility of portfolio price volatility. Historically, small-
capitalization stocks and stocks of recently organized companies, in
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which all of the Funds may also invest, have been more volatile in price than
the larger-capitalization stocks (such as those included in the S&P 500).
Among the reasons for the greater price volatility of the stocks of these
smaller companies are the less certain growth prospects of smaller firms, the
lower degree of liquidity in the markets for such stocks, and the greater
sensitivity of smaller companies to changing economic conditions. For example,
such companies may be subject to greater business risks resulting from their
limited product lines, markets, distribution channels, and financial and
managerial resources.
The stock prices of smaller companies may fluctuate independently of larger
company stock prices. Thus, small company stocks may decline in price as large
company stock prices rise, or rise in price as large company stock prices
decline. Investors should, therefore, expect that to the extent a Fund invests
in stock of small-capitalization companies, the net asset value of that Fund's
shares may be more volatile than, and may fluctuate independently of, broad
stock market indices such as the S&P 500. Furthermore, the securities of
companies with small stock market capitalizations may trade less frequently
and in limited volumes.
START-UP PERIOD
Since the Funds are new, during the start-up period their asset size may not
be sufficient to invest in the number of different stocks indicated above or
to take advantage of certain investment opportunities, and they may not be as
diversified as other mutual fund portfolios. There is no certainty as to how
rapidly a Fund's assets will increase.
SECURITIES LENDING
All Funds may seek to increase their income by lending portfolio securities.
Under present regulatory policies, such loans may be made to institutions,
such as certain broker-dealers, and are required to be secured continuously by
collateral in cash, cash equivalents, or U.S. Government securities maintained
on a current basis at an amount at least equal to the market value of the
securities loaned. A Fund may experience a loss or delay in the recovery of
its securities if the institution with which it has engaged in a portfolio
security loan transaction breaches its agreement with the Fund. If the
Portfolio Manager determines to make securities loans, the value of the
securities loaned will not exceed one-third of the value of the total assets
of the Fund making the loan.
OTHER INVESTMENTS
Some or all of the Funds may also utilize the following investment
techniques or make the following types of investments. However, it is
anticipated that no Fund will have more than 5% of its assets invested in any
one of the following:
. Foreign Government Obligations
. Sovereign Debt Obligations (Brady Bonds)
. American Depository Receipts, European Depository Receipts, International
Depository Receipts, and Global Depository Receipts
. Forward Foreign Currency Exchange Contracts
. Short-Term Bank and Corporate Obligations
. Zero Coupon Bonds
. Warrants and Rights
. Convertible Securities
. Repurchase Agreements
. Restricted and Illiquid Securities
. Borrowing
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The Statement of Additional Information contains descriptions of these
investments and investment techniques.
PERFORMANCE INFORMATION
From time to time, the Company may publish average annual total return
figures for one or more of the Funds in advertisements, communications to
shareholders, and sales literature. Average annual total return is determined
by computing the annual percentage change in value of $1,000 invested for
specified periods ending with the most recent calendar quarter, assuming
reinvestment of all dividends and distributions at net asset value. The
average annual total return calculation assumes a complete redemption of the
investment at the end of the relevant period.
The Company also may, from time to time, publish year-by-year total return,
cumulative total return and yield information for the Funds in advertisements,
communications to shareholders, and sales literature. These may be provided
for various specified periods by means of quotations, charts, graphs or
schedules. Year-by-year total return and cumulative total return for a
specified period are each derived by calculating the percentage rate required
to make a $1,000 investment in a Fund (assuming all distributions are
reinvested) at the beginning of such period equal to the actual total value of
such investment at the end of such period.
The Funds also may advertise their yields. Yield is computed by dividing net
investment income earned during a recent 30-day period by the product of the
average daily number of shares outstanding and entitled to receive dividends
during the period and the price per share on the last day of the relevant
period. The results are compounded on a bond-equivalent (semiannual) basis and
then annualized. Net investment income per share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from
the net investment income determined for accounting purposes. Performance data
for the Funds will not reflect charges deducted under the Policies. If Policy
charges were taken into account, such performance data would reflect lower
returns.
In addition, the Company may from time to time publish the performance of
its Funds relative to certain performance rankings and indices.
The investment results of the Funds will fluctuate over time and any
presentation of investment results for any prior period should not be
considered a representation of what an investment may earn or what a Fund's
performance may be in any future period. In addition to information provided
in shareholder reports, the Company may, in its discretion, from time to time
make lists of a Fund's holdings available to investors upon request.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is normally determined once daily
as of the close of regular trading on the New York Stock Exchange, currently
4:00 p.m. New York time (with exceptions), on each day when the New York Stock
Exchange is open. The New York Stock Exchange is scheduled to be open Monday
through Friday throughout the year, except for certain federal and other
holidays. The net asset value of each Fund is determined by dividing the value
of the Fund's securities, cash, and other assets (including accrued but
uncollected interest and dividends), less all liabilities (including accrued
expenses) by the number of shares of the Fund outstanding.
