BT ADVISOR FUNDS
U.S. Bond Index Fund
Equity 500 Equal Weighted Index Fund
Small Cap Index Fund
EAFE(R) Equity Index Fund*
(Advisor Class Shares)
BT PYRAMID MUTUAL FUNDS
BT Investment Equity 500 Index Fund
PROSPECTUS
FEBRUARY 28, 1997
BT Advisor Funds (the `Trust'') is an open-end, management investment
company (mutual fund) which consists of several funds. With the exception
of the BT Investment Equity 500 Index Fund (the `Equity 500 Index Fund''),
each of the diversified funds listed above (each, a `Fund'') is a separate
series of the Trust and each offers two classes of shares. The shares
offered by this prospectus are the Advisor Class Shares (the `Shares'').
The Equity 500 Index Fund is a series of BT Pyramid Mutual Funds, an open-
end management investment company (together with the Trust, the `Trusts'').
Each Fund seeks to replicate as closely as possible the performance of a
selected market index before the deduction of the expenses allocable to the
Shares of the Fund and the corresponding Portfolio (the `Expenses''). There
is no assurance, however, that each Fund will achieve its stated objective.
Please read this Prospectus before investing, and keep it on file for
future reference. It contains important information, including how each
Fund invests and the services available to shareholders.
To learn more about each Fund and its investments, investors can obtain a
copy of the Funds' Statement of Additional Information (the "SAI"), dated
February 28, 1997. The SAI has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated herein by reference. For a free
copy of this document, call (800) 730-1313.
UNLIKE OTHER OPEN-END MANAGEMENT INVESTMENT COMPANIES (MUTUAL FUNDS),
EACH FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS
INVESTABLE ASSETS (`ASSETS'') IN A SEPARATE INVESTMENT COMPANY (THE
`PORTFOLIO'') WITH AN IDENTICAL INVESTMENT OBJECTIVE. THE INVESTMENT
PERFORMANCE OF EACH FUND WILL CORRESPOND DIRECTLY TO THE INVESTMENT
PERFORMANCE OF THE CORRESPONDING PORTFOLIO. SEE `SPECIAL INFORMATION
CONCERNING MASTER-FEEDER FUND STRUCTURE'' HEREIN.
BANKERS TRUST COMPANY ("BANKERS TRUST") IS THE INVESTMENT ADVISER (THE
"ADVISER") OF EACH PORTFOLIO. SHARES OF THE FUNDS ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, BANKERS TRUST OR ANY OTHER
BANKING OR DEPOSITORY INSTITUTION. SHARES ARE NOT FEDERALLY GUARANTEED OR
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE U.S. GOVERNMENT,
THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
LIKE SHARES OF ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
* The EAFE index is the exclusive property of Morgan Stanley. Morgan
Stanley Capital International is a service mark of Morgan Stanley and has
been licensed for use by Bankers Trust Company.
EDGEWOOD SERVICES, INC.
Clearing Operations P.O. Box 897 Pittsburgh, Pennsylvania 15230-0897
TABLE OF CONTENTS
The Funds 3
Who May Want to Invest 4
Investment Principles and Risks 4
Summary of Fund Expenses 5
Financial Highlights 7
The Funds in Detail 10
Risk Factors and Certain Securities and Investment Practices
14
Performance Information and Reports
20
Management of the Trusts and the Portfolios 21
Net Asset Value
23
Account Information
24
Purchase and Redemption of Shares 25
Dividends, Distributions, and Taxes
30
Additional Information
31
THE FUNDS
THE U.S. BOND INDEX FUND seeks to replicate as closely as possible (before
deduction of Expenses) the investment performance of the Lehman Brothers
Aggregate Bond Index (the `Aggregate Bond Index''), a broad market weighted
index which encompasses U.S. Treasury and agency securities, corporate
investment grade bonds, international (dollar-denominated) investment grade
bonds, and mortgage-backed securities. The Fund will be invested primarily
in fixed income securities of the U.S. government or any agency thereof,
publicly issued fixed rate domestic debt of industrial, financial, and
utility corporations, and U.S. dollar denominated fixed income securities
of foreign and supranational entities issued publicly in the United States.
The Fund will also invest in mortgage pass-through securities issued by the
Government National Mortgage Association, the Federal Home Loan Mortgage
Corporation, and the Federal National Mortgage Association. The U.S. Bond
Index Fund invests all of its Assets in the U.S. Bond Index Portfolio.
THE EQUITY 500 EQUAL WEIGHTED INDEX FUND seeks to replicate as closely
as possible (before deduction of Expenses) the total return of the Standard
& Poor's 500 Equal Weighted Index (the `S&P 500 Equal Weighted Index'').
The S&P 500 Equal Weighted Index is comprised of all stocks that make up
the Standard & Poor's 500 Composite Stock Price Index with each security
having the same weight. The S&P 500 Equal Weighted Index is re-balanced to
these equal weights at the end of each calendar month. The Fund will
include the common stock of each company included in the S&P 500, other
than Bankers Trust New York Corporation, in such a manner that the market
value of the Fund's holding of each stock will be approximately equal to
the market value of each other stock held in the Fund. The Equity 500 Equal
Weighted Index Fund invests all of its Assets in the Equity 500 Equal
Weighted Index Portfolio.
THE SMALL CAP INDEX FUND seeks to replicate as closely as possible (before
deduction of Expenses) the total return of the Russell 2000 Small Stock
Index (the `Russell 2000''), an index consisting of 2,000 small-
capitalization common stocks. The Fund will include the common stock of one
or more companies included in the Russell 2000, on the basis of computer-
generated statistical data, that are deemed representative of the industry
diversification of the entire Russell 2000. The Small Cap Index Fund
invests all of its Assets in the Small Cap Index Portfolio.
THE EAFE(R) EQUITY INDEX FUND seeks to replicate as closely as possible
(before deduction of Expenses) the total return of the Morgan Stanley
Capital International Europe, Australia, Far East (EAFE) Index with net
dividends (the `EAFE Index''), a capitalization-weighted index containing
approximately 1,100 equity securities of companies located outside the
United States. The Fund will be invested primarily in equity securities of
business enterprises organized and domiciled outside of the United States
or for which the principal trading market is outside the United States.
Statistical methods will be employed to replicate the Index by buying most
of the relevant Index securities. Securities purchased for the Fund will
generally, but not necessarily, be traded on a foreign securities exchange.
The EAFE(R) Equity Index Fund invests all of its Assets in the EAFE(R)
Equity Index Portfolio.
The Equity 500 Index Fund seeks to replicate as closely as possible (before
deduction of Expenses) the total return of the Standard & Poor's 500
Composite Stock Price Index (the `S&P 500''), an index emphasizing large-
capitalization stocks. The Fund will include the common stock of those
companies included in the S&P 500, other than Bankers Trust New York
Corporation, selected on the basis of computer generated statistical data,
that are deemed representative of the industry diversification of the
entire S&P 500. The Equity 500 Index Fund invests all of its Assets in the
Equity 500 Index Portfolio.
WHO MAY WANT TO INVEST
Shares of each Fund are offered through this Prospectus to investors who
engage an Investment Professional.
The Trusts seek to achieve the investment objective of each Fund by
investing all the Assets of the Fund in the corresponding Portfolio. The
Portfolios are not managed according to traditional methods of `active''
investment management, which involve the buying and selling of securities
based upon economic, financial and market analysis and investment judgment.
Instead, the Portfolios, utilizing a `passive'' or ``indexing'' investment
approach and attempt to replicate the investment performance of their
respective indices through statistical procedures.
The U.S. Bond Index Portfolio represents all major sectors of the
investment grade fixed-income securities markets. The U.S. Bond Index Fund
may be a suitable investment vehicle for those investors seeking ownership
in the `bond market'' as a whole, without regard to particular sectors. The
U.S. Bond Index Fund also may be suitable for those investors with common
stock holdings who are seeking a complementary fixed-income investment to
create a more balanced asset mix.
The Equity 500 Equal Weighted, Small Cap Index, EAFE(R) Equity Index and
Equity 500 Index Funds may be appropriate for investors who are willing to
ride out domestic and/or foreign stock market fluctuations in pursuit of
potentially higher long-term returns. Each corresponding Portfolio invests
for growth and does not pursue income. Over time, stocks, although more
volatile, have shown greater growth potential than other types of
securities. In the shorter term, however, stock prices can fluctuate
dramatically in response to market factors.
The EAFE(R) Equity Index Fund may be appropriate for investors who want to
pursue their investment goals in markets outside of the United States. By
including international investments in their portfolio, investors can
achieve an extra level of diversification and also participate in
opportunities around the world. However, there are additional risks
involved with international investing. The performance of international
funds depends upon currency values, the political and regulatory
environment, and overall economic factors in the countries in which a
Portfolio invests.
The Trusts are intended to be a long-term investment vehicle and are
not designated to provide investors with a means of speculating on short-
term market movements. Investors who engage in excessive account activity
generate additional costs which are borne by all the Trusts' shareholders.
In order to minimize such costs, each Trust has adopted the following
policies. Each Trust reserves the right to reject any purchase request
(including exchange purchases from other BT Advisor Funds ) that is
reasonably deemed to be disruptive to efficient portfolio management,
either because of the timing of the investment or previous excessive
trading by the investor. Additionally, each Trust has adopted exchange
privilege limitations as described in the section `Exchange Limitations''
herein. Finally, each Trust reserves the right to suspend the offering of
its shares.
Each Fund is not in itself a balanced investment plan. Investors should
consider their investment objective and tolerance for risk when making an
investment decision. When an investor sells their Fund Shares, they may be
worth more or less than what they paid for them.
INVESTMENT PRINCIPLES AND RISKS
The value of each Portfolio's investments varies based on many factors. The
value of bonds fluctuates based on changes in domestic or foreign interest
rates, the credit quality of the issuer, market conditions, and other
economic and political news.
In general, bond prices rise when interest rates fall, and vice versa. This
effect is usually more pronounced for longer-term securities. Lower-quality
securities offer higher yields, but also carry more risk. Stock values
fluctuate, sometimes dramatically, in response to the activities of
individual companies and general market and economic conditions. Over time,
however, stocks have shown greater long-term growth potential than other
types of securities.
Because many foreign investments are denominated in foreign currencies,
changes in the value of these currencies can significantly affect the
EAFE(R) Equity Index Fund's share price. General economic factors in the
various world markets can also impact the value of an investors investment.
When investors sell Fund Shares, they may be worth more or less than what
they paid for them. See `Risk Factors and Certain Securities and Investment
Practices'' herein for more information.
SUMMARY OF FUND EXPENSES
Annual Operating Expenses are paid out of the assets of each Portfolio and
Fund. Each Portfolio pays an investment advisory fee and an administrative
services fee to Bankers Trust. Each Fund incurs expenses such as
maintaining shareholder records and furnishing shareholder statements. Each
Fund must provide financial reports.
The following table provides: (i) a summary of expenses relating to
purchases and sales of the Shares of each Fund and the annual operating
expenses of the Fund and expenses of the corresponding Portfolio, in the
aggregate, as a percentage of average daily net assets of each Fund; and
(ii) an example illustrating the dollar cost of such expenses on a $1,000
investment in each Fund. The Trustees of each Trust believe that the
expenses of each Fund and expenses of the corresponding Portfolio, in the
aggregate, will be less than or approximately equal to the expenses which
the Fund would incur if the Trusts retained the services of an investment
adviser and the Assets of each Fund were invested directly in the type of
securities being held by the corresponding Portfolio.
Shareholder Transaction Expenses
Maximum Sales Charge on Purchases
(as a percentage of offering price) None*
Maximum Sales Charge on
Reinvested Distributions None
Redemption Fee None*
Exchange Fee None
Shareholder transaction expenses are charges paid when investors buy,
sell, exchange, or hold Shares of a Fund. See 'Purchase and Redemption of
Shares'' for an explanation of how and when these charges apply.
* A transaction fee of 0.50% is deducted from redemptions and exchanges out
of the Small Cap Index Fund and the EAFE(R) Equity Index Fund. These
transaction fees are paid to the respective Funds and are deducted
automatically from the amount redeemed.
The purpose of the 0.50% transaction fee is to allocate transaction costs
associated with redemptions and exchanges to investors making those
redemptions and exchanges, thus insulating existing shareholders from those
transaction costs. These costs include: (1) brokerage costs; (2) the effect
of the `bid-ask'' spread in small and medium sized company stock and
international markets; and (3) taxes in some countries. Since the investor,
not the Fund, bears these costs, the Fund is expected to be able to track
its benchmark index more closely.
ANNUAL OPERATING EXPENSES
U.S. BOND INDEX FUND
Investment advisory fee (after reimbursements or waiver) 0.10%
Other expenses (after reimbursements or waivers) 0.25
Total Operating Expenses (after reimbursements or waivers) 0.35%
EQUITY 500 EQUAL WEIGHTED INDEX FUND
Investment advisory fee (after reimbursements or waiver) 0.15%
Other expenses (after reimbursements or waivers) 0.50
Total Operating Expenses (after reimbursements or waivers) 0.65%
SMALL CAP INDEX FUND
Investment advisory fee (after reimbursements or waiver) 0.08%
Other expenses (after reimbursements or waivers) 0.37
Total Operating Expenses (after reimbursements or waivers) 0.45%
EAFE(R) EQUITY INDEX FUND
Investment advisory fee (after reimbursements or waiver) 0.24%
Other expenses (after reimbursements or waivers) 0.41
Total Operating Expenses (after reimbursements or waivers) 0.65%
EQUITY 500 INDEX FUND
Investment advisory fee 0.10%
12b-1 fees
0.00
Other expenses (after reimbursements or waivers) 0.15
Total Operating Expenses (after reimbursements or waivers) 0.25%
EXAMPLES
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end
of each time period:
1 Year 3 Years 5 Years 10 Years
U.S. Bond Index Fund
$3 $8
Equity 500 Equal Weighted Index Fund $7
$21
Small Cap Index Fund
$5 $14
EAFE(R) Equity Index Fund
$7 $21
Equity 500 Index Fund
$3 $8 $14 $32
The expense table and the example above show the costs and expenses that
an investor will bear directly or indirectly as a shareholder of a Fund.
With respect tot he Equity 500 Index Fund, reimbursement of distribution
expenses in amounts up to 0.20% of average net assets are authorized to be
made pursuant to the Distribution and Service Plan, adopted under Rule 12b-
1 of the Investment Company Act of 1940, as amended (the `1940 Act''),
however, it is not expected that any payment will actually be made under
that Plan in the foreseeable future. Bankers Trust has voluntarily agreed
to waive a portion of its investment advisory fee with respect to each
Portfolio. Without such waiver, each Portfolio's investment advisory fee
would be equal to the following: U.S. Bond Index Portfolio- 0.15%; Equity
500 Equal Weighted Index Portfolio -- 0.25%; Small Cap Index Portfolio --
0.15%; EAFE(R) Equity Index Portfolio - - - 0.25%; and Equity 500 Index
Portfolio -- 0.10%. The expense table and the example reflect a voluntary
undertaking by Bankers Trust to waive or reimburse expenses such that the
total operating expenses will not exceed the following percentages of the
Funds'-Advisor Class Shares average daily net assets: U.S. Bond Index --
0.35%; Equity 500 Equal Weighted Index 0.65%; Small Cap Index -- 0.45%; and
EAFE(R) Equity Index- 0.65%; and Equity 500 Index Fund-0.25%. In the
absence of this undertaking, it is estimated that for the fiscal year
ending December 31, 1997, `Total Operating Expenses'' of the U.S. Bond
Index Fund (Portfolio) and the Equity 500 Equal Weighted Index Fund
(Portfolio) would be 0.55%, and 0.75%, respectively. With respect to the
Equity 500 Index Fund (Portfolio), EAFE Equity Index Fund (Portfolio), and
Small Cap Index Fund (Portfolio), in the absence of this undertaking, for
the fiscal year ended December 31, 1996, the total operating expenses would
have been equal to approximately 0.47%, 2.35%, and 23.14%, respectively of
each Funds'-Advisor Class Shares average net assets annually. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover, while
each example assumes a 5% annual return, actual performance will vary and
may result in a return greater or less than 5%.
The Funds are distributed by Edgewood Services, Inc. (`Edgewood'' or the
`Distributor'') to customers of Bankers Trust or to customers of another
bank, dealer or other financial intermediary that has a shareholder
servicing agreement with Bankers Trust (along with Bankers Trust, a
`Service Agent''). Some Service Agents may impose certain conditions on
their customers in addition to or different from those imposed by a Fund
and may charge their customers a direct fee for their services. Each
Service Agent has agreed to transmit to shareholders who are its customers
appropriate disclosures of any fees that it may charge them directly.
CURRENTLY, THE FUNDS (WITH THE EXCEPTION OF THE EQUITY 500 INDEX FUND) HAVE
ISSUED TWO CLASSES OF SHARES. THE FUNDS OFFER BY SEPARATE PROSPECTUS
ANOTHER CLASS OF SHARES. BECAUSE THE EXPENSES VARY BETWEEN THE CLASSES,
PERFORMANCE WILL VARY WITH RESPECT TO EACH CLASS. ADDITIONAL INFORMATION
CONCERNING THE FUNDS' OTHER CLASS OF SHARES IS AVAILABLE FROM BANKERS
TRUST, AS ADMINISTRATOR, AT (800) 730 1313.
FINANCIAL HIGHLIGHTS
The following tables show the selected data for a share outstanding,
total investment return, ratios to average net assets and other
supplemental data of the Funds for the periods indicated. The Funds' Annual
Reports have been audited by Coopers & Lybrand L.L.P., the Funds'
independent accountants, whose report thereon appears in the respective
Fund's Annual Report. Each Fund's Annual Report is incorporated by
reference in the respective Trusts' SAI.
Equity 500 Index Fund
For the For the
For
the Year Ended Period 12/31/96
December 31, (Commencement
1996
1995 1994 1993 of Operations)
Per Share Operating Performance
Net Asset Value, Beginning of Period $13.82 $10.36 $10.57
$10.00 $10.00
Income from Investment Operations
Net Investment Income 0.30 0.29
0.22 0.24 -
Net Realized and Unrealized Gain (Loss) on
Investments and Futures Transactions 2.83 3.53 (0.10)
0.71 -
Total from Investment Operations 3.13 3.82 0.12
0.95 -
Distributions to Shareholders
Net Investment Income (0.30) (0.29)
(0.22) (0.24) -
Net Realized Gain from Investments
and Futures Transactions (0.14) (0.07)
(0.11) (0.14) -
Total Distributions (0.44) (0.36)
(0.33) (0.38) -
Net Asset Value, End of Period $ 16.51 $13.82 $10.36
$10.57 $10.00
Total Investment Return 22.83% 37.15% 1.15%
9.53% -
Supplemental Data and Ratios:
Net Assets, End of Period (000's omitted) $ 451,762 $277,140
$181,898 $1,835 $100
Ratios to Average Net Assets:
Net Investment Income 2.05% 2.38% 2.68%
2.53% -
Expenses including
Expenses of the
Equity 500 Index Portfolio 0.25% 0.25%
0.25% 0.25% -
Decrease Reflected in Above Expense Ratio
Due to Absorption of Expenses
by Bankers Trust 0.22% 0.23%
0.29% 1.82% -
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated December 31, 1996, which can be obtained free of
charge.
