SUPPLEMENT TO PROSPECTUS
OF M FUND, INC.
THIS SUPPLEMENT IS DATED AS OF JULY 1, 1998.
The Prospectus (the "Prospectus") of M Fund, Inc. (the "Company")
dated May 1, 1998, is hereby amended and supplemented as follows:
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BRANDES INTERNATIONAL EQUITY FUND
(FORMERLY EDINBURGH OVERSEAS EQUITY FUND)
NAME CHANGE
Effective July 1, 1998, the name of the Edinburgh Overseas Equity Fund
was changed, pursuant to a vote of the majority of the Directors of the
Company, to Brandes International Equity Fund (the "Brandes Fund"). This
change was made in connection with the change in Portfolio Manager of the
Brandes Fund described below. References to the Edinburgh Overseas Equity
Fund within the Prospectus shall hereinafter be deemed to be references to
the Brandes International Equity Fund.
PORTFOLIO MANAGER
Effective July 1, 1998, Brandes Investment Partners, L.P. ("Brandes")
became the Portfolio Manager to the Brandes Fund. Edinburgh Fund Managers plc
will no longer be the Portfolio Manager for the Brandes International Equity
Fund (formerly the Edinburgh Overseas Equity Fund). Brandes' principal
business address is 12750 High Bluff Drive, San Diego, California 92130.
Brandes is a limited partnership organized in May 1996 as the successor to an
investment advisor which was both founded and registered as an investment
adviser with the Securities and Exchange Commission in 1974. As of June 30,
1998, Brandes managed approximately $20 billion in assets. Charles H. Brandes
owns a controlling interest in Brandes' general partner.
The Brandes Fund is team-managed by Brandes' Investment Committee,
whose members are senior portfolio management professionals of the firm.
NEW INVESTMENT SUB-ADVISORY AGREEMENT
A new Investment Sub-Advisory Agreement (the "New Agreement") between
M Financial Investment Advisers, Inc. (the "Adviser") and Brandes Investment
Partners, L.P. became effective July 1, 1998. The terms of the New Agreement
are substantially similar to the terms of the previous Investment Sub-Advisory
Agreement with Edinburgh Fund Managers plc, except for the effective date, the
name of the adviser and the fund and certain other terms and conditions.
INVESTMENT OBJECTIVES AND POLICIES
In connection with the assumption by Brandes of the role of Portfolio
Manager to the Brandes Fund, the Board of Directors of the Company, at a
meeting held on May 22, 1998, approved certain changes to the investment
objectives, policies and restrictions of the Brandes Fund. The text that
follows supersedes, replaces or adds to the corresponding text in the
Prospectus. The following changes became effective on July 1, 1998.
AMENDMENT TO INVESTMENT OBJECTIVES AND POLICIES
BRANDES INTERNATIONAL EQUITY FUND
The investment objective of the Brandes International Equity Fund is
long-term capital appreciation. The Brandes Fund seeks to achieve its
objective by investing principally in equity securities of foreign issuers.
No assurance can be given that the Brandes Fund will achieve its investment
objective.
The Fund will normally invest at least 65% of its total assets in
equity securities of foreign issuers with market capitalizations greater than
$1 billion. The Fund will not invest more than 5% of its total assets at the
time of purchase in small capitalization companies, i.e., those with market
capitalizations of $1 billion or less.
Under normal circumstances, the Fund will invest at least 65% of its
total assets at the time of purchase in equity securities of issuers located
in at least three countries other than the United States. Countries in which
the Fund may invest include, but are not limited to, the nations of Western
Europe, North and South America, Australia, Africa and Asia. With respect to
investments in any particular country or industry, the Fund may invest up to
the greater of either (a) 20% of total Fund assets at the time of purchase, or
(b) 150% of the weighting of such country or industry as represented in the
Morgan Stanley Capital International Europe, Far East ("MSCI EAFE") Index at
the time of purchase; but in no event may the Fund invest more than 25% of its
total assets, calculated at the time of purchase, in any one industry (other
than U.S. Government securities). No more than 20% of the value of the Fund's
total assets, measured at the time of purchase, may be invested in securities
of companies located in countries with emerging securities markets.