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The value of each Fund's securities and assets, except certain short-term
debt securities, is determined on the basis of their market values. Short-term
debt securities having remaining maturities of 60 days or less held by any of
the Funds are valued by the amortized cost method, which approximates market
value. Investments for which market quotations are not readily available are
valued at their fair value as determined in good faith by, or under authority
delegated by, the Board of Directors. See "Determination of Net Asset Value"
in the SAI.
OFFERING, PURCHASE AND REDEMPTION OF SHARES
Shares of the Funds are sold in a continuous offering to separate accounts
of the Participating Insurance Companies to support the insurance and annuity
Policies. Net purchase payments under the Policies are placed in one or more
subaccounts of the Participating Insurance Company's separate account, and the
assets of each such subaccount are invested in the shares of the Fund
corresponding to that subaccount. The separate accounts purchase and redeem
shares of the Funds for their subaccounts at net asset value without sales or
redemption charges.
For each day on which a Fund's net asset value is calculated, the separate
accounts transmit to the Transfer Agent any orders to purchase or redeem
shares of the Fund(s) based on the purchase payments, redemption (surrender)
requests, death benefits, Policy charges, and transfer requests from Policy
owners, annuitants and beneficiaries that have been processed on that day. The
separate accounts purchase and redeem shares of each Fund at the Fund's net
asset value per share calculated as of that same day although such purchases
and redemptions may be executed the next morning.
Please refer to the separate prospectus for the Policies (and the separate
account through which they are funded) for a more detailed description of the
procedures whereby a Policy owner, annuitant, or beneficiary may allocate his
or her interest in the separate account to a subaccount using the shares of
one of the Funds as an underlying investment medium.
The Company may also offer shares of one or more of the Funds (including new
Funds that might be added to the Company) to qualified pension and retirement
plans.
A potential for certain conflicts may exist between the interests of
variable annuity contract owners, variable life insurance policy owners and
plan participants. The Company currently does not foresee any disadvantage to
owners of the Policies arising from the fact that shares of any Fund might be
held by such entities. The Board of Directors, however, will monitor the Funds
in order to identify any material irreconcilable conflicts of interest which
may possibly arise, and to determine what action, if any, should be taken in
response to any such conflicts.
INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Company will pay dividends for each Fund from that Fund's net investment
income and will make distributions from net realized securities gains, if any,
once a year, but may make distributions on a more frequent basis to comply
with the distribution requirements of the Internal Revenue Code of 1986, as
amended (the "Code"), in all events in a manner consistent with the provisions
of the Investment Company Act of 1940 (the "1940 Act"). The Company will not
make distributions from net realized securities gains unless capital loss
carryovers, if any, have been utilized or have expired. Dividends are
automatically reinvested in additional Company shares at net asset value
unless payment in cash is selected. All expenses are accrued daily and
deducted before declaration of dividends to investors.
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Notice as to the tax status of dividends and distributions will be mailed to
shareholders annually. Dividends from net investment income, together with
distributions of net realized short-term securities gains and gains from
certain market discount bonds, generally are taxable as ordinary income
whether received in cash or reinvested in additional shares. Distributions
from net realized long-term securities gains generally are taxable as long-
term capital gains whether received in cash or reinvested in additional
shares. Since the Company's shareholders are the Participating Insurance
Companies and their separate accounts, no discussion is included herein as to
the federal income tax consequences to variable life insurance or annuity
policy holders. For information concerning the federal income tax consequences
to such holders, see the prospectus for such contract or policy.
TAXES
Tax Status. The Company believes that each Fund will qualify as a regulated
investment company under Subchapter M, Chapter 1, Subtitle A of the Code, and
each Fund intends to distribute substantially all of its net income and net
capital gain to its shareholders. As a result, under the provisions of
Subchapter M, there should be little or no income or gains taxable to the
Fund. In addition, each Fund intends to comply with certain other distribution
rules specified in the Code so that it will not incur a 4% nondeductible
federal excise tax that otherwise would apply. Under current law, the net
income of the Funds, including net capital gain, is not taxed to Participating
Insurance Companies to the extent that it is applied to increase the reserves
held by the Participating Insurance Company in respect of the Policies.
Foreign Investments. Funds investing in foreign securities or currencies may
be required to pay withholding or other taxes to foreign governments. Foreign
tax withholding from dividends and interest, if any, is generally at a rate
between 10% and 35%. The investment yield of the Funds that invest in foreign
securities or currencies will be reduced by these foreign taxes. Shareholders
will bear the cost of any foreign tax withholding, but may not be able to
claim a foreign tax credit or deduction for these foreign taxes. Funds
investing in securities of passive foreign investment companies may be subject
to U.S. federal income taxes and interest charges, and the investment yield of
the Funds making such investments will be reduced by these taxes and interest
charges. Shareholders will bear the cost of these taxes and interest charges,
but will not be able to claim a deduction for these amounts.