Small Cap Index Fund
Institutional
Class Shares Advisor Class Shares
For the period July 10,
1996 For the period August 8, 1996
(Commencement of Operations)
(Commencement of Operations)
to
December 31, 1996 to December 31, 1996
Per Share Operating Performance:
Net Asset Value, Beginning of Period $ 10.00
$ 10.00
Income from Investment Operations
Net Investment Income 0.04
0.02
Net Realized and Unrealized Gain on Investments and
Futures Transactions 0.90
1.06
Total from Investment Operations 0.94
1.08
Distributions to Shareholders
Net Investment Income (0.04)
(0.04)
Net Realized Gain from Investment Transactions (0.00)+
(0.00)+
Total Distributions
(0.04) (0.04)+
Net Asset Value, End of Period $ 10.90
$ 11.04
Total Investment Return 9.47%
10.87%
Supplemental Data and Ratios:
Net Assets, End of Period (000s omitted) $ 61,558
$ 77
Ratios to Average Net Assets:
Net Investment Income 1.71%*
1.61%*
Expenses, including expenses of the
Small Cap Index Portfolio 0.25%*
0.45%*
Decrease Reflected In Above Expense Ratio Due
to Absorption of Expenses by Bankers Trust 0.62%*
22.69%*
*Annualized
+Less than $0.01
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated December 31, 1996, which can be obtained free of
charge.
EAFE Equity Index Fund
Institutional Class Shares Advisor Class Shares
January 24, 1996 For the period June 21, 1996
(Commencement of
Operations) (Commencement of Operations)
to
December 31, 1996 to December 31, 1996
Per Share Operating Performance:
Net Asset Value, Beginning of Period $ 10.00
$ 10.00
Income from Investment Operations
Net Investment Income 0.12
0.02
Net Realized and Unrealized Gain on Investments and
Foreign Currency Transactions 0.60
0.12
Total from Investment Operations 0.72
0.14
Distributions to Shareholders
Net Investment Income (0.08)
(0.00)+
Net Realized Gain from Investment Transactions (0.02)
(0.00)+
Total Distributions
(0.10) (0.00)+
Net Asset Value, End of Period $ 10.62
$ 10.14
Total Investment Return 7.22%
1.57%
Supplemental Data and Ratios:
Net Assets, End of Period (000s omitted) $ 39,667
$ 717
Ratios to Average Net Assets:
Net Investment Income 1.64%*
0.67%*
Expenses, including expenses of the
EAFE Equity Index Portfolio 0.40%*
0.65%*
Decrease Reflected In Above Expense Ratio Due
to Absorption of Expenses by Bankers Trust 0.48%*
1.70%*
*Annualized
+Less than $0.01
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated December 31, 1996, which can be obtained free of
charge.
THE FUNDS IN DETAIL
INVESTMENT OBJECTIVES AND POLICIES
The Trusts seek to achieve the investment objective of each Fund by
investing all of its Assets in the corresponding Portfolio, which has the
same investment objective as the Fund. Since the investment characteristics
of each Fund will correspond directly to those of the corresponding
Portfolio, the following is a discussion of the various investments of and
techniques employed by each Portfolio. Additional information about the
investment policies of each Portfolio appears in `Risk Factors and Certain
Securities and Investment Practices'' herein and in the Funds' SAI. There
can be no assurance that the investment objective of either a Fund or the
corresponding Portfolio will be achieved.
The U.S. Bond Index Portfolio seeks to replicate as closely as possible
(before deduction of Expenses) the investment performance of the Aggregate
Bond Index, a broad market weighted index which encompasses four major
classes of investment grade fixed-income securities in the United States:
U.S. Treasury and agency securities, corporate bonds, international
(dollar-denominated) bonds, and mortgage-backed securities, with maturities
greater than one year.
As of December 31, 1996, the major classes of fixed-income securities
represented the following proportions of the Index's total market value:
Aggregate
Bond Index
U.S. Treasury and agency securities
51%
Corporate bonds
14%
International (dollar-denominated) bonds 4%
Mortgage-backed securities
30%
Asset Backed Securities
1%
Dollar-weighted average maturity (Years) 8.7
Years
The U.S. Bond Index Portfolio will be unable to hold all of the individual
issues which comprise the Index because of the large number of securities
involved. Instead, the Portfolio will hold a representative sample of the
securities in the Index, selecting one or two issues to represent entire
`classes'' or types of securities in the Index. The Portfolio will be
constructed so as to match as closely as possible the composition of the
Index by investing in fixed-income securities approximating their relative
proportion of the Index's total market value.
At the broadest level, the U.S. Bond Index Portfolio will seek to hold
securities and other investments which reflect the weighting of the major
asset classes in the Index. These classes include U.S. Treasury and agency
securities, corporate bonds, and mortgage-backed securities. For example,
if U.S. Treasury and agency securities represent approximately 51% of the
Index's interest rate risk, then approximately 51% of the Portfolio's
interest rate risk will come from such securities and other investments.
Similarly, if corporate bonds represent 14% of the interest rate risk of
the Index, then they will represent approximately 14% of the interest rate
risk of the Portfolio. Such a sampling technique is expected to be an
effective means of substantially replicating the income and capital returns
provided by the Index before deduction of Fund and Portfolio expenses.
The Portfolio may, from time to time, substitute one type of investment
grade bond for another. For instance, a Portfolio may hold more short-term
corporate bonds (and, in turn, hold fewer short U.S. Treasury bonds) than
represented in the Index so as to increase income. This corporate
substitution strategy will entail the assumption of additional credit risk;
however, substantial diversification within the corporate sector should
moderate issue-specific credit risk. Overall, credit risk is expected to be
very low for the U.S. Bond Index Portfolio.
Fixed-income securities will be primarily of investment grade quality -
i.e., those rated at least Baa by Moody's Investors Service, Inc.
(`Moody's'') or BBB-by Standard & Poor's Ratings Group (``S&P'').
Securities rated Baa or BBB possess some speculative characteristics. The
Portfolio may invest in U.S. Treasury bills, notes and bonds and other
`full faith and credit'' obligations of the U.S. government and in U.S.
government agency securities, which are debt obligations issued or
guaranteed by agencies or instrumentalities of the U.S. government (`U.S.
Government Securities'). Such ``agency'' securities may not be backed by
the `full faith and credit'' of the U.S. government. Such U.S. Government
agencies may include the Farm Credit Banks, the Resolution Trust
Corporation and the Government National Mortgage Association. Even though
they all carry top (AAA) credit ratings, `agency'' obligations are not
explicitly guaranteed by the U.S. government and so are perceived as
somewhat riskier than comparable Treasury bonds.
As a mutual fund investing primarily in fixed-income securities, the
Portfolio is subject to interest rate, income, call and credit risks. Since
the Portfolio also invests in mortgage-backed securities, it is also
subject to prepayment risk. See `Risk Factors and Certain Securities and
Investment Practices.''
For more information about the historical performance of the Aggregate Bond
Index, see the SAI.
The EQUITY 500 EQUAL WEIGHTED INDEX PORTFOLIO seeks to replicate as closely
as possible (before deduction of Expenses) the total return of the S&P 500
Equal Weighted Index. The S&P 500 Equal Weighted Index is comprised of all
stocks that make up the Standard & Poor's 500 Composite Stock Price Index
with each security having the same weight. The S&P 500 Equal Weighted Index
is re-balanced to these equal weights at the end of each calendar month.
Investing in a fund designed to replicate this benchmark provides investors
with diversified equity exposure with a small cap tilt and value investment
attributes.
The EQUITY 500 EQUAL WEIGHTED INDEX PORTFOLIO allocates its assets equally
among the equity securities which compose the S&P 500 Equal Weighted Index.
The Portfolio may omit or remove any S&P 500 Equal Weighted Index stock
from the Portfolio if, following objective criteria, Bankers Trust judges
the stock to be insufficiently liquid or believes the merit of the
investment has been substantially impaired by extraordinary events or
financial conditions. Bankers Trust will not purchase the stock of Bankers
Trust New York Corporation, which is included in the Index, and instead
will overweight its holdings of companies engaged in similar businesses.
The Equity 500 Equal Weighted Index Fund and the Equity 500 Equal Weighted
Index Portfolio are not sponsored, endorsed, sold or promoted by Wilshire
Associates. Wilshire makes no representation or warranty, express or
implied, to the shareholders of the Fund or investors in the Portfolio or
any member of the public regarding the advisability of investing in
securities generally or in the Fund or the Portfolio particularly or the
ability of the index to track general stock market performance.
The SMALL CAP INDEX PORTFOLIO seeks to replicate as closely as possible
(before deduction of Expenses) the total return of the Russell 2000. The
Russell 2000 is composed of approximately 2,000 small-capitalization common
stocks. A company's stock market capitalization is the total market value
of its floating outstanding shares. As of December 31, 1996, the average
stock market capitalization of the Russell 2000 was $360 million and the
weighted average stock market capitalization of the Russell 2000 was $640
million.
The Small Cap Fund and the Small Cap Portfolio are neither sponsored by nor
affiliated with the Frank Russell Company. Frank Russell's only
relationship to the Fund and the Portfolio is the licensing of the use of
the Russell 2000. Frank Russell Company is the owner of the trademarks and
copyrights relating to the Russell indices. The Small Cap Portfolio invests
in a statistically selected sample of the approximately 2,000 stocks
included in the Russell 2000. The stocks of the Russell 2000 to be included
in the Small Cap Index Portfolio will be selected utilizing a statistical
sampling technique known as `optimization.'' This process selects stocks
for the Portfolio so that various industry weightings, market
capitalizations and fundamental characteristics (e.g. price-to-book, price-
to-earnings, debt-to-asset ratios, and dividend yields) closely approximate
those of the Russell 2000. For instance, if 10% of the capitalization of
the Russell 2000 consists of utility companies with relatively small
capitalizations, then the Small Cap Portfolio is constructed so that
approximately 10% of the Portfolio's assets are invested in the stocks of
utility companies with relatively small capitalizations. The stocks held by
the Portfolio are weighted to make the Portfolio's aggregate investment
characteristics similar to those of the Russell 2000 Index as a whole.
For more information about the historical performance of the Russell 2000,
see the SAI.
The EAFE(R) EQUITY INDEX PORTFOLIO seeks to replicate as closely as
possible (before deduction of Expenses) the total return of the EAFE Index.
The Portfolio attempts to achieve this objective by investing in a
statistically selected sample of the equity securities included in the EAFE
Index.
The EAFE Index is a capitalization-weighted index containing approximately
1,100 equity securities of companies located outside the United States. The
countries currently included in the EAFE Index are Australia, Austria,
Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy,
Japan, Malaysia, The Netherlands, New Zealand, Norway, Singapore, Spain,
Sweden, Switzerland and United Kingdom.
Inclusion of a security in the EAFE Index in no way implies an opinion by
Morgan Stanley as to its attractiveness as an investment. Neither the Fund
nor the Portfolio is sponsored by or affiliated with Morgan Stanley. The
EAFE(R) Equity Index Portfolio is constructed to have aggregate investment
characteristics similar to those of the EAFE Index. The Portfolio invests
in a statistically selected sample of the securities included in the EAFE
Index, although not all companies within a country will be represented in
the Portfolio at the same time. Stocks are selected for inclusion in the
Portfolio based on country of origin, market capitalization, yield,
volatility and industry sector. Bankers Trust will manage the Portfolio
using advanced statistical techniques to determine which stocks are to be
purchased or sold to replicate the EAFE Index. From time to time,
adjustments may be made in the Portfolio because of changes in the
composition of the EAFE Index, but such changes should be infrequent.
This Fund and Portfolio are not sponsored, endorsed, sold or promoted by
Morgan Stanley. Morgan Stanley makes no representation or warranty, express
or implied, to the owners of this Fund or any member of the public
regarding the advisability of investing in securities generally or in this
Fund and Portfolio particularly or the ability of the EAFE Index to track
general stock market performance. Morgan Stanley is the licensor of certain
trademarks, service marks and trade names of Morgan Stanley and of the EAFE
Index which is determined, composed and calculated by Morgan Stanley
without regard to the issuer of this Fund and Portfolio or this Fund and
Portfolio itself. Morgan Stanley has no obligation to take the needs of the
issuer of this Fund and Portfolio or the owners of this Fund and Portfolio
into consideration in determining, composing or calculating the EAFE Index.
Inclusion of a security in the EAFE Index in no way implies an opinion by
Morgan Stanley as to its attractiveness as an investment. Morgan Stanley is
not responsible for and has not participated in the determination of the
timing of, prices at, or quantities of this Fund and Portfolio to be issued
or in the determination or calculation of the equation by which this Fund
is redeemable for cash. Morgan Stanley has no obligation or liability to
owners of this Fund and Portfolio in connection with the administration,
marketing or trading of this Fund and Portfolio. This Fund and Portfolio is
neither sponsored by nor affiliated with Morgan Stanley.</R.
ALTHOUGH MORGAN STANLEY SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR
USE IN THE CALCULATION OF THE INDICES FROM SOURCES WHICH MORGAN STANLEY
CONSIDERS RELIABLE, MORGAN STANLEY DOES NOT GUARANTEE THE ACCURACY AND/OR
THE COMPLETENESS OF THE INDICES OR ANY DATA INCLUDED THEREIN. MORGAN
STANLEY MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED
BY LICENSEE, LICENSEE'S CUSTOMERS AND COUNTERPARTIES, OWNERS OF THE
PRODUCTS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDICES OR ANY
DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR
FOR ANY OTHER USE. MORGAN STANLEY MAKES NO EXPRESS OR IMPLIED WARRANTIES,
AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDEXES OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL MORGAN
STANLEY HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE,
CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
For more information about the performance of the EAFE Index, see the SAI.
The EQUITY 500 INDEX PORTFOLIO seeks to replicate as closely as possible
(before deduction of Expenses) the total return of the S&P 500. The S&P 500
is an index of 500 common stocks, most of which trade on the New York Stock
Exchange Inc. (the `NYSE''). Bankers Trust believes that the S&P 500 is
representative of the performance of publicly traded common stocks in the
U.S. in general.
In seeking to replicate the performance of the S&P 500, before deduction of
Fund and Portfolio expenses, Bankers Trust will attempt over time to
allocate the Equity 500 Index Portfolio's investment among common stocks in
approximately the same proportions as they are represented in as the S&P
500, beginning with the heaviest weighted stocks that make up a larger
portion of the S&P 500 value.
The Adviser utilizes a two-stage sampling approach in seeking to obtain its
objective. Stage one, which encompasses large cap stocks, maintains the
stock holdings at or near their benchmark weights. Large capitalization
stocks are defined as those securities which represent 0.10% or more of the
index. In stage two, smaller stocks are analyzed and selected using risk
characteristics and industry weights in order to match the sector and risk
characteristics of the smaller companies in the S&P 500. This approach
helps to maximize portfolio liquidity while minimizing costs. Bankers Trust
generally will seek to match the composition of the S&P 500 but usually
will not invest the Equity 500 Index Portfolio's stock portfolio to mirror
the S&P 500 exactly. Because of the difficulty and expense of executing
relatively small stock transactions, the Portfolio may not always be
invested in the less heavily weighted S&P 500 stocks, and may at times have
its portfolio weighted differently from the S&P 500, particularly if the
Portfolio has a low level of assets. In addition, the Portfolio may omit or
remove any S&P 500 stock from the Portfolio if, following objective
criteria, Bankers Trust judges the stock to be insufficiently liquid or
believes the merit of the investment has been substantially impaired by
extraordinary events or financial conditions. Bankers Trust will not
purchase the stock of Bankers Trust New York Corporation, which is included
in the S&P 500, and instead will overweight its holdings of companies
engaged in similar businesses.
About the S&P 500. The S&P 500 is composed of 500 common stocks, which
are chosen by S&P on a statistical basis to be included in the Index. The
inclusion of a stock in the S&P 500 in no way implies that S&P believes the
stock to be an attractive investment. The 500 securities represented, as of
December 31, 1996 approximately 79% of the market value of all U.S. common
stocks. Each stock in the S&P 500 is weighted by its market value. The
composition of the S&P 500 is determined by S&P and is based on such
factors as the market capitalization and trading activity of each stock and
its adequacy as a representation of stocks in a particular industry group,
and may be changed from time to time.
The Equity 500 Index Fund and the Equity 500 Index Portfolio are not
sponsored, endorsed, sold or promoted by Standard & Poor's Corporation. S&P
makes no representation or warranty, express or implied, to the
shareholders of the Fund or investors in the Portfolio or any member of the
public regarding the advisability of investing in securities generally or
in the Fund or the Portfolio particularly or the ability of the S&P 500 to
track general stock market performance.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500
or any data included therein.
S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE RESULTS TO BE OBTAINED
BY THE FUND OR THE PORTFOLIO, OWNERS OF THE FUND OR THE PORTFOLIO, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES AND HEREBY EXPRESSLY
DISCLAIMS ALL SUCH WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 OR ANY DATA INCLUDED
THEREIN.
GENERAL
Over time, the correlation between the performance of each Fund, before the
deduction of Expenses, and the respective index is expected to be 0.95 or
higher. A correlation of 1.00 would indicate perfect correlation, which
would be achieved when the net asset value of the Fund, including the value
of its dividend and any capital gain distributions, increases or decreases
in exact proportion to changes in its respective Index. Each Fund's ability
to track its respective index may be affected by, among other things,
transaction costs, administration and other expenses incurred by the Funds
or the corresponding Portfolio, changes in either the composition of the
Index or the assets of a Portfolio, and the timing and amount of Portfolio
investor contributions and withdrawals, if any. In the unlikely event that
a high correlation is not achieved, the Trusts' Boards of Trustees will
consider alternatives. Because each Portfolio seeks to track the respective
index, Bankers Trust will not attempt to judge the merits of any particular
stock as an investment.
Under normal circumstances, each Portfolio will invest at least 80% of its
assets in the securities of its respective index.