Equity securities include common stocks, preferred stocks and
securities convertible into common stocks. It is anticipated that securities
generally will be purchased in the form of common stock, American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") or Global Depositary
Receipts ("GDRs"). ADRs, EDRs and GDRs, which may be sponsored or unsponsored,
are receipts typically issued by a bank or trust company evidencing ownership
of the underlying foreign securities. The issuers of securities underlying
unsponsored ADRs, EDRs and GDRs are not obligated to disclose material
information to the holders of such securities and, accordingly, there may not
be a correlation between such information and the market value of the
Depositary Receipts.
In seeking out foreign securities for purchase, Brandes does not
attempt to match the security allocations of foreign stock market indices.
Therefore, the Fund's country weightings may differ significantly from country
weightings found in published foreign stock indices. For example, Brandes may
choose not to invest the Fund's assets in a country whose stock market, at any
given time, may comprise a large portion of a published foreign stock market
index. At the same time, Brandes may invest the Fund's assets in countries
whose representation in such an index may be small or non-existent. Brandes
selects stocks for the Fund based on their individual merits and not
necessarily on their geographic locations.
Brandes is committed to the use of the Graham and Dodd Value Investing
approach as introduced in the classic book Security Analysis. Utilizing this
philosophy, Brandes views stocks as parts of businesses which are for sale.
It seeks to purchase a diversified group of these businesses at prices its
research indicates are well below their true long-term, or intrinsic, value.
By purchasing stocks whose current prices are believed to be considerably
below their intrinsic value, Brandes believes it can buy not only a possible
margin of safety against price declines, but also an attractive opportunity
for profit over the business cycle.
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INVESTMENT METHODS AND RISKS
FOREIGN INVESTMENTS
The Brandes Fund may from time to time invest a substantial portion
of the total value of its assets in securities of issuers located in
particular countries and/or associated with particular industries. During
such periods, the Fund may be more susceptible to risks associated with a
single economic, political or regulatory occurrence than more diversified
portfolios.
SHORT-TERM INVESTMENTS
At times the Brandes Fund may invest in short-term cash equivalent
securities either for temporary, defensive purposes or as part of its overall
investment strategy. These securities consist of high quality debt obligations
maturing in one year or less from the date of purchase, such as U.S. Government
securities, certificates of deposit, bankers' acceptances and commercial paper.
High quality means the obligations have been rated at least A-1 by Standard &
Poor's Corporation ("S&P") or Prime-1 by Moody's Investor's Service, Inc.
("Moody's"), have an outstanding issue of debt securities rated at least AA
by S&P or Aa by Moody's, or are of comparable quality in the opinion of
Brandes.
REPURCHASE AGREEMENTS
Short-term investments also include repurchase agreements with respect
to the high quality debt obligations listed above. A repurchase agreement is
a transaction in which the Brandes Fund purchases a security and, at the same
time, the seller (normally a commercial bank or broker-dealer) agrees to
repurchase the same security (and/or a security substituted for it under the
repurchase agreement) at an agreed-upon price and date in the future. The
resale price is in excess of the purchase price, as it reflects an agreed-upon
market interest rate effective for the period of time during which the Fund
holds the securities. The purchaser maintains custody of the underlying
securities prior to their repurchase; thus, the obligation of the bank or
dealer to pay the repurchase price on the date agreed to is, in effect,
secured by such underlying securities. If the value of such securities is
less than the repurchase price, the other party to the agreement is required
to provide additional collateral so that at all times the collateral is at
least equal to the repurchase price.
The majority of these transactions run from day to day and not more
than seven days from the original purchase. The Fund's risk is limited to the
ability of the seller to pay the agreed-upon sum on the delivery date; in the
event of bankruptcy or default by the seller, there may be possible delays and
expenses in liquidating the instrument purchased, decline in its value and
loss of interest. The securities will be marked to market every business day
so that their value is at least equal to the amount due from the seller,
including accrued interest. Brandes will also consider the credit-worthiness
of any bank or broker-dealer involved in repurchase agreements under
procedures adopted by the Company's Board of Directors.