Additional Tax Considerations. If a Fund fails to qualify as a regulated
investment company, owners of Policies supported by the Fund (1) might be
taxed currently on the investment earnings under their Policies and thereby
lose the benefit of tax deferral, and (2) the Fund might incur additional
taxes. In addition, if a Fund fails to comply with the diversification
requirements of Section 817(h) of the Code, owners of Policies supported by
the Fund would be taxed on the investment earnings under their Policies and
thereby lose the benefit of tax deferral. Accordingly, compliance with the
above rules is carefully monitored by the Portfolio Managers and the Adviser,
and it is intended that the Funds will comply with these rules as they exist
or as they may be modified from time to time. In order to comply with the
diversification and other requirements of Subchapter M and Section 817(h), a
Fund may not be able to buy or sell certain securities at certain times, so
the investments utilized (and the time at which such investments are purchased
and sold) may be different from that the Portfolio Manager might otherwise
believe to be desirable.
For more information regarding the tax implications for the purchaser of a
Policy who allocates investments to the Funds, please refer to the prospectus
for the Policy.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations currently in effect. It is not
intended to be a complete explanation or a substitute for consultation with
individual tax advisers. For the complete provisions, reference should be made
to the pertinent Code sections and the Treasury Regulations promulgated
thereunder. The Code and Regulations are subject to change.
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OTHER INFORMATION
REPORTS
Annual Reports containing audited financial statements of the Company and
Semiannual Reports containing unaudited financial statements, as well as proxy
materials, are sent to Policy owners, annuitants or beneficiaries, as
appropriate. Inquiries may be directed to the Company at the telephone number
or address set forth on the cover page of this Prospectus.
VOTING AND OTHER RIGHTS
Each share outstanding is entitled to one vote on all matters submitted to a
vote of shareholders (of a Fund or the Company) and is entitled to a pro rata
share of any distributions made by the applicable Fund and, in the event of
liquidation, of its net assets remaining after satisfaction of outstanding
liabilities. Each share (of each Fund), when issued, is nonassessable and has
no preemptive or conversion rights. The shares have noncumulative voting
rights. The Participating Insurance Companies will vote shares of a Fund held
by their separate accounts which are attributable to Policies in accordance
with instructions received from Policy owners, annuitants and beneficiaries as
provided in the prospectus for the Policies. Fund shares held by the separate
accounts as to which no instructions have been received will be voted for or
against any proposition, or in abstention, in the same proportion as the
shares of that separate account as to which instructions have been received.
Fund shares held by a Participating Insurance Company that are not
attributable to Policies will also be voted for or against any proposition in
the same proportion as the shares for which voting instructions are received
by that company. However, if a Participating Insurance Company determines that
it is permitted to vote any such shares of a Fund in its own right, it may
elect to do so, subject to the then-current interpretation of the 1940 Act and
the rules thereunder.
As a Maryland corporation, the Company is not required to, and does not
intend to, hold regular annual shareholder meetings. The Company is, however,
required to hold shareholder meetings for the following purposes: (i)
approving investment advisory and sub-advisory agreements as required by the
1940 Act (unless, with respect to sub-advisory agreements, the Company and the
Adviser obtain the SEC exemptive order); (ii) changing any fundamental
investment policy or restriction of any Fund; and (iii) filling vacancies on
the Board of Directors in the event that less than a majority of the Company's
directors were elected by shareholders. Directors may also be removed by
shareholders by a vote of two-thirds of the outstanding votes attributable to
shares at a meeting called at the request of holders of 10% or more of such
votes. The Company has the obligation to assist in shareholder communications.
At the inception of the Company, M Life owns more than 25% of the
outstanding shares of each Fund, which ownership may result in it being deemed
a controlling person of each of the Funds, as that term is defined in the 1940
Act.
ADMINISTRATIVE AND OTHER SERVICES
Pursuant to a custody agreement with the Company, Investors Bank & Trust
Company ("Investors Bank") serves as the custodian of the Funds' assets.
Investors Bank also performs certain accounting services for the Company.
These services include maintaining and keeping current the Company's books,
accounts, records, journals and other records of original entry related to the
Company's business, performing certain daily functions related thereto,
including calculating
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each Fund's daily net asset value. Investors Bank is responsible for providing
certain administrative services to the Company, such as calculating each
Fund's standardized performance information, preparing annual and semiannual
reports to shareholders and the SEC, preparing each Fund's tax returns,
monitoring compliance and performing other administrative duties.
Pursuant to a Transfer Agency and Service Agreement with the Company,
Investors Bank also acts as a transfer, redemption and dividend disbursing
agent for the Company. Investors Bank's principal business address is 89 South
Street, Boston, Massachusetts 02111.
Investors Bank is not involved in the investment decisions made by the
Portfolio Managers.
The Company was incorporated in Maryland on August 11, 1995. It has no
employees and relies on the Adviser and other service providers for its day-
to-day operations.
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