As diversified funds, no more than 5% of the assets of each Portfolio may
be invested in the securities of one issuer (other than U.S. Government
Securities), except that up to 25% of each Portfolio's assets may be
invested without regard to this limitation. Each Portfolio will not invest
more than 25% of its assets in the securities of issuers in any one
industry. In the unlikely event that the S&P 500 should concentrate to an
extent greater than that amount, each Portfolio's ability to achieve its
investment objective may be impaired. These are fundamental investment
policies of the Portfolios which may not be changed without investor
approval. No more than 15% of each Portfolio's net assets may be invested
in illiquid or not readily marketable securities (including repurchase
agreements and time deposits maturing in more than seven calendar days).
Additional investment policies of each Portfolio are contained in the SAI.
Each Portfolio may maintain up to 20% of its assets in short-term debt
securities and money market instruments to meet redemption requests or to
facilitate investment in the securities of the respective index. Securities
index futures contracts and related options, warrants, convertible
securities and swap agreements may be used for several reasons: to simulate
full investment in the underlying index while retaining a cash balance for
fund management purposes, to facilitate trading, or to reduce transaction
costs or to seek higher investment returns when a futures contract, option,
warrant, convertible security or swap agreement is priced more attractively
than the underlying equity security or index. These instruments may be
considered derivatives. See `Risk Factors and Certain Securities and
Investment Practices'' herein.
The use of derivatives for non-hedging purposes may be considered
speculative. While each of these securities can be used as leveraged
investments, a Portfolio may not use them to leverage its net assets. No
Portfolio will invest in such instruments as part of a temporary defensive
strategy (such as altering the aggregate maturity of the Portfolio) to
protect the Portfolio against potential market declines.
Each Portfolio may lend its investment securities and purchase
securities on a when-issued and a delayed delivery basis. The U.S. Bond
Index Portfolio may invest in mortgage-related and other asset-backed
securities. The EAFE(R) Equity Index Portfolio may engage in foreign
currency forward and futures transactions for the purpose of enhancing
portfolio returns or hedging against foreign exchange risk arising from the
Portfolio's investment or anticipated investment in securities denominated
in foreign currencies. See `Risk Factors and Certain Securities and
Investment Practices'' herein and in the SAI for more information about the
investment practices of the Portfolios.
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of
instruments in which a Portfolio may invest and strategies Bankers Trust
may employ in pursuit of a Portfolio's investment objective. A summary of
risks and restrictions associated with these instrument types and
investment practices is included as well.
Bankers Trust may not buy all of these instruments or use all of these
techniques to the full extent permitted unless it believes that doing so
will help a Portfolio achieve its goal. Holdings and recent investment
strategies are described in the financial reports of a Fund and the
corresponding Portfolio, which are sent to Fund shareholders twice a year.
For a free SAI or financial report, call an Investment Professional or
Bankers Trust.
Fixed Income Security Risk - U.S. Bond Index Fund.
Investors in the U.S. Bond Index Fund are exposed to four types of risk
from fixed income securities: (1) Interest rate risk is the potential for
fluctuations in bond prices due to changing interest rates; (2) Income risk
is the potential for a decline in a Portfolio's income due to falling
market interest rates; (3) Credit risk is the possibility that a bond
issuer will fail to make timely payments of either interest or principal to
the Portfolio; and (4) Prepayment risk or call risk is the likelihood that,
during periods of falling interest rates, securities with high stated
interest rates will be prepaid (or `called'') prior to maturity, requiring
the Portfolio to invest the proceeds at generally lower interest rates.
Market Risk - Equity 500 Index Fund, Equity 500 Equal Weighted Index Fund,
Small Cap Index Fund and EAFE(R) Equity Index Fund.
As mutual funds investing primarily in common stocks, these Portfolios are
subject to market risk-i.e., the possibility that common stock prices will
decline over short or even extended periods. The U.S. and foreign stock
markets tend to be cyclical, with periods when stock prices generally rise
and periods when prices generally decline.
Risks of Investing In Medium- and Small-Capitalization Stocks -- Small Cap
Index Fund.
Historically, medium- and small-capitalization stocks have been more
volatile in price than the larger-capitalization stocks included in the S&P
500. Among the reasons for the greater price volatility of these securities
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
medium- and small-size companies to changing economic conditions. In
addition to exhibiting greater volatility, medium- and small-size company
stocks may fluctuate independently of larger company stocks. Medium- and
small-size company stocks may decline in price as large company stocks
rise, or rise in prices as large company stocks decline.
Risks of Investing in Foreign Securities - EAFE(R) Equity Index Portfolio.
Investors should realize that investing in securities of foreign issuers
involves considerations not typically associated with investing in
securities of companies organized and operated in the United States.
Investors should realize that the value of a Portfolio's foreign
investments may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or
imposition of (or change in) exchange control or tax regulations in foreign
countries. In addition, changes in government administrations or economic
or monetary policies in the United States or abroad could result in
appreciation or depreciation of portfolio securities and could favorably or
unfavorably affect the Portfolio's operations. Furthermore, the economies
of individual foreign nations may differ from the U.S. economy, whether
favorably or unfavorably, in areas such as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency
and balance of payments position; it may also be more difficult to obtain
and enforce a judgment against a foreign issuer. In general, less
information is publicly available with respect to foreign issuers than is
available with respect to U.S. companies.
Most foreign companies are also not subject to the uniform accounting and
financial reporting requirements applicable to issuers in the United
States. Any foreign investments made by the Portfolio must be made in
compliance with U.S. and foreign currency restrictions and tax laws
restricting the amounts and types of foreign investments.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, the value of the net assets of the
Portfolio as measured in U.S. dollars will be affected favorably or
unfavorably by changes in exchange rates. In order to protect against
uncertainty in the level of future foreign currency exchange rates, the
Portfolio is also authorized to enter into certain foreign currency
exchange transactions. Furthermore, the Portfolio's foreign investments may
be less liquid and their prices may be more volatile than comparable
investments in securities of U.S. companies. The settlement periods for
foreign securities, which are often longer than those for securities of
U.S. issuers, may affect portfolio liquidity. Finally, there may be less
government supervision and regulation of securities exchanges, brokers and
issuers in foreign countries than in the United States.
Special Information Concerning Master-Feeder Fund Structure
Unlike other open-end management investment companies (mutual funds) which
directly acquire and manage their own portfolio securities, each Fund seeks
to achieve its investment objective by investing all of its Assets in the
corresponding Portfolio, a separate registered investment company with the
same investment objectives as the Fund. Therefore, an investor's interest
in the Portfolio's securities is indirect, like investments in other
investment companies and pooled investment vehicles. In addition to selling
a beneficial interest to the corresponding Fund, each Portfolio may sell
beneficial interests to other mutual funds or institutional investors. Such
investors will invest in a Portfolio on the same terms and conditions and
will pay a proportionate share of the Portfolio's expenses. However, the
other investors investing in a Portfolio are not required to sell their
shares at the same public offering price as the Fund due to variations in
sales commissions and other operating expenses. Therefore, investors in a
Fund should be aware that these differences may result in differences in
returns experienced by investors in the different funds that invest in the
Portfolio. Such differences in returns are also present in other mutual
fund structures. Information concerning other holders of interests in the
Portfolio is available from Bankers Trust, as the Administrator, at (800)
730-1313.
The master-feeder structure is relatively complex, so shareholders
should carefully consider this investment approach.
Smaller funds investing in a Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large
fund withdraws from a Portfolio, the remaining funds may experience higher
pro rata operating expenses, thereby producing lower returns (however, this
possibility exists as well for traditionally structured funds which have
large institutional investors). Additionally, a Portfolio may become less
diverse, resulting in increased portfolio risk. Also, funds with a greater
pro rata ownership in a Portfolio could have effective voting control of
the operations of the Portfolio. Except as permitted by the SEC, whenever a
Trust is requested to vote on matters pertaining to a Portfolio, each Trust
will hold a meeting of shareholders of the Fund and will cast all of its
votes in the same proportion as the votes of the Fund's shareholders. Fund
shareholders who do not vote will not affect a Trust's votes at the
Portfolio meeting. The percentage of a Trust's votes representing Fund
shareholders not voting will be voted by the Trustees or officers of the
Trust in the same proportion as the Fund shareholders who do, in fact,
vote. Certain changes in the Portfolio's investment objectives, policies or
restrictions may require the Fund to withdraw its interest in the
Portfolio. Any such withdrawal could result in a distribution `in kind'' of
portfolio securities (as opposed to a cash distribution from the
Portfolio). If securities are distributed, the Fund could incur brokerage,
tax or other charges in converting the securities to cash. In addition, the
distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Fund. Notwithstanding
the above, there are other means for meeting redemption requests, such as
borrowing.
A Fund may withdraw its investment from a Portfolio at any time, if the
Board of Trustees of a Trust determines that it is in the best interests of
the shareholders of the Fund to do so.
Upon any such withdrawal, the Board of Trustees of the Trust would consider
what action might be taken, including the investment of all the Assets of
the Fund in another pooled investment entity having the same investment
objectives as the Fund or the retaining of an investment adviser to manage
the Fund's Assets in accordance with the investment policies described
herein with respect to the corresponding Portfolio.
Each Fund's investment objective is not a fundamental policy and may be
changed upon notice to but without the approval of the Fund's shareholders.
If there is a change in a Fund's investment objective, the Fund's
shareholders should consider whether the Fund remains an appropriate
investment in light of their then-current needs. The investment objective
of each Portfolio is also not a fundamental policy. Shareholders of the
Funds will receive 30 days prior written notice with respect to any change
in the investment objective of a Fund or the corresponding Portfolio. See
`Risk Factors and Certain Securities and Investment Practices'' in the SAI
for a description of the fundamental policies of each Portfolio that cannot
be changed without approval by `the vote of a majority of the outstanding
voting securities''(as defined in the Investment Company Act of 1940, as
amended (the `1940 Act''), of the Portfolio.
For descriptions of the investment objective, policies and restrictions
of each Portfolio, see `The Funds in Detail'' herein and ``Risk Factors
and Certain Securities and Investment Practices'' herein and in the SAI.
For descriptions of the management and expenses of the Trusts and the
Portfolios, see `Management of the Trusts and the Portfolios'' herein and
in the SAI.
SECURITIES AND INVESTMENT PRACTICES
SHORT-TERM INVESTMENTS. Each Portfolio may invest in certain short-term
fixed income securities. Such securities may be used to invest uncommitted
cash balances, to maintain liquidity to meet shareholder redemptions or to
serve as collateral for the obligations underlying a Portfolio's investment
in securities index futures or related options or warrants. These
securities include: obligations issued or guaranteed by the U.S. government
or any of its agencies or instrumentalities or by any of the states,
repurchase agreements, time deposits, certificates of deposit, bankers'
acceptances and commercial paper.
U.S. GOVERNMENT SECURITIES are obligations of, or guaranteed by, the U.S.
government, its agencies or instrumentalities. Some U.S. government
securities, such as Treasury bills, notes and bonds, are supported by the
full faith and credit of the United States; others, such as those of the
Federal Home Loan Banks, are supported by the right of the issuer to borrow
from the Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S.
government to purchase the agency's obligations; and still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality.
SECURITIES LENDING. Each Portfolio may lend its investment securities to
qualified institutional investors for either short-term or long-term
purposes of realizing additional income. Loans of securities by a Portfolio
will be collateralized by cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The collateral will
equal at least 100% of the current market value of the loaned securities,
and such loans may not exceed 30% of the value of a Portfolio's net assets.
The risks in lending portfolio securities, as with other extensions of
credit, consist of possible loss of rights in the collateral should the
borrower fail financially. In determining whether to lend securities,
Bankers Trust will consider all relevant facts and circumstances, including
the creditworthiness of the borrower.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and
payment for these securities may take place as long as a month or more
after the date of the purchase commitment. The value of these securities is
subject to market fluctuation during this period and no income accrues to
the Portfolio until settlement takes place. The Portfolio segregates with
the Custodian liquid securities in an amount at least equal to these
commitments.
MORTGAGE-RELATED SECURITIES. As part of its effort to replicate the
investment performance of its Index, the U.S. Bond Index Portfolio may
invest in mortgage-backed securities. Mortgage-backed securities represent
an interest in an underlying pool of mortgages. Unlike ordinary fixed-
income securities, which generally pay a fixed rate of interest and return
principal upon maturity, mortgage-backed securities repay both interest
income and principal as part of their periodic payments. Because the
mortgages underlying mortgage-backed certificates can be prepaid at any
time by homeowners or corporate borrowers, mortgage-backed securities give
rise to certain unique `pre-payment'' risks. See ``Risk Factors and Certain
Securities and Investment Practices'' herein.
THE U.S. BOND INDEX PORTFOLIO may purchase mortgage-backed securities
issued by the Government National Mortgage Association (GNMA), the Federal
Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association (FNMA), and the Federal Housing Authority (FHA). GNMA
securities are guaranteed by the U.S. government as to the timely payment
of principal and interest; securities from other Government-sponsored
entities are generally not secured by an explicit pledge of the U.S.
government. The U.S. Bond Index Portfolio may also invest in conventional
mortgage securities, which are packaged by private corporations and are not
guaranteed by the U.S. government. Mortgage securities that are guaranteed
by the U.S. government are guaranteed only as to the timely payment of
principal and interest. The market value of such securities is not
guaranteed and may fluctuate.
DERIVATIVES. Each Portfolio may invest in various instruments that are
commonly known as `derivatives.'' Generally, a derivative is a financial
arrangement, the value of which is based on, or `derived'' from, a
traditional security, asset, or market index. Some `derivatives'' such as
mortgage-related and other asset-backed securities are in many respects
like any other investment, although they may be more volatile or less
liquid than more traditional debt securities. There are, in fact, many
different types of derivatives and many different ways to use them. There
are a range of risks associated with those uses. Futures and options are
commonly used for traditional hedging purposes to attempt to protect a fund
from exposure to changing interest rates, securities prices, or currency
exchange rates and as a low cost method of gaining exposure to a particular
securities market without investing directly in those securities. The
Adviser will only use derivatives for cash management purposes. Derivatives
will not be used to increase portfolio risk above the level that could be
achieved using only traditional investment securities or to acquire
exposure to changes in the value of assets or indices that by themselves
would not be purchased for the Portfolio.
Securities Index Futures and Related Options. Each Portfolio may enter into
securities index futures contracts and related options provided that not
more than 5% of its assets are required as a margin deposit for futures
contracts or options and provided that not more than 20% of a Portfolio's
assets are invested in futures and options at any time. When a Portfolio
has cash from new investments in the Portfolio or holds a portion of its
assets in money market instruments, it may enter into index futures or
options to attempt to increase its exposure to the market. Strategies the
Portfolio could use to accomplish this include purchasing futures
contracts, writing put options, and purchasing call options. When the
Portfolio wishes to sell securities, because of shareholder redemptions or
otherwise, it may use index futures or options to hedge against market risk
until the sale can be completed. These strategies could include selling
futures contracts, writing call options, and purchasing put options. Swap
Agreements. Each Portfolio may enter into swap agreements only to the
extent that obligations under such agreements represent not more than 10%
of the Portfolio's total assets.
Swap Agreements are contracts between parties in which one party agrees to
make payments to the other party based on the change in market value of a
specified index or asset. In return, the other party agrees to make
payments to the first party based on the return of a different specified
index or asset.
Although swap agreements entail the risk that a party will default on its
payment obligations thereunder, a Portfolio will minimize this risk by
entering into agreements that mark to market no less frequently than
quarterly. Swap agreements also bear the risk that a Portfolio will not be
able to meet its obligation to the counterparty. This risk will be
mitigated by investing a Portfolio in the specific asset for which it is
obligated to pay a return.
Warrants. Each Portfolio's investment in warrants will not exceed more than
5% of its assets (2% with respect to warrants not listed on the New York or
American Stock Exchanges). Warrants are instruments which entitle the
holder to buy underlying equity securities at a specific price for a
specific period of time. A warrant tends to be more volatile than its
underlying securities and ceases to have value if it is not exercised prior
to its expiration date. In addition, changes in the value of a warrant do
not necessarily correspond to changes in the value of its underlying
securities.
Convertible Securities. Each Portfolio may invest in convertible securities
which are a bond or preferred stock which may be converted at a stated
price within a specific period of time into a specified number of shares of
common stock of the same or different issuer. Convertible securities are
senior to common stock in a corporation's capital structure, but usually
are subordinated to non-convertible debt securities. While providing a
fixed income stream- generally higher in yield than in the income derived
from a common stock but lower than that afforded by a non-convertible debt
security-a convertible security also affords an investor the opportunity,
through its conversion feature, to participate in the capital appreciation
of common stock into which it is convertible.
In general, the market value of a convertible security is the higher of its
investment value (its value as a fixed income security) or its conversion
value (the value of the underlying shares of common stock if the security
is converted). As a fixed income security, the market value of a
convertible security generally increases when interest rates decline and
generally decreases when interest rates rise; however, the price of a
convertible security generally increases as the market value of the
underlying stock increases, and generally decreases as the market value of
the underlying stock declines. Investments in convertible securities
generally entail less risk than investments in the common stock of the same
issuer.
Further Risks Associated with the use of Futures Contracts, Options,
Warrants, Convertible Securities and Swap Agreements. The risk of loss
associated with futures contracts in some strategies can be substantial due
to both the low margin deposits required and the extremely high degree of
leverage involved in futures pricing. As a result, a relatively small price
movement in a futures contract may result in an immediate and substantial
loss or gain. However, the Portfolios will not use futures contracts,
options, warrants, convertible securities and swap agreements for
speculative purposes or to leverage their net assets. Accordingly, the
primary risks associated with the use of futures contracts, options,
warrants, convertible securities and swap agreements by the Portfolios are:
(i) imperfect correlation between the change in market value of the
securities held by a Portfolio and the prices of futures contracts,
options, warrants, convertible securities and swap agreements; and (ii)
possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures position prior to its maturity date.
The risk of imperfect correlation will be minimized by investing only in
those contracts whose behavior is expected to resemble that of a
Portfolio's underlying securities. The risk that a Portfolio will be unable
to close out a futures position will be minimized by entering into stock
transactions on an exchange with an active and liquid secondary market.
However options, warrants, convertible securities and swap agreements
purchased or sold over-the-counter may be less liquid than exchange-traded
securities. Illiquid securities, in general, may not represent more than
15% of the net assets of a Portfolio.
Foreign Currency Forward, Futures and Related Options Transactions. The
EAFE(R) Equity Index Portfolio may enter into foreign currency forward and
foreign currency futures contracts in order to maintain the same currency
exposure as the EAFE Index. The Portfolio may not enter into such contracts
as a way of protecting against anticipated adverse changes in exchange
rates between foreign currencies and the U.S. dollar. A foreign currency
forward contract is an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of
the contract agreed upon by the parties, at a price set at the time of the
contract. Such contracts do not eliminate fluctuations in the underlying
prices of securities held by the Portfolios. Although such contracts tend
to minimize the risk of loss due to a decline in the value of a currency
that has been sold forward, and the risk of loss due to an increase in the
value of a currency that has been purchased forward, at the same time they
tend to limit any potential gain that might be realized should the value of
such currency increase.