U.S. GOVERNMENT SECURITIES
The Fund may invest in securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. U.S. Government securities
include direct obligations issued by the United States Treasury, such as
Treasury Bills, certificates of indebtedness, notes and bonds. U.S.
Government agencies and instrumentalities that issue or guarantee securities
include, but are not limited to, the Federal Home Loan Banks, the Federal
National Mortgage Association, and the Student Loan Marketing Association.
Except for U.S. Treasury securities, obligations of U.S. Government agencies
and instrumentalities may or may not be supported by the full faith and credit
of the United States. Some, such as those of the Federal Home Loan Banks, are
backed by the right of the issuer to borrow from the Treasury, others by
discretionary authority of the U.S. Government to purchase the agencies'
obligations, while still others, such as the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. In the
case of securities not backed by the full faith and credit of the United
States, the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to
assert a claim against the United States itself in the vent the agency or
instrumentality does not meet its commitment.
WHEN-ISSUED SECURITIES
The Brandes Fund may purchase securities on a when-issued or
delayed-delivery basis, generally in connection with an underwriting or other
offering. When-issued and delayed-delivery transactions occur when securities
are bought with payment for and delivery of the securities scheduled to take
place at a future time, beyond normal settlement dates, generally from 15 to
45 days after the transaction. No interest accrues to the purchaser during
the period before delivery. There is a risk in these transactions that the
value of the securities at settlement may be more or less than the agreed
upon price, or that the party with which the Fund enters into such a
transaction may not perform its commitment. The Fund will segregate liquid
assets, such as cash, U.S. Government securities and other liquid securities
in an amount sufficient to meet its payment obligations with respect to these
transactions.
OPTIONS
The Brandes Fund may write (sell) covered call options on individual
securities and on stock indices and engage in related closing transactions.
A covered call option on a security is an agreement by the Fund, in exchange
for a premium, to sell a particular portfolio security if the option is
exercised at a specified price before a set date. An option on a stock index
gives the option holder the right to receive, upon exercising the option, a
cash settlement amount based on the difference between the exercise price and
the value of the underlying stock index. Risks associated with writing
covered options include the possible inability to effect closing transactions
at favorable prices and a limit on the appreciation of the securities set
aside for settlement. The Fund may also purchase call options in closing
transactions, to terminate option positions written by the Fund. There is no
assurance of liquidity in the secondary market for purposes of closing out
covered call option positions.
The Fund may purchase put and call options with respect to securities
which are eligible for purchase by the Fund and with respect to various stock
indices for the purpose of hedging against the risk of unfavorable price
movements adversely affecting the value of the Fund's securities or securities
the Fund intends to buy. A put option on a security is an agreement by the
writer of the option, in exchange for a premium, to purchase the security from
the Fund, if the option is exercised, at a specified price before a set date.
Special risks are associated with the use of options. There can be no
guarantee of a correlation between price movements in the option and in the
underlying securities or index. A lack of correlation could result in a loss
on both the Fund's portfolio holdings and the option so that the Fund's return
might have been better had the option not been purchased or sold. There can
be no assurance that a liquid market will exist at a time when the Fund seeks
to close out an option position. The Fund may purchase a put or call option
only if the value of its premium, when aggregated with the premiums on all
other options held by the Fund, does not exceed 5% of the Fund's total assets
at the time of purchase.
STOCK INDEX FUTURES
The Brandes Fund may buy and sell stock index futures contracts for
bona fide hedging purposes, e.g., in order to hedge against changes in prices
of the Fund's securities. No more than 25% of the Fund's total assets at the
time of any such transaction will be hedged with stock index futures contracts.
A stock index futures contract is an agreement pursuant to which one
party agrees to deliver to the other an amount of cash equal to a specific
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made, but profits
and losses resulting from changes in the market value of the contract are
credited or debited at the close of each trading day to the accounts of the
parties to the contract. If Brandes expects general stock market prices to
rise, it might purchase a stock index futures contract as a hedge against an
increase in prices of particular equity securities it wants ultimately to buy.
If in fact the stock index did rise, the price of the equity securities
intended to be purchased might also increase, but that increase would be
offset in part by the increase in the value of the Fund's futures contract
resulting from the increase in the index. On the other hand, if Brandes
expects general stock market prices to decline, it might sell a futures
contract on the index. If that index did in fact decline, the value of some
or all of the equity securities held by the Fund might also be expected to
decline, but that decrease would be offset in part by the increase in the
value of the futures contract.
There is no assurance that it will be possible at any particular time
to close a futures position. In the event that the Fund could not close a
futures position and the value of the position declined, the Fund would be
required to continue to make daily cash payments to the other party to the
contract to offset the decline in value of the position. There can be no
assurance that hedging transactions will be successful, as there may be an
imperfect correlation between movements in the prices of the futures contracts
and of the securities being hedged, or price distortions due to market
conditions in the futures markets. Successful use of futures contracts is
subject to Brandes's ability to predict correctly movements in the direction
of interest rates, market prices and other factors affecting the value of
securities.
RESTRICTED AND ILLIQUID SECURITIES
The Brandes Fund may invest up to 5% of its net assets at the time
of purchase in illiquid securities, including (i) securities for which there
is no readily available market; (ii) securities which may be subject to legal
restrictions on resale (so-called "restricted securities") other than Rule
144A securities noted below; (iii) repurchase agreements having more than
seven days to maturity; and (iv) fixed time deposits subject to withdrawal
penalties (other than those with a term of less than seven days). Illiquid
securities do not include those which meet the requirements of Securities
Act Rule 144A and which the Directors have determined to be liquid based on
the applicable trading markets.
PERFORMANCE INFORMATION
PRIVATE ACCOUNT PERFORMANCE INFORMATION
Effective July 1, 1998, the private account performance of the
Edinburgh Fund Managers / Edinburgh Foreign Equity Composite information,
shown on page 17 of the Prospectus, should be disregarded.
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GENERAL
CHANGE OF PORTFOLIO MANAGERS
M Fund, Inc. and M Financial Investment Advisers, Inc. (the "Adviser")
have received an exemptive order from the Securities and Exchange Commission,
that permits 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 agreement to a vote of the Fund's
shareholders.
Pursuant to the terms and conditions of the exemptive order, the
Adviser manages the assets of each of the Funds using a "manager of managers"
approach under which it retains sub-advisers and may, in its discretion,
allocate each Fund's assets among one or more "specialist" sub-advisers.
The Adviser selects sub-advisers based on a continuing quantitative and
qualitative evaluation of their skills and proven abilities in managing assets
pursuant to a particular investment style. While superior performance is the
ultimate goal, short-term performance by itself will not be a significant
factor in selecting or terminating sub-advisers, and the Adviser does not
anticipate frequent changes in sub-advisers. Criteria for employment of
sub-advisers will include, but will not be limited to, proven discipline and
thoroughness in pursuit of stated investment objectives, consistently
above-average performance, an ability to conserve values in down markets, and
a high level of service and responsibility to clients.
The Adviser monitors the performance of each sub-adviser and of each
Fund's portfolio and, to the extent that it considers it appropriate to
achieve a Fund's investment objective(s) recommends to the Company's Board of
Directors that the Company employ or terminate particular sub-advisers and, if
more than one sub-adviser is retained to manage a Fund, may reallocate
portfolio assets among the sub-advisers for a Fund. In the event that the
Company's Board of Directors replaces a sub-adviser or retains additional
sub-advisers, the Company will send to each investor information about such
new sub-adviser(s).
<PAGE>
SUPPLEMENT TO
STATEMENT OF ADDITIONAL INFORMATION
OF M FUND, INC.
THIS SUPPLEMENT IS DATED AS OF JULY 1, 1998.
The Statement of Additional Information (the "SAI") of M Fund, Inc.
(the "Company") dated May 1, 1998, is hereby amended and supplemented as
follows:
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BRANDES INTERNATIONAL EQUITY FUND
(FORMERLY EDINBURGH OVERSEAS EQUITY FUND)
NAME CHANGE
Effective July 1, 1998, the name of the Edinburgh Overseas Equity Fund
was changed, pursuant to a vote of the majority of the Directors of the
Company, to Brandes International Equity Fund (the "Brandes Fund"). This
change was made in connection with the change in Portfolio Manager of the
Brandes Fund described below. References to the Edinburgh Overseas Equity
Fund within the SAI shall hereinafter be deemed to be references to the
Brandes International Equity Fund.