Successful use of forward contracts depends on Bankers Trust's skill in
analyzing and predicting relative currency values. Forward contracts alter
the EAFE(R) Equity Index Portfolio's exposure to currency exchange rate
activity and could result in losses to that Portfolio if currencies do not
perform as Bankers Trust anticipates. The Portfolio may also incur
significant costs when converting assets from one currency to another.
Asset Coverage. To assure that a Portfolio's use of futures and related
options, as well as when-issued and delayed-delivery securities, interest
rate swaps and foreign currency forward futures and related options
transactions are not used to achieve excessive investment leverage, a
Portfolio will cover such transactions, as required under applicable
interpretations of the SEC, either by owning the underlying securities,
entering into an off-setting transaction, or by segregating with the
Portfolio's Custodian liquid securities in an amount at all times equal to
or exceeding the Portfolio's commitment with respect to these instruments
or contracts.
PORTFOLIO TURNOVER
The frequency of Portfolio transactions-the Portfolio's portfolio turnover
rate-will vary from year to year depending on market conditions and the
Portfolio's cash flows. Each Portfolio's annual portfolio turnover rate is
not expected to exceed 100%.
The fiscal years ended December 31, 1996, and 1995, the portfolio turnover
rates for the Equity 500 Index Portfolio were 15% and 6%, respectively. For
the period from January 24, 1996 (Commencement of Operations) to December
31, 1996, the portfolio turnover rate for the EAFE Equity Index Portfolio
was 4%. For the period from July 1, 1996 (Commencement of Operations) to
December 31, 1996, the portfolio turnover rate for the Small Cap Index
Portfolio was 16%.
PERFORMANCE INFORMATION AND REPORTS
Each Portfolio's recent strategies and holdings, and the corresponding
Fund's performance, is detailed twice a year in the Funds' financial
reports (not available during the first year for each Fund other than the
Equity 500 Index Fund), which are sent to all Fund shareholders.
For current Fund performance or a free copy of a Fund's financial report,
please contact an Investment Professional or Bankers Trust.
Mutual fund performance is commonly measured as Total Return and/or Yield.
Each Fund's performance is affected by the expenses of that Fund.
Explanation of Terms
Total Return is the change in value of an investment in a Fund over a given
period, assuming reinvestment of any dividends and capital gains. A
cumulative total return reflects actual performance over a stated period of
time. An average annual total return is a hypothetical rate of return that,
if achieved annually, would have produced the same cumulative total return
if performance had been constant over the entire period. Average annual
total return calculations smooth out variations in performance; they are
not the same as actual year-by-year results. Average annual total returns
covering periods of less than one year assume that performance will remain
constant for the rest of the year.
Cumulative
Average Annual
Total Return
Total Return
for the period
for the period
from
from
commencement
commencement Total Return
of operations
of operations for 1 year
through
through ended
12/31/96
12/31/96 12/31/96
Equity 500 Index Fund(a) 22.83%
- ------ 16.88%
Small Cap Index Fund
- - -Advisor Class Shares(b) ---
10.87% -----
EAFE Equity Index Fund
- - -Advisor Class Shares(c) ---
1.57% ------
(a) Fund commenced operations on December 31, 1992
(b) Fund commenced operations on August 8, 1996
(c) Fund commenced operations on June 21, 1996
Yield refers to the income generated by an investment in a Fund over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all stock and bond
funds. Because this differs from other accounting methods, the quoted yield
may not equal the income actually paid to shareholders. This difference may
be significant for a Fund investing in a Portfolio whose investments are
denominated in foreign currencies.
Performance information may include comparisons of a Fund's investment
results to various unmanaged indices or results of other mutual funds or
investment or savings vehicles. From time to time, Fund rankings may be
quoted from various sources, such as Lipper Analytical Services, Inc.,
Value Line, and Morningstar, Inc.
The 30-day SEC yield for the period ended December 31, 1996 for the
Equity 500 Index Fund was 1.86%.
Unlike some bank deposits or other investments which pay a fixed yield for
a stated period of time, the total return of a Fund will vary depending
upon interest rates, the current market value of the securities held by the
corresponding Portfolio and changes in the expenses of the Fund or
Portfolio. In addition, during certain periods for which total return may
be provided, Bankers Trust may have voluntarily agreed to waive portions of
its fees, or reimburse certain operating expenses of a Fund or Portfolio,
on a month-to-month basis. Such waivers will have the effect of increasing
the Fund's net income (and therefore its yield and total return) during the
period such waivers are in effect.
TOTAL RETURNS AND YIELDS ARE BASED ON PAST RESULTS AND ARE NOT AN
INDICATION OF FUTURE PERFORMANCE.
MANAGEMENT OF THE TRUSTS AND THE PORTFOLIOS
Board of Trustees
Each Trust and each Portfolio is governed by a Board of Trustees which is
responsible for protecting the interests of investors. A majority of the
Trustees who are not `interested persons'' (as defined in the 1940 Act) of
the Trusts or the Portfolio, as the case may be, have adopted written
procedures reasonably appropriate to deal with potential conflicts of
interest arising from the fact that certain of the same individuals are
Trustees of the Trusts and the Portfolios, up to and including creating
separate boards of trustees. See `Management of the Trusts and the
Portfolios'' in the SAI for more information with respect to the Trustees
and officers of the Trusts and each Portfolio.
Investment Adviser
The Trusts have not retained the services of an investment adviser since
the Trusts seek to achieve the investment objective of each Fund by
investing all the Assets of the Fund in the corresponding Portfolio. Each
Portfolio has retained the services of Bankers Trust as investment adviser.
Bankers Trust Company and Its Affiliates
Bankers Trust Company, a New York banking corporation with principal
offices at 280 Park Avenue, New York, New York 10017, is a wholly owned
subsidiary of Bankers Trust New York Corporation. Bankers Trust conducts a
variety of general banking and trust activities and is a major wholesale
supplier of financial services to the international and domestic
institutional market.
As of December 31, 1996, Bankers Trust New York Corporation was the
seventh largest bank holding company in the United States with total assets
of approximately $120 billion. Bankers Trust is a worldwide merchant bank
dedicated to servicing the needs of corporations, governments, financial
institutions and private clients through a global network of over 120
offices in more than 40 countries. Investment management is a core business
of Bankers Trust, built on a tradition of excellence from its roots as a
trust bank founded in 1903. The scope of Bankers Trust's investment
management capability is unique due to its leadership positions in both
active and passive quantitative management and its presence in major equity
and fixed income markets around the world. Bankers Trust is one of the
nation's largest and most experienced investment managers with
approximately $227 billion in assets under management globally. Of that
total, approximately $92 billion are in U.S. equity index assets alone.
Bankers Trust has more than 50 years of experience managing retirement
assets for the nation's largest corporations and institutions. In the past,
these clients have been serviced through separate account and commingled
fund structures. Now, the BT Family of Funds brings Bankers Trust's
extensive investment management expertise - once available to only the
largest institutions in the U.S. - to individual investors. Bankers Trust's
officers have had extensive experience in managing investment portfolios
having objectives similar to those of each Portfolio.
Bankers Trust, subject to the supervision and direction of the Board of
Trustees of each Portfolio, manages each Portfolio in accordance with the
Portfolio's investment objective and stated investment policies, makes
investment decisions for the Portfolio, places orders to purchase and sell
securities and other financial instruments on behalf of the Portfolio and
employs professional investment managers and securities analysts who
provide research services to the Portfolio. Bankers Trust may utilize the
expertise of any of its world wide subsidiaries and affiliates to assist it
in its role as investment adviser. All orders for investment transactions
on behalf of a Portfolio are placed by Bankers Trust with broker-dealers
and other financial intermediaries that it selects, including those
affiliated with Bankers Trust. A Bankers Trust affiliate will be used in
connection with a purchase or sale of an investment for the Portfolio only
if Bankers Trust believes that the affiliate's charge for the transaction
does not exceed usual and customary levels. The Portfolio will not invest
in obligations for which Bankers Trust or any of its affiliates is the
ultimate obligor or accepting bank. The Portfolio may, however, invest in
the obligations of correspondents and customers of Bankers Trust.
The Investment Advisory Agreements provide for each Portfolio to pay
Bankers Trust receives a fee from each Portfolio, accrued daily and paid
monthly, equal on an annual basis to the following percentages of the
average daily net assets of the Portfolio for its then-current fiscal year:
U.S. Bond Index Portfolio, 0.15%; Equity 500 Equal Weighted Index
Portfolio, 0.25%; Small Cap Index Portfolio, 0.15%; EAFE(R) Equity Index
Portfolio, 0.25%; and Equity 500 Index Portfolio, 0.10%.
Bankers Trust has been advised by its counsel that, in counsel's opinion,
Bankers Trust currently may perform the services for the Trusts and the
Portfolios described in this Prospectus and the SAI without violation of
the Glass-Steagall Act or other applicable banking laws or regulations.
State laws on this issue may differ from the interpretations of relevant
Federal law, and banks and financial institutions may be required to
register as dealers pursuant to state securities law.
Bankers Trust investment personnel may invest in securities for their
own account pursuant to a code of ethics that establishes procedures for
personal investing and restricts certain transactions.
Portfolio Managers
Frank Salerno, Managing Director of Bankers Trust, is responsible for the
management of the Equity 500 Equal Weighted Index Portfolio, the Small Cap
Portfolio and the Equity 500 Index Portfolio. Mr. Salerno oversees
administration, management and trading of international and domestic equity
index strategies. He has been employed by Bankers Trust since 1981 and has
managed the Portfolios' assets since each Portfolio commenced operations.
Richard J. Vella, Managing Director of Bankers Trust, is responsible for
the day-to-day management of the EAFE(R) Equity Index Portfolio. Mr. Vella
has been employed by Bankers Trust since 1985 and has ten years of trading
and investment experience.
Louis R. D'Arienzo, Vice President of Bankers Trust, is responsible for the
day-to-day management of the U.S. Bond Index Portfolio. Mr. D'Arienzo has
been employed by Bankers Trust since 1981 and has twelve years of trading
and investment experience in fixed income securities.
Administrator
Under its Administration and Services Agreement with each Trust, Bankers
Trust calculates the net asset value of each Fund and generally assists the
Board of Trustees of the Trust in all aspects of the administration and
operation of the Funds. The Administration and Services Agreement provides
for the respective Trust to pay Bankers Trust a fee, accrued daily and paid
monthly equal on an annual basis to the following percentages of the
average daily net assets of the Fund, attributable to the Class, for its
then-current fiscal year: U.S. Bond Index Fund, 0.20%; Equity 500 Equal
Weighted Index Fund, 0.30%; Small Cap Index Fund, 0.25%; EAFE(R) Equity
Index Fund, 0.30%; and Equity 500 Index Fund, 0.30%.
Under an Administration and Services Agreement with each Portfolio, Bankers
Trust calculates the value of the assets of the Portfolio and generally
assists the respective Board of Trustees in all aspects of the
administration and operation of the Portfolios. The Administration and
Services Agreement provides for each Portfolio to pay Bankers Trust a fee,
accrued daily and paid monthly, equal on an annual basis to the following
percentages of the Portfolio's average daily net assets for its then-
current fiscal year: U.S. Bond Index Portfolio, 0.05%; Equity 500 Equal
Weighted Index Portfolio, 0.05%; Small Cap Index Portfolio, 0.05%; EAFE(R)
Equity Index Portfolio, 0.10%; and Equity 500 Index Portfolio, 0.05%. Under
each Administration and Services Agreement, Bankers Trust may delegate one
or more of its responsibilities to others, including affiliates of
Edgewood, at Bankers Trust's expense.
Distributor
Edgewood Services, Inc. is the principal distributor for Shares of the
Funds. In addition, Edgewood and its affiliates provide the Trusts with
office facilities and currently provide administration and distribution
services for other registered investment companies. The principal business
address of Edgewood and its affiliates is Clearing Operations, P.O. Box
897, Pittsburgh, Pennsylvania 15230-0897.
With respect to the Equity 500 Index Fund, pursuant to the terms of the
Trust's Distribution and Service Plan, adopted pursuant to Rule 12b-1 under
the 1940 Act (the `Plan''), Edgewood, as Distributor, may seed
reimbursement in an amount not exceeding 0.l20% of the Fund's average daily
net assets annually for expenses incurred in connection with any activities
primarily intended to result in the sale of the Fund's shares. These
activities include, but are not limited to: compensation to and
expenses(including overhead and telephone expenses) of account executives
or other employees of Edgewood who, as their primary activity, engage in or
support the distribution of shares; printing of prospectuses, SAIs and
reports for other than existing Fund shareholders in amounts in excess of
that typically used in connection with the distribution of shares of the
Fund; costs of placing advertising in various media; services of parties
other than Edgewood or its affiliates in formulating sales literature; and
typesetting, printing and distribution of sales literature. All costs and
expenses in connection with implementing and operating the Plan will be
paid by the Fund, subject to the 0.20% of net assets limitation. All costs
and expenses associated with preparing the prospectuses and statements of
additional information and in connection with printing them for and
distributing them to existing shareholders and regulatory authorities,
which costs and expenses would not be considered distribution expenses for
purposes of the Plan, will also be paid by the Fund. To the extent expenses
of Edgewood under the Plan in any fiscal year of the Trust exceed amounts
payable under the Plan during that year, those expenses will not be
reimbursed in any succeeding fiscal year. Expenses incurred in connection
with distribution activities will be identified to the Fund or the other
series of the Trust involved, although it is anticipated that some
activities may be conducted on a Trust-wide basis, with the result that
those activities will not be identifiable to any particular series. In the
latter case, expenses will be allocated among the series of the Trust on
the basis of their relative net assets. It is not expected that any
payments will be make under the Plan in the foreseeable future.
Custodian and Transfer Agent
Bankers Trust acts as custodian of the assets of the Trusts and each
Portfolio and serves as the transfer agent (the `Transfer Agent'') for the
Trusts and each Portfolio under the Administration and Services Agreement
with the Trusts and each Portfolio.
NET ASSET VALUE
The net asset value (`NAV'') per share of each Fund is calculated on each
day on which the New York Stock Exchange, Inc. (the `NYSE'') is open (each
such day being a `Valuation Day''). The NYSE is currently open on each day,
Monday through Friday, except: (a) January 1st, Presidents' Day (the third
Monday in February), Good Friday, Memorial Day (the last Monday in May),
July 4th, Labor Day (the first Monday in September), Thanksgiving Day (the
last Thursday in November) and December 25th; and (b) the preceding Friday
or the subsequent Monday when one of the calendar-determined holidays falls
on a Saturday or Sunday, respectively.
With the exception of the EAFE(R) Equity Index Fund, the Funds are open
for business each day the NYSE is open. Each Fund's NAV is calculated on
each Valuation Day as of the close of regular trading on the NYSE (the
`Valuation Time''), which is currently 4:00 p.m. Eastern time or in the
event that the NYSE closes early, at the time of such early closing. The
EAFE(R) Equity Index Fund will not process orders on any day when either
the NYSE or the Tokyo Stock Exchange is closed. Orders received on such
days will be priced on the next day the Fund computes its NAV. As such,
investors may experience a delay in purchasing or redeeming Shares of the
EAFE(R) Equity Index Fund.
A Fund's NAV is the value of a single Share. The NAV of each Fund is
computed by dividing the value of the Fund's Assets (i.e., the value of its
investment in the Portfolio and other assets), less all liabilities,
allocable to the Advisor Class Shares by the total number of its Shares
outstanding. Each Portfolio's securities and other assets are valued
primarily on the basis of market quotations or, if quotations are not
readily available, by Bankers Trust pursuant to procedures adopted by the
Portfolio's Board of Trustees. These procedures require Bankers Trust to
value such a security at the same value as an equivalent security which is
readily marketable and, in making such comparisons, to consider all
relevant factors under applicable guidelines of the SEC.
Under procedures adopted by the Board, a NAV for a Fund later determined to
have been inaccurate for any reason will be recalculated. Purchases and
redemptions made at NAV determined to have been inaccurate will be
adjusted, although in certain circumstances, such as where the difference
between the original NAV and the recalculated NAV divided by the
recalculated NAV is 0.005 (1/2 of 1%) or less or shareholder transactions
are otherwise insubstantially affected, further action is not required.
ACCOUNT INFORMATION
Types of Accounts
Read your Investment Professional's program materials in conjunction with
this Prospectus for details of services that may differ from those
described in the Prospectus and for additional fees that may apply. Some of
the services and features of this Prospectus may not be available to you.
Certain features of the Funds, such as minimum initial or subsequent
investment amounts, may be modified in these programs, and administrative
charges may be imposed for the services rendered. The different ways to set
up (register) your account with BT Advisor Funds are listed below.
The account guidelines that follow may not apply to certain Funds or to
certain retirement accounts. If your employer offers a Fund through a
retirement program, contact your employer for more information. Otherwise,
call your Investment Professional directly.
WAYS TO SET UP YOUR ACCOUNT
Individual or Joint Tenant For Your General Investment Needs Individual
accounts are owned by one person. Joint accounts can have two or more
owners (tenants). Joint accounts may only be joint tenants in common or
joint tenants with rights of survivorship. Gifts or Transfers to a Minor
(UGMA, UTMA) to Invest for a Child's Education or other Future Needs. These
custodial accounts provide a way to give money to a child and obtain tax
benefits. An individual can give up to $10,000 a year per child without
paying federal gift tax. Depending on state laws, you can set up a
custodial account under the Uniform Gifts to Minors Act (UGMA) or the
Uniform Transfers to Minors Act (UTMA). Contact your Investment
Professional or Bankers Trust.
Trust
For Money Being Invested by a Trust. The trust must be established before
on account can be opened.
Business or Organization
For Investment Needs of Corporations, Associations, Partnerships, or other
Groups. Contact your Investment Professional or Bankers Trust.
PURCHASE AND REDEMPTION OF SHARES
HOW TO BUY SHARES
The Trusts accept purchase orders for Shares of each Fund at the NAV per
Share (and, if applicable, of the respective class of shares) next
determined after the order is received on each Valuation Day. See `Net
Asset Value''herein. Shares of each Fund may be available through
Investment Professionals, such as broker/dealers and investment advisers
(including Service Agents).
Purchase orders for Shares of each Fund (including those purchased through
a Service Agent) that are transmitted to the Trusts' Transfer Agent (the
`Transfer Agent''), prior to the Valuation Time on any Valuation Day will
be effective at that day's Valuation Time. The Trusts and Transfer Agent
reserve the right to reject any purchase order.