PORTFOLIO MANAGER
Effective July 1, 1998, Brandes Investment Partners, L.P. ("Brandes")
became the Portfolio Manager to the Brandes Fund. Edinburgh Fund Managers plc
will no longer be the Portfolio Manager for the Brandes International Equity
Fund (formerly the Edinburgh Overseas Equity Fund). Brandes' principal
business address is 12750 High Bluff Drive, San Diego, California 92130.
Brandes is a limited partnership organized in May 1996 as the successor to
an investment advisor which was both founded and registered as an investment
adviser with the Securities and Exchange Commission in 1974. As of June 30,
1998, Brandes managed approximately $20 billion in assets. Charles H. Brandes
owns a controlling interest in Brandes' general partner.
The Brandes Fund is team-managed by Brandes' Investment Committee,
whose members are senior portfolio management professionals of the firm.
NEW INVESTMENT SUB-ADVISORY AGREEMENT
A new Investment Sub-Advisory Agreement (the "New Agreement") between
M Financial Investment Advisers, Inc. (the "Adviser") and Brandes Investment
Partners, L.P. ("Brandes") became effective July 1, 1998. The terms of the
New Agreement are substantially similar to the terms of the previous
Investment Sub-Advisory Agreement with Edinburgh Fund Managers plc, except
for the effective date, the name of the adviser and the fund and certain
other terms and conditions.
SPECIAL INVESTMENT METHODS AND RISKS
FOREIGN SECURITIES
The U.S. Government has, from time to time, imposed restrictions,
through taxation or otherwise, on foreign investments by U.S. entities such as
the Fund. If such restrictions should be reinstituted, the Board of Directors
of the Company would consider alternative arrangements, including reevaluation
of the Brandes Fund's investment objective and policies. However, the Fund
would adopt any revised investment objective and fundamental policies only
after approval by the holders of a "majority of the outstanding voting
securities" of the Fund, which is defined in the Investment Company Act of
1940 (the "1940 Act") to mean the lesser of (i) 67% of the shares represented
at a meeting at which more than 50% of the outstanding shares are represented
or (ii) more than 50% of the outstanding shares.
Investments in foreign securities involve certain inherent risks.
Individual foreign economies may differ from the U.S. economy in such aspects
as growth of gross national product, rate of inflation, capital reinvestment,
source self-sufficiency, diversification and balance of payments position.
The internal politics of certain foreign countries may not be as stable as
those of the United States. Governments in certain foreign countries also
continue to participate to a significant degree in their respective economies.
Action by these governments could include restrictions on foreign investment,
nationalization, expropriation of property or imposition of taxes, and could
have a significant effect on market prices of securities and payment of
interest. The economies of many foreign countries are heavily dependent on
international trade and are accordingly affected by the trade policies and
economic conditions of their trading partners. Enactment by these trading
partners of protectionist trade legislation, or other adverse developments
affecting these trading partners, could have a significant adverse effect on
the securities markets of such countries.
Because most of the securities in which the Fund invests are
denominated in foreign currencies, a change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S.
dollar value of the Fund's assets which are denominated in that currency.
Such changes will also affect the Fund's income. The values of the Fund's
assets may also be affected significantly by currency restrictions and
exchange control regulations imposed from time to time.
Foreign securities markets may be more volatile than those in the
United States. While growing in volume, they usually have substantially less
volume than U.S. markets, and the Fund's portfolio securities may be less
liquid and more volatile than U.S. securities. Settlement practices for
transactions may differ from those in the United States and may include delays
beyond periods customary in the United States. Such differences and potential
delays may expose the Fund to increased risk of loss in the event of a failed
trade or the insolvency of a foreign broker-dealer.
SMALL CAPITALIZATION COMPANIES
Small capitalization companies have historically offered greater
growth potential than larger ones, but they are often overlooked by investors.
However, small capitalization companies often have limited product lines,
markets or financial resources and may be dependent on one person or a few key
persons for management. The securities of such companies may be subject to
more volatile market movements than securities or larger, more established
companies, both because the securities typically are traded in lower value
and because the issuers typically are more subject to changes in earnings
and prospects.
REPURCHASE AGREEMENTS
Although repurchase agreements carry certain risks not associated with
direct investments in securities, the Fund intends to enter into repurchase
agreements only with banks and dealers believed by Brandes to present minimum
credit risks in accordance with guidelines established by the Board of
Directors. Brandes will review and monitor the creditworthiness of such
institutions under the Board's general supervision. To the extent that the
proceeds from any sale of collateral upon a default in the obligation to
repurchase were less than the repurchase price, the purchaser would suffer a
loss. If the other party to the repurchase agreement petitions for bankruptcy
or otherwise becomes subject to bankruptcy or other liquidation proceedings,
there might be restrictions on the purchaser's ability to sell the collateral
and the purchaser could suffer a loss. However, with respect to financial
institutions whose bankruptcy or liquidation proceedings are subject to the
U.S. Bankruptcy Code, the Fund intends to comply with provisions under such
Code that would allow it immediately to resell the collateral.
WHEN-ISSUED SECURITIES
The Fund may from time to time purchase securities on a "when-issued"
basis. The price of such securities, which may be expressed in yield terms,
is fixed at the time the commitment to purchase is made, but delivery and
payment for the when-issued securities take place at a later date. Normally,
the settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. To the extent that assets of the Fund
are held in cash pending the settlement of a purchase of securities, the Fund
would earn no income. While when-issued securities may be sold prior to the
settlement date, the Fund intends to purchase such securities with the purpose
of actually acquiring them unless a sale appears desirable for investment
reasons. At the time the Fund makes the commitment to purchase a security on
a when-issued basis, it will record the transaction and reflect the value of
the security in determining its net asset value. The market value of the
when-issued securities may be more or less than the purchase price. Brandes
does not believe that the Fund's net asset value or income will be adversely
affected by the purchase of securities on a when-issued basis. the Fund will
establish a segregated account with the Custodian in which it will maintain
cash or liquid assets such as U.S. government securities or other high-grade
debt obligations equal in value to commitments for when-issued securities.
Such segregated securities either will mature or, if necessary, be sold on or
before the settlement date.
RULE 144A SECURITIES
As noted in the prospectus, the Fund may invest no more than 5% of its
net assets in securities that at the time of purchase have legal or contractual
restrictions on resale, are otherwise illiquid or do not have readily available
market quotations. Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered under the Securities Act of 1933 ("restricted securities"),
securities which are otherwise not readily marketable such as over-the-counter,
or dealer traded, options, and repurchase agreements having a maturity of more
than seven days. Mutual funds do not typically hold a significant amount of
restricted or other illiquid securities because of the potential for delays
on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities, and the Fund
might not be able to dispose of such securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions. The
Fund might also have to register such restricted securities in order to
dispose of them, resulting in additional expense and delay.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act of
1933, including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on
resale to the general public or to certain institutions may not be indicative
of the liquidity of such investments. If such securities are subject to
purchase by institutional buyers in accord with Rule 144A promulgated by the
Securities and Exchange Commission, the Directors may determine that such
securities, up to a limit of 5% of the Fund's total net assets, are not
illiquid notwithstanding their legal or contractual restrictions on resale.
PUT AND CALL OPTIONS
PURCHASING OPTIONS. By purchasing a put option, the Fund obtains the
right (but not the obligation) to sell the option's underlying instrument at
a fixed "strike" price. In return for this right, the Fund pays the current
market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities,
indices of securities prices, and futures contracts. The Fund may terminate
its position in a put option it has purchased by selling the option, by
allowing it to expire or by exercising the option. If the option is allowed
to expire, the Fund will lose the entire premium it paid. If the Fund
exercises the option, it completes the sale of the underlying instrument at
the strike price. The Fund also may terminate a put option position by
closing it out in the secondary market at its current price (i.e., by selling
an option of the same series as the option purchased), if a liquid secondary
market exists.