Shares must be purchased in accordance with procedures established by the
Transfer Agent and each Service Agent. It is the responsibility of each
Service Agent to transmit to the Transfer Agent purchase and redemption
orders and to transmit to Bankers Trust as the Trust's custodian (the
`Custodian'') purchase payments by the following business day (trade date
+ 1) after an order for Shares is placed. A shareholder must settle with
the Service Agent for his or her entitlement to an effective purchase or
redemption order as of a particular time. Because Bankers Trust is the
Custodian and Transfer Agent of the Trust, funds may be transferred
directly from or to a customer's account held with Bankers Trust to settle
transactions with the Fund without incurring the additional costs or delays
associated with the wiring of Federal funds.
Certificates for Shares will not be issued. Each shareholder's account
will be maintained by a Service Agent or Transfer Agent.
If orders are placed through an Investment Professional, it is the
responsibility of the Investment Professional to transmit the order to buy
Shares of each class to the Transfer Agent before 4:00 p.m. Eastern time.
The Transfer Agent must receive payment within one business day after an
order for Shares is placed; otherwise, the purchase order may be canceled
and the investor could be held liable for resulting fees and/or losses.
MINIMUM INVESTMENTS
TO OPEN AN ACCOUNT $2,500
For retirement accounts 500
Through automatic investment plans 1,000
TO ADD TO AN ACCOUNT $250
For retirement accounts 100
Through automatic investment plan 100
MINIMUM BALANCE $1,000
For retirement accounts None
IF YOU ARE NEW TO BT ADVISOR FUNDS OR BT PYRAMID MUTUAL FUNDS complete
and sign an account application and mail it along with your check to the
address listed below. If there is no account application accompanying this
Prospectus, call the BT Service Center at 1-800-730-1313.
BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
Overnight mailings:
BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
IF YOU ALREADY HAVE MONEY INVESTED IN A FUND IN THE BT FAMILY OF FUNDS, you
can:
o Mail an account application with a check,
o Wire money into your account,
o Open an account by exchanging from another fund in the BT Family of
Funds, or
o Contact your Service Agent or Investment Professional.
If you are investing through a tax-sheltered retirement plan, such as an
IRA, for the first time, you will need a special application. Contact your
Investment Professional for more information and a retirement account
application.
ADDITIONAL INFORMATION ABOUT BUYING SHARES
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
BY WIRE Call the BT Service Center at Call your Investment Professional
or wire
1-800-730-1313 to receive additional investment to:
wire instructions for account
establishment.
ROUTING NO.: 021001033
ATTN: Bankers Trust/IFTC Deposit
DDA NO.: 00-226-296
FBO: (Account name)
(Account number)
CREDIT: Fund Number (see table below)
EAFE Equity Index-Advisor Class-510
Small Cap Index-Advisor Class- 509
U.S. Bond Index Fund-Advisor Class-507
Equity 500 Equal Weighted Index Fund-
Advisor Class- 508
BT Investment Equity 500 Index Fund-462
Specify the complete name of the Fund of your choice, and include your
account number and your name.
BY PHONE Contact your Service Agent, Contact your Service Agent,
Investment Professional, or call Investment Professional,
or call
BT's Service Center at BT's Service Center at
1-800-730-1313. If you are an 1-800-730-1313. If you are an
existing shareholder, you may existing shareholder, you may
exchange from another BT account exchange from another BT
account
with the same registration, including, with the same
registration, including,
name, address, and taxpayer name, address, and taxpayer
ID number. ID number.
BY MAIL Complete and sign the account Make your check payable to the
application. Make your check complete name of the Fund of
your payable to the complete name of the choice.
Indicate your Fund account Fund of your choice. Mail to the
number on your check and mail to the appropriate address
indicated on the address printed on your
application. account statement.
HOW TO SELL SHARES
You can arrange to take money out of your Fund account at any time by
selling (redeeming) some or all of your Shares. Your Shares shall be sold
at the next NAV calculated after an order is received by the Transfer
Agent. Redemption requests should be transmitted by customers in accordance
with procedures established by the Transfer Agent and the Shareholder's
Service Agent. Redemption requests for Shares of the Fund received by the
Service Agent and transmitted to the Transfer Agent prior to the Valuation
Time on each Valuation Day will be effective at that day's Valuation Time
and the redemption proceeds normally will be delivered to the shareholder's
account the next day, but in any event within seven calendar days following
receipt of the request.
Service Agents may allow redemptions or exchanges by telephone and may
disclaim liability for following instructions communicated by telephone
that the Service Agent reasonably believes to be genuine. The Service Agent
must provide the investor with an opportunity to choose whether or not to
utilize the telephone redemption or exchange privilege. The Transfer Agent
and the Service Agent must employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. If the Shareholder
Servicing Agent does not do so, it may be liable for any losses due to
unauthorized or fraudulent instructions. Such procedures may include, among
others, requiring some form of personal identification prior to acting upon
instructions received by telephone, providing written confirmation of such
transactions and/or tape recording of telephone instructions.
Redemption orders are processed without charge by the Trust. A Service
Agent may on at least 30 days' notice involuntarily redeem a shareholder's
account with the Fund having a balance below the minimum, but not if an
account is below the minimum due to a change in market value. See `Minimum
Investments''above for minimum balance amounts.
TO SELL SHARES IN A RETIREMENT ACCOUNT, your request must be made in
writing, except for exchanges to other eligible funds in the BT Family of
Funds, which can be requested by phone or in writing. For information on
retirement distributions, contact your Service Agent or call the BT Service
Center at 1-800-730-1313.
IF YOU ARE SELLING SOME BUT NOT ALL OF YOUR NON-RETIREMENT ACCOUNT SHARES,
leave at least $1,000 worth of Shares in the account to keep it open.
TO SELL SHARES BY BANK WIRE you will need to sign up for these services in
advance when completing your account application.
CERTAIN REQUESTS MUST INCLUDE A SIGNATURE GUARANTEE to protect you and
Bankers Trust from fraud. Redemption requests in writing must include a
signature guarantee if any of the following situations apply:
o Your account registration has changed within the last 30 days,
o The check is being mailed to a different address than the one on your
account (record address),
o The check is being made payable to someone other than the account
owner,
o The redemption proceeds are being transferred to a BT account with a
different registration, or
o You wish to have redemption proceeds wired to a non-predesignated bank
account.
A signature guarantee is also required if you change the pre-designated
bank information for receiving redemption proceeds on your account.
You should be able to obtain a signature guarantee from a bank, broker,
dealer, credit union (if authorized under state law), securities exchange
or association, clearing agency, or savings association. A notary public
cannot provide a signature guarantee.
ADDITIONAL INFORMATION ABOUT SELLING SHARES
BY WIRE - You must sign up for the wire feature before using it. To verify
that it is in place, call 1-800-730-1313. Minimum wire: $1,000. Your wire
redemption request must be received by the Transfer Agent before 4:00 p.m.
Eastern time for money to be wired on the next business day.
IN WRITING - Write a signed `letter of instruction'' with your name, the
Fund's name and Fund's number, your Fund account number, the dollar amount
or number of Shares to be redeemed, and mail to one of the following
addresses:
BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
Overnight mailings:
BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
For Trust accounts, the trustee must sign the letter indicating capacity as
trustee. If the trustee's name is not on the account registration, provide
a copy of the trust document certified within the last 60 days.
For a Business or Organization account, at least one person authorized by
corporate resolution to act on the account must sign the letter.
Unless otherwise instructed, the Transfer Agent will send a check to the
account address of record. The Trust reserves the right to close investor
accounts via 30 day notice in writing if the Fund account balance falls
below the Fund minimums.
INVESTOR SERVICES
BT Advisor Funds, and BT Pyramid Mutual Funds provide a variety of services
to help you manage your account.
INFORMATION SERVICES
STATEMENTS AND REPORTS that your Investment Professional or the Transfer
Agent may send to you include the following:
o Confirmation statements (after every transaction that affects your
account balance, including distributions or your account registration)
o Account statements (monthly)
o Financial reports (every six months)
To reduce expenses, only one copy of most financial reports will be
mailed, even if you have more than one account in the Fund. Call your
Investment Professional or the BT Service Center at 1-800-730-1313 if you
need additional copies of financial reports.
The Transfer Agent reserves the right to deduct an annual maintenance fee
of $12.00 from accounts with a value of less than $2,500 (including any
amount paid as a sales charge.) The fee, which is payable to the Transfer
Agent, is designed to offset in part the relatively higher costs of
servicing smaller accounts.
The Transfer Agent may charge a fee for special services, such as providing
historical account documents, that are beyond the normal scope of its
services.
EXCHANGE PRIVILEGE
Shareholders may exchange their Shares for shares of certain other funds
in the BT Family of Funds registered in their state. The Fund reserves the
right to terminate or modify the exchange privilege in the future. To make
an exchange, follow the procedures indicated in `How to Buy Shares'' and
`How to Sell Shares'' herein. Before making an exchange, please note the
following:
o Call your Service Agent for information and a prospectus. Read the
prospectus for relevant information.
o Complete and sign an application, taking care to register your new
account in the same name, address and taxpayer identification number
as your existing account(s).
o Each exchange represents the sale of shares of one fund and the
purchase of shares of another, which may produce a gain or loss for tax
purposes. Your Service Agent will receive a written confirmation of each
exchange transaction.
Note that exchanges out of a Fund may be limited to four per calendar year
and that they may have tax consequences for you.
SYSTEMATIC PROGRAMS
TO MOVE MONEY FROM YOUR BANK ACCOUNT TO BT ADVISOR FUNDS OR BT PYRAMID
MUTUAL FUNDS
MINIMUM MINIMUM FREQUENCY SETTING UP OR CHANGING
INITIAL SUBSEQUENT
$1,000 $100 Monthly, bimonthly, For a new account, complete
the quarterly or semi- appropriate section
annually on the application.
For existing accounts, call your
Investment Professional for an
application. To change the amount or
frequency of your investment, contact
your Investment Professional directly or
call 1-800-730-1313. Call at least 10
business days prior to your next
scheduled investment date.
SYSTEMATIC WITHDRAWAL PROGRAM lets you set up periodic redemptions from
your account. Because of the Shares' front-end sales charge, you may not
want to set up a systematic withdrawal plan during a period when you are
buying Shares on a regular basis.
MINIMUM FREQUENCY SETTING UP OR CHANGING
$100 Monthly, quarterly, To establish, call your Investment
Professional semi-annually or annually or call 1-800-730-
1313 after your account is open. The accounts
from which the withdrawals be processed
must have a minimum balance of $10,000.
TAX-SAVING RETIREMENT PLANS
Retirement plans offer significant tax savings and are available to
individuals, partnerships, small businesses, corporations, nonprofit
organizations and other institutions. Contact Bankers Trust for further
information. Bankers Trust can set up your new account in the Fund under a
number of several tax-savings or tax-deferred plans. Minimums may differ
from those listed elsewhere in this Prospectus.
o INDIVIDUAL RETIREMENT ACCOUNTS (IRAS): personal savings plans that
offer tax advantages for individuals to set aside money for retirement
and allow new contributions of $2,000 per tax year.
O ROLLOVER IRAS: tax-deferred retirement accounts that retain the
special tax advantages of lump sum distributions from qualified
retirement plans and transferred IRA accounts.
o SIMPLIFIED EMPLOYEE PENSION PLANS (SEP): a relatively easy and
inexpensive alternative to retirement planning for sole proprietors,
partnerships and corporations. Under a SEP, employers make tax-deductible
contributions to their own and to eligible employees' IRA accounts.
Employee contributions are available through a `Salary Deferral'' SEP for
businesses with fewer than 25 eligible employees.
o KEOGH PLANS: defined contribution plans available to individuals with
self-employed income and nonincorporated businesses such as sole
proprietors, professionals and partnerships. Contributions are tax-
deductible to the employer and earnings are tax- sheltered until
distribution.
o CORPORATE PROFIT-SHARING AND MONEY-PURCHASE PLANS: defined
contribution plans available to corporations to benefit their employees by
making contributions on their behalf and in some cases permitting
their employees to make contributions.
o 401(K) PROGRAMS: defined contribution plans available to corporations
allowing tax- deductible employer contributions and permitting employees
to contribute a percentage of their wages on a tax-deferred basis.
o 403(B) CUSTODIAN ACCOUNTS: defined contribution plans open to
employees of most non- profit organizations and educational institutions.
o DEFERRED BENEFIT PLANS: plan sponsors may invest all or part of their
pension assets in the Fund.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
Each Fund distributes substantially all of its net income and capital
gains to shareholders each year. Each Fund distributes capital gains
annually. Normally, income dividends for the Equity 500 Index Fund and
Equity 500 Equal Weighted Index Fund are distributed quarterly; income
dividends for the Small Cap Index Fund and EAFE Equity Index Fund are
distributed annually; and income dividends for the U.S. Bond Index Fund are
declared daily and distributed monthly.
Each Fund intends to qualify as a regulated investment company, as defined
in the Internal Revenue Code of 1986, as amended (the `Code''). Provided
the Funds meet the requirements imposed by the Code, the Funds will not pay
any Federal income of excise taxes. The Portfolios will also not be
required to pay any Federal income or excise taxes. Dividends paid by a
Fund from its taxable net investment income and distributions by a Fund of
its net realized short-term capital gains are taxable to shareholders as
ordinary income, whether received in cash or reinvested in additional
shares of a Fund. Each Fund's dividends and distribution will not qualify
for the dividends-received deduction for corporations.
.
Distribution Options
When you open an account, specify on your account application how you want
to receive distributions. The Trusts offer four options:
1. Reinvestment Option. Your dividend and capital gain distributions
will be automatically reinvested in additional Shares of the Fund. If you
do not indicate a choice on your application you will be assigned this
option.
2. Income-Earned Option. Your capital gain distributions will be
automatically reinvested in additional Shares of the Fund, but you will be
sent a check for each dividend distribution.
3. Cash Option. You will be sent a check for your dividend and capital
gain distributions.
4. Automatic Dividends Program. Your dividend and capital gain
distributions be automatically invested in another fund in the BT Family
of Funds as long as the minimums for that account are met.
If you select distribution option 2 or 3 and the U.S. Postal Service cannot
deliver your checks, or if your checks remain uncashed for six months,
those checks will be reinvested in your account at the current NAV and your
election may be converted to the Reinvestment Option. You may change
distribution option at anytime by notifying the Transfer Agent in writing.
For Retirement Accounts, all distributions are automatically reinvested.
When you are over 59 1/2 years old, you can receive distributions in cash.
If distributions from a retirement account for any taxable year following
the year in which the participant reaches age 70 1/2 are less than the
`minimum required distribution'' for that taxable year, an excise tax equal
to 50% of the deficiency may be imposed by the Internal Revenue Service
(the `IRS''). The administrator, trustee or custodian of such a retirement
account will be responsible for reporting distributions from such accounts
to the IRS.
When each of the Funds deducts a distribution from its NAV, the
reinvestment price is the applicable Fund's NAV at the close of business
that day. Distribution checks will be mailed within seven days, or longer
for a December ex-dividend date.
Federal Taxes. The Trusts intends to qualify each Fund as a regulated
investment company, as defined in the Internal Revenue Code of 1986, as
amended (the `Code''). Provided each Fund meets the requirements imposed by
the Code and distributes all of its income and gains, each Fund will not
pay any federal income or excise taxes. Each Portfolio will also not be
required to pay any federal income or excise taxes.
Distributions from the Fund's income and short-term capital gains are taxed
as dividends, and long-term capital gains distributions are taxed as long-
term capital gains. The Fund's distributions are taxable when they are
paid, whether you take them in cash or reinvest them in additional shares.
Distributions declared to shareholders of record in November and December
and paid in January are taxable as if paid on December 31. The Funds will
send each shareholder a tax statement by January 31 showing the tax status
of the distributions received in the past year.
Capital Gains. You may realize a capital gain or loss when you redeem
(sell) or exchange shares. Because the tax treatment also depends on your
purchase price and your personal tax position, you should keep your regular
account statements to use in determining your tax. `
`Buying a Dividend.'' On the ex-date for a distribution from income and/or
capital gains, the Fund's share value is reduced by the amount of the
distribution.
If you buy shares just before the ex-date (`buying a dividend''), you will
pay the full price for the shares and then receive a portion of the price
back as a taxable distribution.
Other Tax Information. In addition to Federal taxes, you may be subject to
state or local taxes on your investment, depending on the laws in your
area. You should consult with your own tax adviser concerning the
application of Federal, state and local taxes to your distributions from
the Fund.
ADDITIONAL INFORMATION
Each Fund is a mutual fund: an investment that pools shareholders' money
and invests it toward a specified goal. Each Fund (with the exception of
the Equity 500 Index Fund) is a separate diversified series of BT Advisor
Funds, a Massachusetts business trust. The Equity 500 Index Fund is
separate diversified series of BT Pyramid Mutual Funds. Each Fund (with the
exception of the Equity 500 Index Fund) offers two classes of Shares of
beneficial interest, Advisor Class Shares and Institutional Class Shares.
Each of the U.S. Bond Index Portfolio, Equity 500 Equal Weighted Index
Portfolio, Small Cap Index Portfolio, and EAFE(R) Equity Index Portfolio is
a separate diversified series of BT Investment Portfolios, a New York
master trust fund. The Equity 500 Index Portfolio is a separate New York
trust. Each Trust and BT Investment Portfolios reserves the right to add
additional series in the future. The Trust also reserves the right to issue
additional classes of Shares of each Fund.
The Trusts or a Portfolio may hold special meetings and mail proxy
materials. These meetings may be called to elect or remove trustees,
change fundamental policies, approve Portfolio's investment advisory
agreement, or for other purposes. Shareholders not attending these meetings
are encouraged to vote by proxy. Each Trust's Transfer Agent will mail
proxy materials in advance, including a voting card and information about
the proposals to be voted on.
When matters are submitted for shareholder vote, shareholders of each Fund
will have one vote for each full share held and proportionate, fractional
votes for fractional shares held. A separate vote of one of the Funds or
classes is required on any matter affecting only that Fund or class on
which shareholders are entitled to vote. Shareholders of a Fund or class
are not entitled to vote on Trust matters that do not affect that Fund or
class, respectively, and do not require a separate vote of the Fund or
class. All series of each Trust and all classes will vote together on
certain matters, such as electing trustees or approving independent public
auditors. There normally will be no meetings of shareholders for the
purpose of electing Trustees unless and until such time as less than a
majority of Trustees holding office have been elected by shareholders, at
which time the Trustees then in office will call a shareholders' meeting
for the election of Trustees. Any Trustee may be removed from office upon
the vote of shareholders holding at least two-thirds of that Trust's
outstanding shares at a meeting called for that purpose. The Trustees are
required to call such a meeting upon the written request of shareholders
holding at least 10% of that Trust's outstanding shares. Each Trust will
also assist shareholders in communicating with one another as provided for
in the 1940 Act.
As of December 31, 1996, Zachary Smith, San Francisco, California owned
50.06% of the voting Advisor Class securities of the Small Cap Index Fund,
and, therefore, may for certain purposes, be deemed to control the Fund and
be able to affect the outcome of certain matters presented for a vote of
shareholders.
As of December 31, 1996, Bankers Trust Co. Custodian for IRA R/O Michael G.
Deluca, owned 36/90% of the voting Advisor Class securities of the Small
Cap Index Fund, and, therefore, may for certain purposes, be deemed to
control the Fund and be able to affect the outcome of certain matters
presented for a vote of shareholders.
As of December 31, 1996, Charles Schwab, San Francisco, California owned
25.05% of the voting Advisor Class securities of the EAFE Equity Index
Fund, and, therefore, may for certain purposes, be deemed to control the
Fund and be able to affect the outcome of certain matters presented for a
vote of shareholders.
Each series of a Trust will vote separately on any matter involving the
corresponding Portfolio. Shareholders of all of the series of a Trust will,
however, vote together to elect Trustees of that Trust and for certain
other matters. Under certain circumstances, the shareholders of one or more
series could control the outcome of these votes. The series of BT
Investment Portfolios will vote together or separately on matters in the
same manner, and in the same circumstances, as do the series of the Trusts.
As with the Trusts, the investors in one or more series of BT Investment
Portfolios could control the outcome of these votes.
The Trusts are each an entity of the type commonly known as a
`Massachusetts business trust.'' Under Massachusetts law, shareholders of
such a business trust may, under certain circumstances, be held personally
liable as partners for its obligations. However, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which both inadequate insurance existed and the Trust
itself was unable to meet its obligations.
The Declaration of Trust of each of BT Investment Portfolios and the Equity
500 Index Portfolio provides that each Fund and other entities investing in
a Portfolio (e.g., other investment companies, insurance company separate
accounts and common and commingled trust funds) will each be liable for all
obligations of that Portfolio. However, the risk of a Fund incurring
financial loss on account of such liability is limited to circumstances in
which both inadequate insurance existed and a Portfolio itself was unable
to meet its obligations. Accordingly, the Trustees of the Trusts believe
that neither the Funds nor their shareholders will be adversely affected by
reason of the Funds' investing in the Portfolios. No series of BT
Investment Portfolios has any preference over any other series.
(THIS PAGE INTENTIONALLY LEFT BLANK)
(THIS PAGE INTENTIONALLY LEFT BLANK)
BT ADVISOR FUNDS
U.S. Bond Index Fund
Equity 500 Equal Weighted Index Fund
Small Cap Index Fund
EAFE(R) Equity Index Fund
(Advisor Class Shares)
BT PYRAMID MUTUAL FUNDS
BT Investment Equity 500 Index Fund
INVESTMENT ADVISER OF EACH PORTFOLIO AND ADMINISTRATOR
BANKERS TRUST COMPANY
280 Park Avenue
New York, NY 10017
DISTRIBUTOR
Edgewood Services, Inc.
Clearing Operations
P.O. Box 897
Pittsburgh, PA 15230-0897
CUSTODIAN AND TRANSFER AGENT
BANKERS TRUST COMPANY
280 Park Avenue
New York, NY 10017
INDEPENDENT ACCOUNTANTS
COOPERS & LYBRAND L.L.P.
1100 Main Street, Suite 900
Kansas City, MO 64105
COUNSEL
WILLKIE FARR & GALLAGHER
153 East 53rd Street
New York, NY 10022
No person has been authorized to give any information or to make any
representations other than those contained in the Trusts' Prospectuses, the
corresponding SAIs or the Trusts' official sales literature in connection
with the offering of the Trust's Shares and, if given or made, such other
information or representations must not be relied on as having been
authorized by a Trust. This Prospectus does not constitute an offer in any
state in which, or to any person to whom, such offer may not lawfully be
made.
Cusips #05576L866
#000000000
#05576L858
#05576L106
#055847107
COMBADV300 (3/97)
STATEMENT OF{PRIVATE }
ADDITIONAL INFORMATION
FEBRUARY 28, 1997
BT ADVISOR FUNDS -- ADVISOR CLASS SHARES
U.S. BOND INDEX FUND
EQUITY 500 EQUAL WEIGHTED INDEX FUND
SMALL CAP INDEX FUND
EAFE(R) EQUITY INDEX FUND
BT PYRAMID MUTUAL FUNDS
BT INVESTMENT EQUITY 500 INDEX FUND
BT Advisor Funds (the "Trust") is comprised of several funds. The
funds listed above (with the exception of BT Investment Equity 500 Index
Fund) (each, a "Fund") are each a series of the Trust and offers two
classes of shares (each a "Class" and collectively the "Classes"). This
Statement of Additional Information describes the Advisor Class Shares. BT
Investment Equity 500 Index Fund (the "Equity 500 Index Fund") is a series
of BT Pyramid Mutual Funds (the "Pyramid Trust") (together with the Trust,
the "Trusts").
As described in the Prospectus, the Trusts seek to achieve the
investment objectives of each Fund by investing all the investable assets
("Assets") of the Fund in a diversified open-end management investment
company (or a series thereof) having the same investment objectives as such
Fund. These investment companies are, respectively, BT Investment
Portfolios and Equity 500 Index Portfolio. U.S. Bond Index Portfolio,
Equity 500 Equal Weighted Index Portfolio, Small Cap Index Portfolio and
EAFE(R) Equity Index Portfolio are each a series of BT Investment
Portfolios.
Shares of the Funds are sold Edgewood Services, Inc. ("Edgewood"), the
Trusts' Distributor, to clients and customers (including affiliates and
correspondents) of Bankers Trust Company ("Bankers Trust"), the Portfolios'
Adviser, and to clients and customers of other organizations.
The Trusts' Prospectus for the Funds is dated February 28, 1997. The
Prospectus provides the basic information investors should know before
investing and may be obtained without charge by calling the Trust at the
telephone number listed below or by contacting your Investment
Professional. This Statement of Additional Information, which is not a
Prospectus, is intended to provide additional information regarding the
activities and operations of the Trusts and should be read in conjunction
with a Fund's Prospectus. This Statement of Additional Information is not
an offer of any Fund for which an investor has not received a Prospectus.
Capitalized terms not otherwise defined in this Statement of Additional
Information have the meanings accorded to them in the Fund's Prospectus.
BANKERS TRUST COMPANY
INVESTMENT ADVISER OF EACH PORTFOLIO AND ADMINISTRATOR
EDGEWOOD SERVICES, INC.
DISTRIBUTOR
Clearing Operations, Pittsburgh, Pennsylvania 15230-0897
(800) 730- 1313
P.O. Box 897
TABLE OF CONTENTS
Risk Factors and Certain Securities and Investment Practices.....1
Performance Information..........................................24
Valuation of Securities; Redemptions and Purchases in Kind.......27
Management of the Trusts and Portfolios..........................28
Organization of the Trusts.......................................35
Taxation.........................................................36
Financial Statements.............................................37
Appendix.........................................................38
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
INVESTMENT OBJECTIVES
The investment objective(s) of each Fund is described in the Funds'
Prospectus. There can, of course, be no assurance that any Fund will
achieve its investment objective(s).
INVESTMENT PRACTICES
Each Fund seeks to achieve its investment objective by investing all
of its Assets in the corresponding Portfolio. The Trusts may withdraw a
Fund's investment from the corresponding Portfolio at any time if the Board
of Trustees of the respective Trust determines that it is in the best
interests of the Fund to do so.
Since the investment characteristics of each Fund will correspond
directly to those of the corresponding Portfolio, the following is a
discussion of the various investments of and techniques employed by each
Portfolio.
Certificates of Deposit and Bankers' Acceptances. Certificates of
deposit are receipts issued by a depository institution in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus
interest to the bearer of the receipt on the date specified on the
certificate. The certificate usually can be traded in the secondary market
prior to maturity. Bankers' acceptances typically arise from short-term
credit arrangements designed to enable businesses to obtain funds to
finance commercial transactions. Generally, an acceptance is a time draft
drawn on a bank by an exporter or an importer to obtain a stated amount of
funds to pay for specific merchandise. The draft is then "accepted" by a
bank that, in effect, unconditionally guarantees to pay the face value of
the instrument on its maturity date. The acceptance may then be held by the
accepting bank as an earning asset or it may be sold in the secondary
market at the going rate of discount for a specific maturity. Although
maturities for acceptances can be as long as 270 days, most acceptances
have maturities of six months or less.
Commercial Paper. Commercial paper consists of short-term (usually
from 1 to 270 days) unsecured promissory notes issued by corporations in
order to finance their current operations. A variable amount master demand
note (which is a type of commercial paper) represents a direct borrowing
arrangement involving periodically fluctuating rates of interest under a
letter agreement between a commercial paper issuer and an institutional
lender pursuant to which the lender may determine to invest varying
amounts.
For a description of commercial paper ratings, see the Appendix to
this Statement of Additional Information.
Illiquid Securities. 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, as amended
(the "1933 Act"), securities which are otherwise not readily marketable and
repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the 1933 Act are referred
to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual funds do not
typically hold a significant amount of these 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 a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register
such restricted securities in order to dispose of them resulting in
additional expense and delay. Adverse market conditions could impede such a
public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the 1933 Act,
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 of such investments to the general public or to certain institutions
may not be indicative of their liquidity.
The Securities and Exchange Commission (the "SEC") has adopted
Rule 144A, which allows a broader institutional trading market for
securities otherwise subject to restriction on their resale to the general
public. Rule 144A establishes a "safe harbor" from the registration
requirements of the 1933 Act of resales of certain securities to qualified
institutional buyers. The Adviser anticipates that the market for certain
restricted securities such as institutional commercial paper will expand
further as a result of this regulation and the development of automated
systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System
sponsored by the National Association of Securities Dealers, Inc.
The Adviser will monitor the liquidity of Rule 144A securities in each
Portfolio's portfolio under the supervision of the Portfolio's Board of
Trustees. In reaching liquidity decisions, the Adviser will consider, among
other things, the following factors: (i) the frequency of trades and quotes
for the security; (ii) the number of dealers and other potential purchasers
wishing to purchase or sell the security; (iii) dealer undertakings to make
a market in the security and (iv) the nature of the security and of the
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer).
Lending of Portfolio Securities. Each Portfolio has the authority to
lend portfolio securities to brokers, dealers and other financial
organizations. The Portfolio will not lend securities to Bankers Trust,
Edgewood or their affiliates. By lending its securities, a Portfolio can
increase its income by continuing to receive interest on the loaned
securities as well as by either investing the cash collateral in short-term
securities or obtaining yield in the form of interest paid by the borrower
when U.S. government obligations are used as collateral. There may be risks
of delay in receiving additional collateral or risks of delay in recovery
of the securities or even loss of rights in the collateral should the
borrower of the securities fail financially. A Portfolio will adhere to the
following conditions whenever its securities are loaned: (i) the Portfolio
must receive at least 100 percent cash collateral or equivalent securities
from the borrower; (ii) the borrower must increase this collateral whenever
the market value of the securities including accrued interest rises above
the level of the collateral; (iii) the Portfolio must be able to terminate
the loan at any time; (iv) the Portfolio must receive reasonable interest
on the loan, as well as any dividends, interest or other distributions on
the loaned securities, and any increase in market value; (v) the Portfolio
may pay only reasonable custodian fees in connection with the loan; and
(vi) voting rights on the loaned securities may pass to the borrower;
provided, however, that if a material event adversely affecting the
investment occurs, the Board of Trustees of the Portfolio must terminate
the loan and regain the right to vote the securities.
Short-Term Instruments. When a Portfolio experiences large cash
inflows through the sale of securities and desirable equity securities,
that are consistent with the Portfolio's investment objective, which are
unavailable in sufficient quantities or at attractive prices, the Portfolio
may hold short-term investments for a limited time pending availability of
such equity securities. Short-term instruments consist of foreign and
domestic: (i) short-term obligations of sovereign governments, their
agencies, instrumentalities, authorities or political subdivisions; (ii)
other short-term debt securities rated AA or higher by (`S&P'') or Aa or
higher by Moody's Investors Service, Inc. (`Moody's'') or, if unrated, of
comparable quality in the opinion of Bankers Trust; (iii) commercial paper;
(iv) bank obligations, including negotiable certificates of deposit, time
deposits and banker's acceptances; and (v) repurchase agreements. At the
time the Portfolio invests in commercial paper, bank obligations or
repurchase agreements, the issuer of the issuer's parent must have
outstanding debt rated AA or higher by S&P or Aa or higher by Moody's or
outstanding commercial paper or bank obligations rated A-1 by S&P or
Prime-1 by Moody's; or, if no such ratings are available, the instrument
must be of comparable quality in the opinion of Bankers Trust. These
instruments may be denominated in U.S dollars or in foreign currencies.
When-Issued and Delayed Delivery Securities. Each Portfolio may
purchase securities on a when-issued or delayed delivery basis. For
example, delivery of and payment for these securities can take place a
month or more after the date of the purchase commitment. The purchase price
and the interest rate payable, if any, on the securities are fixed on the
purchase commitment date or at the time the settlement date is fixed. The
value of such securities is subject to market fluctuation and no interest
accrues to a Portfolio until settlement takes place. At the time a
Portfolio makes the commitment to purchase securities on a when-issued or
delayed delivery basis, it will record the transaction, reflect the value
each day of such securities in determining its net asset value and, if
applicable, calculate the maturity for the purposes of average maturity
from that date. At the time of settlement a when-issued security may be
valued at less than the purchase price. To facilitate such acquisitions,
each Portfolio will maintain with the Custodian a segregated account with
liquid assets, consisting of cash, U.S. government securities or other
appropriate securities, in an amount at least equal to such commitments. On
delivery dates for such transactions, each Portfolio will meet its
obligations from maturities or sales of the securities held in the
segregated account and/or from cash flow. If a Portfolio chooses to dispose
of the right to acquire a when-issued security prior to its acquisition, it
could, as with the disposition of any other portfolio obligation, incur a
gain or loss due to market fluctuation. It is the current policy of each
Portfolio not to enter into when-issued commitments exceeding in the
aggregate 15% of the market value of the Portfolio's total assets, less
liabilities other than the obligations created by when-issued commitments.
Additional U.S. Government Obligations. Each Portfolio may invest in
obligations issued or guaranteed by U.S. government agencies or
instrumentalities. These obligations may or may not be backed by the "full
faith and credit" of the United States. In the case of securities not
backed by the full faith and credit of the United States, each Portfolio
must look principally to the federal 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 event the agency or instrumentality
does not meet its commitments. Securities in which each Portfolio may
invest that are not backed by the full faith and credit of the United
States include, but are not limited to, obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation and the U.S. Postal
Service, each of which has the right to borrow from the U.S. Treasury to
meet its obligations, and obligations of the Farm Credit Banks and the
Federal Home Loan Banks, both of whose obligations may be satisfied only by
the individual credits of each issuing agency. Securities which are backed
by the full faith and credit of the United States include obligations of
the Government National Mortgage Association, the Farmers Home
Administration, and the Export-Import Bank.
Equity Investments. With the exception of the U.S. Bond Index
Portfolio, each Portfolio may invest in equity securities listed on any
domestic or foreign securities exchange or traded in the over-the-counter
market as well as certain restricted or unlisted securities. They may or
may not pay dividends or carry voting rights. Common stock occupies the
most junior position in a company's capital structure.
Swap Agreements. Swap agreements are contracts entered into by two
parties, primarily institutional investors, for periods ranging from a few
weeks to more than one year. In a standard swap transaction, two parties
agree to exchange the returns (or differentials in rates of return) earned
or realized on particular predetermined investments or instruments. The
gross returns to be exchanged or swapped between the parties are calculated
with respect to a notional amount, i.e., the return on or increase in value
of a particular dollar amount invested at a particular interest rate, in a
particular foreign currency, or in a basket of securities representing a
particular index. The notional amount of the swap agreement is only a
fictive basis on which to calculate the obligations which the parties to a
swap agreement have agreed to exchange. A Portfolio's obligations (or
rights) under a swap agreement will generally be equal only to the net
amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net
amount"). A Portfolio's obligations under a swap agreement will be accrued
daily (offset against any amounts owing to the Portfolio) and any accrued
but unpaid net amounts owed to a swap counterparty will be covered by the
maintenance of a segregated account consisting of cash, U.S. government
securities, or high grade debt obligations, to avoid any potential
leveraging of the Portfolio's portfolio.
The use of swap agreements will be successful in furthering its
investment objective will depend on the Adviser's ability to correctly
predict whether certain types of investments are likely to produce greater
returns than other investments. Swap agreements may be considered to be
illiquid because they are two party contracts and because they may have
terms of greater than seven days. Moreover, a Portfolio bears the risk of
loss of the amount expected to be received under a swap agreement in the
event of the default or bankruptcy of a swap agreement counterparty. A
Portfolio will enter into swap agreements only with counterparties that
would be eligible for consideration as repurchase agreement counterparties
under the Portfolio's repurchase agreement guidelines. Certain restrictions
imposed on the Portfolios by the Internal Revenue Code may limit the
Portfolios' ability to use swap agreements. The swaps market is a
relatively new market and is largely unregulated. It is possible that
developments in the swaps market, including potential government
regulation, could adversely affect a Portfolio's ability to terminate
existing swap agreements or to realize amounts to be received under such
agreements.
Certain swap agreements are exempt from most provisions of the
Commodity Exchange Act (the "CEA") and, therefore, are not regulated as
futures or commodity option transactions under the CEA, pursuant to
regulations approved by the Commodity Futures Trading Commission (the
"CFTC") effective February 22, 1993. To qualify for this exemption, a swap
agreement must be entered into by eligible participants, which includes the
following, provided the participant's total assets exceed established
levels: a bank or trust company, savings association or credit union,
insurance company, investment company subject to regulation under the
Investment Company Act of 1940, as amended (the "1940 Act"), commodity
pool, corporation, partnership, proprietorship, organization, trust or
other entity, employee benefit plan, governmental entity, broker-dealer,
futures commission merchant, natural person, or regulated foreign person.
To be eligible, natural persons and most other entities must have total
assets exceeding $10 million; commodity pools and employee benefit plans
must have asset exceeding $5 million. In addition, an eligible swap
transaction must meet three conditions. First, the swap agreement may not
be part of a fungible class of agreements that are standardized as to their
material economic terms. Second, the creditworthiness of parties with
actual or potential obligations under the swap agreement must be a material
consideration in entering into or determining the terms of the swap
agreement, including pricing, cost or credit enhancement terms. Third, swap
agreements may not be entered into and traded on or through a multilateral
transaction execution facility.