The buyer of a typical put option can expect to realize a gain if
security prices fall substantially. However, if the underlying instrument's
price does not fall enough to offset the cost of purchasing the option, a put
buyer can expect to suffer a loss (limited to the amount of the premium paid,
plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to
suffer a loss if the underlying prices do not rise sufficiently to offset the
cost of the option.
WRITING OPTIONS. When the Fund writes a call option, it takes the
opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the Fund assumes the obligation to sell or deliver the
option's underlying instrument, in return for the strike price, upon exercise
of the option. The Fund may seek to terminate its position in a call option
it writes before exercise by closing out the option in the secondary market
at its current price (i.e., by buying an option of the same series as the
option written). If the secondary market is not liquid for a call option the
Fund has written, however, the Fund must continue to be prepared to deliver
the underlying instrument in return for the strike price while the option is
outstanding, regardless of price changes, and must continue to segregate
assets to cover its position. The Fund will establish a segregated account
with the Custodian in which it will maintain the security underlying the
option written, or securities convertible into that security, or cash or
liquid assets such as U.S. Government securities or other high-grade debt
obligations equal in value to commitments for options written.
Writing a call generally is a profitable strategy if the price of the
underlying security remains the same or falls. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is
greater, a call writer gives up some ability to participate in the underlying
price increases.
COMBINED POSITIONS. The Fund may purchase and write options in
combination with each other to adjust the risk and return characteristics of
the overall position. For example, the Fund may write a put option and
purchase a call option on the same underlying instrument, in order to
construct a combined position whose risk and return characteristics are
similar to selling a futures contract. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be
more difficult to open and close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of
types of exchange-traded options contracts, it is likely that the standardized
contracts available will not match the Fund's current or anticipated
investments exactly. The Fund may invest in options contracts based on
securities with different issuers, maturities, or other characteristics from
the securities in which it typically invests.
Options prices also can diverge from the prices of their underlying
instruments, even if the underlying instruments match the Fund's investments
well. Options prices are affected by such factors as current and anticipated
short-term interest rates, changes in volatility of the underlying instrument,
and the time remaining until expiration of the contract, which may not affect
the security prices the same way. Imperfect correlation also may result from
differing levels of demand in the options markets and the securities markets,
structural differences in how options are traded, or imposition of daily price
fluctuation limits or trading halts. The Fund may purchase or sell options
with a greater or lesser value than the securities it wishes to hedge or
intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the Fund's options positions
are poorly correlated with its other investments, the positions may fail to
produce anticipated gains or result in losses that are not offset by gains in
other investments.
LIQUIDITY OF OPTIONS. There is no assurance a liquid secondary market
will exist for any particular options contract at any particular time.
Options may have relatively low trading volume and liquidity if their strike
prices are not too close to the underlying instrument's current price. In
addition, exchanges may establish daily price fluctuation limits for options
contracts, and may halt trading if a contract's price moves upward or downward
more than the limit in a given day. On volatile trading days when the price
fluctuation limit is reached or a trading halt is imposed, it may be
impossible for the Fund to enter into new positions or close out existing
positions. If the secondary market for a contract is not liquid because of
price fluctuation limits or otherwise, it could prevent prompt liquidation of
unfavorable positions, and potentially could require the Fund to continue to
hold a position until delivery or expiration regardless of changes in its
value. As a result, the Fund's access to other assets held to cover its
options positions also could be impaired.
OTC OPTIONS. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size,
and strike price, the terms of over-the-counter options, i.e., options not
traded on exchanges ("OTC options"), generally are established through
negotiation with the other party to the option contract. While this type of
arrangement allows the Fund greater flexibility to tailor an option to its
needs, OTC options generally involve greater credit risk than exchange-traded
options, which are guaranteed by the clearing organizations of the exchanges
where they are traded. OTC options are considered to be illiquid, since
these options generally can be closed out only by negotiation with the other
party to the option.