This exemption is not exclusive, and participants may continue to rely
on existing exclusions for swaps, such as the Policy Statement issued in
July 1989 which recognized a "safe harbor" for swap transactions from
regulation as futures or commodity option transactions under the CEA or its
regulations. The Policy Statement applies to swap transactions settled in
cash that: (i) have individually tailored terms; (ii) lack exchange style
offset and the use of a clearing organization or margin system; (iii) are
undertaken in conjunction with a line of business; and (iv) are not
marketed to the public.
Reverse Repurchase Agreements. The Portfolios may borrow funds for
temporary or emergency purposes, such as meeting larger than anticipated
redemption requests, and not for leverage, by among other things, agreeing
to sell portfolio securities to financial institutions such as banks and
broker-dealers and to repurchase them at a mutually agreed date and price
(a "reverse repurchase agreement"). At the time a Portfolio enters into a
reverse repurchase agreement it will place in a segregated custodial
account cash, U.S. Government Obligations or high-grade debt obligations
having a value equal to the repurchase price, including accrued interest.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by a Portfolio may decline below the repurchase price of
those securities. Reverse repurchase agreements are considered to be
borrowings by a Portfolio.
Warrants. Warrants entitle the holder to buy common stock from the
issuer at a specific price (the strike price) for a specific period of
time. The strike price of warrants sometimes is much lower than the current
market price of the underlying securities, yet warrants are subject to
similar price fluctuations. As a result, warrants may be more volatile
investments than the underlying securities.
Warrants do not entitle the holder to dividends or voting rights with
respect to the underlying securities and do not represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a
warrant ceases to have value if it is not exercised prior to the expiration
date.
Convertible Securities. Convertible securities may be a debt security
or preferred stock which may be converted into common stock or carries the
right to purchase common stock. Convertible securities entitle the holder
to exchange the securities for a specified number of shares of common
stock, usually of the same company, at specified prices within a certain
period of time.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible
debentures, the holders' claims on assets and earnings are subordinated to
the claims of other creditors, and are senior to the claims of preferred
and common shareholders. In the case of convertible preferred stock, the
holders' claims on assets and earnings are subordinated to the claims of
all creditors and are senior to the claims of common shareholders.
Ginnie Mae Certificates. The Government National Mortgage Association
(`Ginnie Mae'') is a wholly-owned corporate instrumentality of the United
States within the Department of Housing and Urban Development. The National
Housing Act of 1934, as amended (the "Housing Act"), authorizes Ginnie Mae
to guarantee the timely payment of the principal of and interest on
certificates that are based on and backed by a pool of mortgage loans
insured by the Federal Housing Administration under the Housing Act, or
Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by the
Department of Veterans Affairs under the Servicemen's Readjustment Act of
1944, as amended ("VA Loans"), or by pools of other eligible mortgage
loans. The Housing Act provides that the full faith and credit of the
U.S. government is pledged to the payment of all amounts that may be
required to be paid under any Ginnie Mae guaranty. In order to meet its
obligations under such guaranty, Ginnie Mae is authorized to borrow from
the U.S. Treasury with no limitations as to amount.
The Ginnie Mae Certificates in which the U.S. Bond Index Portfolio
will invest will represent a pro rata interest in one or more pools of the
following types of mortgage loans: (i) fixed-rate level payment mortgage
loans; (ii) fixed-rate graduated payment mortgage loans; (iii) fixed-rate
growing equity mortgage loans; (iv) fixed-rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multifamily residential
properties under construction; (vi) mortgage loans on completed multifamily
projects; (vii) fixed-rate mortgage loans as to which escrowed funds are
used to reduce the borrower's monthly payments during the early years of
the mortgage loans ("buydown" mortgage loans); (viii) mortgage loans that
provide for adjustments in payments based on periodic changes in interest
rates or in other payment terms of the mortgage loans; and
(ix) mortgage-backed serial notes. All of these mortgage loans will be FHA
Loans or VA Loans and, except as otherwise specified above, will be
fully-amortizing loans secured by first liens on one- to four-family
housing units.
Fannie Mae Certificates. The Federal National Mortgage Association
(`Fannie Mae'') is a federally chartered and privately owned corporation
organized and existing under the Federal National Mortgage Association
Charter Act of 1938. The obligations of Fannie Mae are not backed by the
full faith and credit of the U.S. government.
Each Fannie Mae Certificate will represent a pro rata interest in one
or more pools of FHA Loans, VA Loans or conventional mortgage loans (i.e.,
mortgage loans that are not insured or guaranteed by any governmental
agency) of the following types: (i) fixed-rate level payment mortgage
loans; (ii) fixed-rate growing equity mortgage loans; (iii) fixed-rate
graduated payment mortgage loans; (iv) variable rate mortgage loans;
(v) other adjustable rate mortgage loans; and (vi) fixed-rate and
adjustable mortgage loans secured by multifamily projects.
Freddie Mac Certificates. The Federal Home Loan Mortgage Corporation
(`Freddie Mac'') is a corporate instrumentality of the United States
created pursuant to the Emergency Home Finance Act of 1970, as amended (the
"FHLMC Act"). The obligations of Freddie Mac are obligations solely of
Freddie Mac and are not backed by the full faith and credit of the
U.S. government.
Freddie Mac Certificates represent a pro rata interest in a group of
mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie
Mac. The mortgage loans underlying the Freddie Mac Certificates will
consist of fixed-rate or adjustable rate mortgage loans with original terms
to maturity of between ten and thirty years, substantially all of which are
secured by first liens on one- to four-family residential properties or
multifamily projects. Each mortgage loan must meet the applicable standards
set forth in the FHLMC Act. A Freddie Mac Certificate group may include
whole loans, participating interests in whole loans and undivided interests
in whole loans and participations comprising another Freddie Mac
Certificate group.
Adjustable Rate Mortgages - Interest Rate Indices. Adjustable rate
mortgages in which the U.S. Bond Index Portfolio invests may be adjusted on
the basis of one of several indices. The One Year Treasury Index is the
figure derived from the average weekly quoted yield on U.S. Treasury
Securities adjusted to a constant maturity of one year. The Cost of Funds
Index reflects the monthly weighted average cost of funds of savings and
loan associations and savings banks whose home offices are located in
Arizona, California and Nevada (the "FHLB Eleventh District") that are
member institutions of the Federal Home Loan Bank of San Francisco (the
"FHLB of San Francisco"), as computed from statistics tabulated and
published by the FHLB of San Francisco. The FHLB of San Francisco normally
announces the Cost of Funds Index on the last working day of the month
following the month in which the cost of funds was incurred.
A number of factors affect the performance of the Cost of Funds Index
and may cause the Cost of Funds Index to move in a manner different from
indices based upon specific interest rates, such as the One Year Treasury
Index. Because of the various origination dates and maturities of the
liabilities of members of the FHLB Eleventh District upon which the Cost of
Funds Index is based, among other things, at any time the Cost of Funds
Index may not reflect the average prevailing market interest rates on new
liabilities of similar maturities. There can be no assurance that the Cost
of Funds Index will necessarily move in the same direction or at the same
rate as prevailing interest rates since as longer term deposits or
borrowings mature and are renewed at market interest rates, the Cost of
Funds Index will rise or fall depending upon the differential between the
prior and the new rates on such deposits and borrowings. In addition,
dislocations in the thrift industry in recent years have caused and may
continue to cause the cost of funds of thrift institutions to change for
reasons unrelated to changes in general interest rate levels. Furthermore,
any movement in the Cost of Funds Index as compared to other indices based
upon specific interest rates may be affected by changes instituted by the
FHLB of San Francisco in the method used to calculate the Cost of Funds
Index. To the extent that the Cost of Funds Index may reflect interest
changes on a more delayed basis than other indices, in a period of rising
interest rates, any increase may produce a higher yield later than would be
produced by such other indices, and in a period of declining interest
rates, the Cost of Funds Index may remain higher than other market interest
rates which may result in a higher level of principal prepayments on
mortgage loans which adjust in accordance with the Cost of Funds Index than
mortgage loans which adjust in accordance with other indices.
LIBOR, the London interbank offered rate, is the interest rate that
the most creditworthy international banks dealing in
U.S. dollar-denominated deposits and loans charge each other for large
dollar-denominated loans. LIBOR is also usually the base rate for large
dollar-denominated loans in the international market. LIBOR is generally
quoted for loans having rate adjustments at one, three, six or twelve month
intervals.
Asset-Backed Securities. The asset-backed securities in which the U.S.
Bond Index Portfolio may invest are limited to those which are readily
marketable, dollar-denominated and rated BBB or higher by S&P or Baa or
higher by Moody's. Asset-backed securities present certain risks that are
not presented by mortgage-backed securities. Primarily, these securities do
not have the benefit of the same type of security interest in the related
collateral. Credit card receivables are generally unsecured and the debtors
are entitled to the protection of a number of state and federal consumer
credit laws, many of which give such debtors the right to avoid payment of
certain amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of automobile receivables permit the servicer to retain
possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of the automobile receivables may
not have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities.
Mortgage-Backed Securities and Asset-Backed Securities-Types of Credit
Support. The mortgage-backed securities in which the U.S. Bond Index
Portfolio may invest are limited to those relating to residential
mortgages. Mortgage-backed securities and asset-backed securities are often
backed by a pool of assets representing the obligations of a number of
different parties. To lessen the effect of failure by obligors on
underlying assets to make payments, such securities may contain elements of
credit support. Such credit support falls into two categories:
(i) liquidity protection and (ii) protection against losses resulting from
ultimate default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in
the pool. Such protection may be provided through guarantees, insurance
policies or letters of credit obtained by the issuer or sponsor from third
parties, through various means of structuring the transaction or through a
combination of such approaches. The U.S. Bond Index Portfolio will not pay
any additional fees for such credit support, although the existence of
credit support may increase the price of a security.
The ratings of mortgage-backed securities and asset-backed securities
for which third-party credit enhancement provides liquidity protection or
protection against losses from default are generally dependent upon the
continued creditworthiness of the provider of the credit enhancement. The
ratings of such securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider
even in cases where the delinquency and loss experience on the underlying
pool of assets is better than expected.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class
securities with one or more classes subordinate to other classes as to the
payment of principal thereof and interest thereon, with the result that
defaults on the underlying assets are borne first by the holders of the
subordinated class), creation of "reserve funds" (where cash or
investments, sometimes funded from a portion of the payments on the
underlying assets, are held in reserve against future losses) and "over-
collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of
the securities and pay any servicing or other fees). The degree of credit
support provided for each issue is generally based on historical
information with respect to the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that which is
anticipated could adversely affect the return on an investment in such a
security.
Stripped Mortgage-Backed Securities. The cash flows and yields on IO
and PO classes are extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets. For
example, a rapid or slow rate of principal payments may have a material
adverse effect on the yield to maturity of IOs or POs, respectively. If the
underlying mortgage assets experience greater than anticipated prepayments
of principal, an investor may fail to recoup fully its initial investment
in an IO class of a stripped mortgage-backed security, even if the IO class
is rated AAA or Aaa. Conversely, if the underlying mortgage assets
experience slower than anticipated prepayments of principal, the yield on a
PO class will be affected more severely than would be the case with a
traditional mortgage-backed security.
Foreign Securities: Special Considerations Concerning Hong Kong,
Malaysia, Singapore and Japan. Many Asian countries may be subject to a
greater degree of social, political and economic instability than is the
case in the United States and European countries. Such instability may
result from (i) authoritarian governments or military involvement in
political and economic decision-making; (ii) popular unrest associated with
demands for improved political, economic and social conditions; (iii)
internal insurgencies; (iv) hostile relations with neighboring countries;
and (v) ethnic, religious and racial disaffection.
The economies of most of the Asian countries are heavily dependent
upon international trade and are accordingly affected by protective trade
barriers and the economic conditions of their trading partners,
principally, the United States, Japan, China and the European Community.
The enactment by the United States or other principal trading partners of
protectionist trade legislation, reduction of foreign investment in the
local economies and general declines in the international securities
markets could have a significant adverse effect upon the securities markets
of the Asian countries.
Hong Kong's impending return to Chinese dominion in 1997 has not
initially had a positive effect on its economic growth which was vigorous
in the 1980s. However, authorities in Beijing have agreed to maintain a
capitalist system for 50 years that, along with Hong Kong's economic
growth, continued to further strong stock market returns. In preparation
for 1997, Hong Kong has to develop trade with China, where it is the
largest foreign investor, while also maintaining its longstanding export
relationship with the United States. Spending on infrastructure
improvements is a significant priority of the colonial government while the
private sector continues to diversify abroad based on its position as an
established international trade center in the Far East.
The Hong Kong stock market is undergoing a period of growth and change
which may result in trading volatility and difficulties in the settlement
and recording of transactions, and in interpreting and applying the
relevant law and regulations.
Singapore has an open entrepreneurial economy with strong service and
manufacturing sectors and excellent international trading links derived
from its entrepot history. During the 1970's and early 1980's, the economy
expanded rapidly, achieving an average annual growth rate of 9%. Per capita
GDP is among the highest in Asia. Singapore holds a position as a major
oil refining and services center.
Investing in Japanese securities may involve the risks associated with
investing in foreign securities generally. In addition, because it invests
in Japan, the EAFE(R) Equity Index Portfolio will be subject to the general
economic and political conditions in Japan.
The common stocks of many Japanese companies continue to trade at high
price earnings ratios in comparison with those in the United States, even
after the recent market decline. There can be no assurance that additional
market corrections will not occur. Differences in accounting methods make
it difficult to compare the earnings of Japanese companies with those of
companies in other countries, especially the United States.
Since the EAFE(R) Equity Index Portfolio invests in securities
denominated in yen, changes in exchange rates between the U.S. dollar and
the yen affect the U.S. dollar value of the EAFE(R) Equity Index
Portfolio's assets. Such rate of exchange is determined by forces of supply
and demand on the foreign exchange markets. These forces are in turn
affected by the international balance of payments and other economic,
political and financial conditions, government intervention, speculation
and other factors.
Japanese securities held by the EAFE(R) Equity Index Portfolio are not
registered with the SEC nor are the issuers thereof subject to its
reporting requirements. There may be less publicly available information
about issuers of Japanese securities than about U.S. companies and such
issuers may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those to which U.S. companies are
subject.
Japan's success in exporting its products has generated a sizable
trade surplus. Such trade surplus has caused tensions at times between
Japan and some of its trading partners. In particular, Japan's trade
relations with the United States have recently been the subject of
discussion and negotiation between the two nations. The United States has
imposed certain measures designed to address trade issues in specific
industries. These measures and similar measures in the future may adversely
affect the performance of the EAFE(R) Equity Index Portfolio.
Japan's economy has typically exhibited low inflation and low interest
rates. There can be no assurance that low inflation and low interest rates
will continue, and it is likely that a reversal of such factors would
adversely affect the Japanese economy. Moreover, the Japanese economy may
differ,
favorably or unfavorably, from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position.
Japan has a parliamentary form of government. In 1993 a coalition
government was formed which, for the first time since 1955, did not include
the Liberal Democratic Party. Since mid-1993, there have been several
changes in leadership in Japan. What, if any, effect the current political
situation will have on prospective regulatory reforms of the economy in
Japan cannot be predicted. Recent and future developments in Japan and
neighboring Asian countries may lead to changes in policy that might
adversely affect the EAFE(R) Equity Index Portfolio.
Futures Contracts and Options on Futures Contracts
General. The successful use of such instruments draws upon the
Adviser's skill and experience with respect to such instruments and usually
depends on the Adviser's ability to forecast interest rate and currency
exchange rate movements correctly. Should interest or exchange rates move
in an unexpected manner, a Portfolio may not achieve the anticipated
benefits of futures contracts or options on futures contracts or may
realize losses and thus will be in a worse position than if such strategies
had not been used. In addition, the correlation between movements in the
price of futures contracts or options on futures contracts and movements in
the price of the securities and currencies hedged or used for cover will
not be perfect and could produce unanticipated losses.
Successful use of the futures contract and related options are subject
to special risk considerations. A liquid secondary market for any futures
or options contract may not be available when a futures or options position
is sought to be closed. In addition, there may be an imperfect correlation
between movements in the securities or currency in the Portfolio.
Successful use of futures or options contracts is further dependent on
Bankers Trust's ability to correctly predict movements in the securities or
foreign currency markets and no assurance can be given that its judgment
will be correct. Successful use of options on securities or stock indices
are subject to similar risk considerations. In addition, by writing covered
call options, the Portfolio gives up the opportunity, while the option is
in effect, to profit from any price increase in the underlying securities
above the options exercise price.
Futures Contracts. Each Portfolio may enter into contracts for the
purchase or sale for future delivery of fixed-income securities, foreign
currencies, or contracts based on financial indices including any index of
U.S. government securities, foreign government securities or corporate debt
securities. U.S. futures contracts have been designed by exchanges which
have been designated "contracts markets" by the CFTC, and must be executed
through a futures commission merchant, or brokerage firm, which is a member
of the relevant contract market. Futures contracts trade on a number of
exchange markets, and, through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of
the exchange. Each Portfolio may enter into futures contracts which are
based on debt securities that are backed by the full faith and credit of
the U.S. government, such as long-term U.S. Treasury Bonds, Treasury Notes,
Ginnie Mae modified pass-through mortgage-backed securities and three-month
U.S. Treasury Bills. A Portfolio may also enter into futures contracts
which are based on bonds issued by entities other than the U.S. government.
At the same time a futures contract is purchased or sold, the
Portfolio must allocate cash or securities as a deposit payment ("initial
deposit"). It is expected that the initial deposit would be approximately 1
1/2% to 5% of a contract's face value. Daily thereafter, the futures
contract is valued and the payment of "variation margin" may be required,
since each day the Portfolio would provide or receive cash that reflects
any decline or increase in the contract's value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the
delivery of securities with a different interest rate from that specified
in the contract. In some (but not many) cases, securities called for by a
futures contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same
month. Such a transaction, which is effected through a member of an
exchange, cancels the obligation to make or take delivery of the
securities. Since all transactions in the futures market are made, offset
or fulfilled through a clearinghouse associated with the exchange on which
the contracts are traded, the Portfolio will incur brokerage fees when it
purchases or sells futures contracts.