STOCK INDEX OPTIONS. The distinctive characteristics of options on
stock indices create certain risks that are not present with stock options
generally. Because the value of an index option depends on movements in the
level of the index rather than the price of a particular stock, whether the
Fund will realize a gain or loss on an options transaction depends on
movements in the level of stock prices generally rather than movements in the
price of a particular stock. Accordingly, successful use of options on a
stock index will be subject to Brandes' ability to predict correctly movements
in the direction of the stock market generally. Index prices may be distorted
if trading in certain stocks included in the index is interrupted. Trading of
index options also may be interrupted in certain circumstances, such as if
trading were halted in a substantial number of stocks included in the index.
If this were to occur, the Fund would not be able to close out positions it
holds. It is the policy of the Fund to engage in options transactions only
with respect to an index which Brandes believes includes a sufficient number
of stocks to minimize the likelihood of a trading halt in the index.
FUTURES CONTRACTS
The Brandes Fund may buy and sell stock index futures contracts. Such
a futures contract is an agreement between two parties to buy and sell an
index for a set price on a future date. Futures contracts are traded on
designated "contract markets" which, through their clearing corporations,
guarantee performance of the contracts. A stock index futures contract does
not require the physical delivery of securities, but merely provides for
profits and losses resulting from changes in the market value of the contract
to be credited or debited at the close of each trading day to the respective
accounts of the parties to the contract. On the contract's expiration date,
a final cash settlement occurs. Changes in the market value of a particular
stock index futures contract reflects changes in the specified index of
equity securities on which the future is based.
There are several risks in connection with the use of futures
contracts. In the event of an imperfect correlation between the index and
the portfolio position which is intended to be protected, the desired
protection may not be obtained and the Fund may be exposed to risk of
unlimited loss. Further, unanticipated changes in stock price movements may
result in a poorer overall performance for the Fund than if it had not entered
into any futures on stock indexes.
In addition, the market prices of futures contracts may be affected
by certain factors. First, all participants in the futures market are subject
to margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors may close futures contracts
through offsetting transactions which could distort the normal relationship
between the securities and futures markets. Second, from the point of view
of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions.
Finally, positions in futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
There is no assurance that a liquid secondary market on an exchange or board
of trade will exist for any particular contract or at any particular time.
The Fund will engage in futures transactions only as a hedge against
the risk of unexpected changes in the values of securities held or intended to
be held by the Fund. As a general rule, the Fund will not purchase or sell
futures if, immediately thereafter, more than 25% of its net assets would be
hedged. In addition, the Fund will not purchase or sell futures or related
options if, immediately thereafter, the amount of margin deposits on the
Fund's existing futures positions would exceed 5% of the market value of the
Fund's net assets.
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GENERAL
CHANGE OF PORTFOLIO MANAGERS
M Fund, Inc. and M Financial Investment Advisers, Inc. (the "Adviser")
have received an exemptive order from the Securities and Exchange Commission,
that permits 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 agreement to a vote of the Fund's
shareholders.
Pursuant to the terms and conditions of the exemptive order, the
Adviser manages the assets of each of the Funds using a "manager of managers"
approach under which it retains sub-advisers and may, in its discretion,
allocate each Fund's assets among one or more "specialist" sub-advisers.
The Adviser selects sub-advisers based on a continuing quantitative and
qualitative evaluation of their skills and proven abilities in managing
assets pursuant to a particular investment style. While superior performance
is the ultimate goal, short-term performance by itself will not be a
significant factor in selecting or terminating sub-advisers, and the Adviser
does not anticipate frequent changes in sub-advisers. Criteria for employment
of sub-advisers will include, but will not be limited to, proven discipline
and thoroughness in pursuit of stated investment objectives, consistently
above-average performance, an ability to conserve values in down markets, and
a high level of service and responsibility to clients.
The Adviser monitors the performance of each sub-adviser and of each
Fund's portfolio and, to the extent that it considers it appropriate to
achieve a Fund's investment objective(s) recommends to the Company's Board of
Directors that the Company employ or terminate particular sub-advisers and, if
more than one sub-adviser is retained to manage a Fund, may reallocate
portfolio assets among the sub-advisers for a Fund. In the event that the
Company's Board of Directors replaces a sub-adviser or retains additional
sub-advisers, the Company will send to each investor information about such
new sub-adviser(s).