The purpose of the acquisition or sale of a futures contract, in the
case of a Portfolio which holds or intends to acquire fixed-income
securities, is to attempt to protect the Portfolio from fluctuations in
interest or foreign exchange rates without actually buying or selling
fixed-income securities or foreign currencies. For example, if interest
rates were expected to increase, the Portfolio might enter into futures
contracts for the sale of debt securities. Such a sale would have much the
same effect as selling an equivalent value of the debt securities owned by
the Portfolio. If interest rates did increase, the value of the debt
security in the Portfolio would decline, but the value of the futures
contracts to the Portfolio would increase at approximately the same rate,
thereby keeping the net asset value of the Portfolio from declining as much
as it otherwise would have. The Portfolio could accomplish similar results
by selling debt securities and investing in bonds with short maturities
when interest rates are expected to increase. However, since the futures
market is more liquid than the cash market, the use of futures contracts as
an investment technique allows the Portfolio to maintain a defensive
position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline,
futures contracts may be purchased to attempt to hedge against anticipated
purchases of debt securities at higher prices. Since the fluctuations in
the value of futures contracts should be similar to those of debt
securities, a Portfolio could take advantage of the anticipated rise in the
value of debt securities without actually buying them until the market had
stabilized. At that time, the futures contracts could be liquidated and the
Portfolio could then buy debt securities on the cash market. To the extent
a Portfolio enters into futures contracts for this purpose, the assets in
the segregated asset account maintained to cover the Portfolio's
obligations with respect to such futures contracts will consist of cash,
cash equivalents or high quality liquid debt securities from its portfolio
in an amount equal to the difference between the fluctuating market value
of such futures contracts and the aggregate value of the initial and
variation margin payments made by the Portfolio with respect to such
futures contracts.
The ordinary spreads between prices in the cash and futures market,
due to differences in the nature of those markets, are subject to
distortions. First, all participants in the futures market are subject to
initial deposit and variation margin requirements. Rather than meeting
additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of
the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent
participants decide to make or take delivery, liquidity in the futures
market could be reduced, thus producing distortion. Third, from the point
of view of speculators, the margin 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
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still
not result in a successful transaction.
In addition, futures contracts entail risks. Although the Adviser
believes that use of such contracts will benefit the Portfolios, if the
Adviser's investment judgment about the general direction of interest rates
is incorrect, a Portfolio's overall performance would be poorer than if it
had not entered into any such contract. For example, if a Portfolio has
hedged against the possibility of an increase in interest rates which would
adversely affect the price of debt securities held in its portfolio and
interest rates decrease instead, the Portfolio will lose part or all of the
benefit of the increased value of its debt securities which it has hedged
because it will have offsetting losses in its futures positions. In
addition, in such situations, if a Portfolio has insufficient cash, it may
have to sell debt securities from its portfolio to meet daily variation
margin requirements. Such sales of bonds may be, but will not necessarily
be, at increased prices which reflect the rising market. A Portfolio may
have to sell securities at a time when it may be disadvantageous to do so.
Options on Futures Contracts. Each Portfolio may purchase and write
options on futures contracts for hedging purposes. The purchase of a call
option on a futures contract is similar in some respects to the purchase of
a call option on an individual security. Depending on the pricing of the
option compared to either the price of the futures contract upon which it
is based or the price of the underlying debt securities, it may or may not
be less risky than ownership of the futures contract or underlying debt
securities. As with the purchase of futures contracts, when a Portfolio is
not fully invested it may purchase a call option on a futures contract to
hedge against a market advance due to declining interest rates.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the underlying security or
foreign currency which is deliverable upon exercise of the futures
contract. If the futures price at expiration of the option is below the
exercise price, a Portfolio will retain the full amount of the option
premium which provides a partial hedge against any decline that may have
occurred in the Portfolio's portfolio holdings. The writing of a put option
on a futures contract constitutes a partial hedge against increasing prices
of the underlying security or foreign currency which is deliverable upon
exercise of the futures contract. If the futures price at expiration of the
option is higher than the exercise price, the Portfolio will retain the
full amount of the option premium which provides a partial hedge against
any increase in the price of securities which the Portfolio intends to
purchase. If a put or call option the Portfolio has written is exercised,
the Portfolio will incur a loss which will be reduced by the amount of the
premium it receives. Depending on the degree of correlation between changes
in the value of its portfolio securities and changes in the value of its
futures positions, the Portfolio's losses from existing options on futures
may to some extent be reduced or increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities.
For example, a Portfolio may purchase a put option on a futures contract to
hedge its portfolio against the risk of rising interest rates.
The amount of risk a Portfolio assumes when it purchases an option on
a futures contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above,
the purchase of an option also entails the risk that changes in the value
of the underlying futures contract will not be fully reflected in the value
of the option purchased.
The Board of Trustees of each Portfolio has adopted the requirement
that futures contracts and options on futures contracts be used as a hedge
and may also use stock index futures on continual basis to equitize cash so
that the Portfolio may maintain 100% equity exposure. In addition to this
requirement, the Board of Trustees of each Portfolio has also adopted a
restriction that the Portfolio will not enter into any futures contracts or
options on futures contracts if immediately thereafter the amount of margin
deposits on all the futures contracts of the Portfolio and premiums paid on
outstanding options on futures contracts owned by the Portfolio (other than
those entered into for bona fide hedging purposes) would exceed 5% of the
market value of the total assets of the Portfolio.
Options on Foreign Currencies. The EAFE(R) Equity Index Portfolio may
purchase and write options on foreign currencies for hedging purposes in a
manner similar to that in which futures contracts on foreign currencies, or
forward contracts, will be utilized. For example, a decline in the dollar
value of a foreign currency in which portfolio securities are denominated
will reduce the dollar value of such securities, even if their value in the
foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, the Portfolio may
purchase put options on the foreign currency. If the value of the currency
does decline, the Portfolio will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, the EAFE(R) Equity Index Portfolio may
purchase call options thereon. The purchase of such options could offset,
at least partially, the effects of the adverse movements in exchange rates.
As in the case of other types of options, however, the benefit to the
Portfolio deriving from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the direction or to
the extent anticipated, the Portfolio could sustain losses on transactions
in foreign currency options which would require it to forego a portion or
all of the benefits of advantageous changes in such rates.
The EAFE(R) Equity Index Portfolio may write options on foreign
currencies for the same types of hedging purposes. For example, where the
Portfolio anticipates a decline in the dollar value of foreign currency
denominated securities due to adverse fluctuations in exchange rates it
could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the options will most
likely not be exercised, and the diminution in value of portfolio
securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
EAFE(R) Equity Index Portfolio could write a put option on the relevant
currency which, if rates move in the manner projected, will expire
unexercised and allow the Portfolio to hedge such increased cost up to the
amount of the premium. As in the case of other types of options, however,
the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and
the Portfolio would be required to purchase or sell the underlying currency
at a loss which may not be offset by the amount of the premium. Through the
writing of options on foreign currencies, the Portfolio also may be
required to forego all or a portion of the benefits which might otherwise
have been obtained from favorable movements in exchange rates.
The EAFE(R) Equity Index Portfolio intends to write covered call
options on foreign currencies. A call option written on a foreign currency
by the Portfolio is "covered" if the Portfolio owns the underlying foreign
currency covered by the call or has an absolute and immediate right to
acquire that foreign currency without additional cash consideration (or for
additional cash consideration held in a segregated account by its
Custodian) upon conversion or exchange of other foreign currency held in
its portfolio. A call option is also covered if the Portfolio has a call on
the same foreign currency and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less
than the exercise price of the call written or (b) is greater than the
exercise price of the call written if the difference is maintained by the
Portfolio in cash, U.S. government securities and other high quality liquid
debt securities in a segregated account with its custodian.
The EAFE(R) Equity Index Portfolio also intends to write call options
on foreign currencies that are not covered for cross-hedging purposes. A
call option on a foreign currency is for cross-hedging purposes if it is
not covered, but is designed to provide a hedge against a decline in the
U.S. dollar value of a security which the Portfolio owns or has the right
to acquire and which is denominated in the currency underlying the option
due to an adverse change in the exchange rate. In such circumstances, the
Portfolio collateralizes the option by maintaining in a segregated account
with its custodian, cash or U.S. government securities or other high
quality liquid debt securities in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked to market daily.
Additional Risks of Options on Futures Contracts, Forward Contracts
and Options on Foreign Currencies. Unlike transactions entered into by a
Portfolio in futures contracts, options on foreign currencies and forward
contracts are not traded on contract markets regulated by the CFTC or (with
the exception of certain foreign currency options) by the SEC. To the
contrary, such instruments are traded through financial institutions acting
as market-makers, although foreign currency options are also traded on
certain national securities exchanges such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation.
Similarly, options on currencies may be traded over-the-counter. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no
daily price fluctuation limits, and adverse market movements could
therefore continue to an unlimited extent over a period of time. Although
the purchaser of an option cannot lose more than the amount of the premium
plus related transaction costs, this entire amount could be lost. Moreover,
the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a
national securities exchange are cleared and guaranteed by the Options
Clearing Corporation (the "OCC"), thereby reducing the risk of counterparty
default. Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the over-the-
counter market, potentially permitting a Portfolio to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses
in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects
of other political and economic events. In addition, exchange-traded
options on foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As
a result, the OCC may, if it determines that foreign governmental
restrictions or taxes would prevent the orderly settlement of foreign
currency option exercises, or would result in undue burdens on the OCC or
its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the
fixing of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and credit
risks which may not be present in the case of exchange-traded currency
options. A Portfolio's ability to terminate over-the-counter options will
be more limited than with exchange-traded options. It is also possible that
broker-dealers participating in over-the-counter options transactions will
not fulfill their obligations. Until such time as the staff of the SEC
changes its position, each Portfolio will treat purchased over-the-counter
options and assets used to cover written over-the-counter options as
illiquid securities. With respect to options written with primary dealers
in U.S. government securities pursuant to an agreement requiring a closing
purchase transaction at a formula price, the amount of illiquid securities
may be calculated with reference to the repurchase formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign
exchanges. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or
securities. The value of such positions also could be adversely affected
by: (i) other complex foreign political and economic factors; (ii) lesser
availability than in the United States of data on which to make trading
decisions; (iii) delays in the Portfolio's ability to act upon economic
events occurring in foreign markets during nonbusiness hours in the United
States; (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States; and
(v) lesser trading volume.
Options on Securities. Each Portfolio except for Equity 500 Equal
Weighted Index Portfolio may write (sell) covered call and put options to a
limited extent on its portfolio securities ("covered options") in an
attempt to increase income. However, the Portfolio may forgo the benefits
of appreciation on securities sold or may pay more than the market price on
securities acquired pursuant to call and put options written by the
Portfolio.
When a Portfolio writes a covered call option, it gives the purchaser
of the option the right to buy the underlying security at the price
specified in the option (the "exercise price") by exercising the option at
any time during the option period. If the option expires unexercised, the
Portfolio will realize income in an amount equal to the premium received
for writing the option. If the option is exercised, a decision over which
the Portfolio has no control, the Portfolio must sell the underlying
security to the option holder at the exercise price. By writing a covered
call option, the Portfolio forgoes, in exchange for the premium less the
commission ("net premium"), the opportunity to profit during the option
period from an increase in the market value of the underlying security
above the exercise price.
When a Portfolio writes a covered put option, it gives the purchaser
of the option the right to sell the underlying security to the Portfolio at
the specified exercise price at any time during the option period. If the
option expires unexercised, the Portfolio will realize income in the amount
of the premium received for writing the option. If the put option is
exercised, a decision over which the Portfolio has no control, the
Portfolio must purchase the underlying security from the option holder at
the exercise price. By writing a covered put option, the Portfolio, in
exchange for the net premium received, accepts the risk of a decline in the
market value of the underlying security below the exercise price. The
Portfolio will only write put options involving securities for which a
determination is made at the time the option is written that the Portfolio
wishes to acquire the securities at the exercise price.
A Portfolio may terminate its obligation as the writer of a call or
put option by purchasing an option with the same exercise price and
expiration date as the option previously written. This transaction is
called a "closing purchase transaction." The Portfolio will realize a
profit or loss for a closing purchase transaction if the amount paid to
purchase an option is less or more, as the case may be, than the amount
received from the sale thereof. To close out a position as a purchaser of
an option, the Portfolio, may make a `closing sale transaction'' which
involves liquidating the Portfolio's position by selling the option
previously purchased. Where the Portfolio cannot effect a closing purchase
transaction, it may be forced to incur brokerage commissions or dealer
spreads in selling securities it receives or it may be forced to hold
underlying securities until an option is exercised or expires.
When a Portfolio writes an option, an amount equal to the net premium
received by the Portfolio is included in the liability section of the
Portfolio's Statement of Assets and Liabilities as a deferred credit. The
amount of the deferred credit will be subsequently marked to market to
reflect the current market value of the option written. The current market
value of a traded option is the last sale price or, in the absence of a
sale, the mean between the closing bid and asked price. If an option
expires on its stipulated expiration date or if the Portfolio enters into a
closing purchase transaction, the Portfolio will realize a gain (or loss if
the cost of a closing purchase transaction exceeds the premium received
when the option was sold), and the deferred credit related to such option
will be eliminated. If a call option is exercised, the Portfolio will
realize a gain or loss from the sale of the underlying security and the
proceeds of the sale will be increased by the premium originally received.
The writing of covered call options may be deemed to involve the pledge of
the securities against which the option is being written. Securities
against which call options are written will be segregated on the books of
the custodian for the Portfolio.
A Portfolio may purchase call and put options on any securities in
which it may invest. The Portfolio would normally purchase a call option in
anticipation of an increase in the market value of such securities. The
purchase of a call option would entitle the Portfolio, in exchange for the
premium paid, to purchase a security at a specified price during the option
period. The Portfolio would ordinarily have a gain if the value of the
securities increased above the exercise price sufficiently to cover the
premium and would have a loss if the value of the securities remained at or
below the exercise price during the option period.
A Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective
puts") or securities of the type in which it is permitted to invest. The
purchase of a put option would entitle the Portfolio, in exchange for the
premium paid, to sell a security, which may or may not be held in the
Portfolio's portfolio, at a specified price during the option period. The
purchase of protective puts is designed merely to offset or hedge against a
decline in the market value of the Portfolio's portfolio securities. Put
options also may be purchased by the Portfolio for the purpose of
affirmatively benefiting from a decline in the price of securities which
the Portfolio does not own. The Portfolio would ordinarily recognize a gain
if the value of the securities decreased below the exercise price
sufficiently to cover the premium and would recognize a loss if the value
of the securities remained at or above the exercise price. Gains and losses
on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
Each Portfolio has adopted certain other nonfundamental policies
concerning option transactions which are discussed below. The Portfolio's
activities in options may also be restricted by the requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification
as a regulated investment company.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that
the option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying
securities markets that cannot be reflected in the option markets. It is
impossible to predict the volume of trading that may exist in such options,
and there can be no assurance that viable exchange markets will develop or
continue.
A Portfolio may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately
ten broker-dealers, including several of the largest primary dealers in
U.S. government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker
rather than an exchange, and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. To
reduce this risk, the Portfolio will purchase such options only from
broker-dealers who are primary government securities dealers recognized by
the Federal Reserve Bank of New York and who agree to (and are expected to
be capable of) entering into closing transactions, although there can be no
guarantee that any such option will be liquidated at a favorable price
prior to expiration. The Adviser will monitor the creditworthiness of
dealers with whom the Portfolio enters into such options transactions under
the general supervision of the Portfolios' Trustees.
Options on Securities Indices. In addition to options on securities,
each Portfolio may also purchase and write (sell) call and put options on
securities indices. Such options give the holder the right to receive a
cash settlement during the term of the option based upon the difference
between the exercise price and the value of the index. Such options will be
used for the purposes described above under "Options on Securities."
EAFE(R) Equity Index Portfolio may, to the extent allowed by Federal
and state securities laws, invest in securities indices instead of
investing directly in individual foreign securities.
Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close
out options positions on securities indices is more likely to occur,
although the Portfolio generally will only purchase or write such an option
if the Adviser believes the option can be closed out.
Use of options on securities indices also entails the risk that
trading in such options may be interrupted if trading in certain securities
included in the index is interrupted. The Portfolio will not purchase such
options unless the Adviser believes the market is sufficiently developed
such that the risk of trading in such options is no greater than the risk
of trading in options on securities.
Price movements in a Portfolio's portfolio may not correlate precisely
with movements in the level of an index and, therefore, the use of options
on indices cannot serve as a complete hedge. Because options on securities
indices require settlement in cash, the Adviser may be forced to liquidate
portfolio securities to meet settlement obligations.
Forward Foreign Currency Exchange Contracts. Because each Portfolio
may buy and sell securities denominated in currencies other than the U.S.
dollar and receives interest, dividends and sale proceeds in currencies
other than the U.S. dollar, each Portfolio from time to time may enter into
foreign currency exchange transactions to convert to and from different
foreign currencies and to convert foreign currencies to and from the U.S.
dollar. A Portfolio either enters into these transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange
market or uses forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by a
Portfolio to purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract. Forward
foreign currency exchange contracts establish an exchange rate at a future
date. These contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and
their customers. A forward foreign currency exchange contract generally has
no deposit requirement and is traded at a net price without commission.
Each Portfolio maintains with its custodian a segregated account of high
grade liquid assets in an amount at least equal to its obligations under
each forward foreign currency exchange contract. Neither spot transactions
nor forward foreign currency exchange contracts eliminate fluctuations in
the prices of the Portfolio's securities or in foreign exchange rates, or
prevent loss if the prices of these securities should decline.
Each Portfolio may enter into foreign currency hedging transactions in
an attempt to protect against changes in foreign currency exchange rates
between the trade and settlement dates of specific securities transactions
or changes in foreign currency exchange rates that would adversely affect a
portfolio position or an anticipated investment position. Since
consideration of the prospect for currency parities will be incorporated
into Bankers Trust's long-term investment decisions, a Portfolio will not
routinely enter into foreign currency hedging transactions with respect to
security transactions; however, Bankers Trust believes that it is important
to have the flexibility to enter into foreign currency hedging transactions
when it determines that the transactions would be in the Portfolio's best
interest. Although these transactions tend to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same time they
tend to limit any potential gain that might be realized should the value of
the hedged currency increase. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of such
securities between the date the forward contract is entered into and the
date it matures. The projection of currency market movements is extremely
difficult, and the successful execution of a hedging strategy is highly
uncertain.
While these contracts are not presently regulated by the CFTC, the
CFTC may in the future assert authority to regulate forward contracts. In
such event the Portfolio's ability to utilize forward contracts in the
manner set forth in the Prospectus may be restricted. Forward contracts may
reduce the potential gain from a positive change in the relationship
between the U.S. dollar and foreign currencies. Unanticipated changes in
currency prices may result in poorer overall performance for the Portfolio
than if it had not entered into such contracts. The use of foreign currency
forward contracts may not eliminate fluctuations in the underlying U.S.
dollar equivalent value of the prices of or rates of return on a
Portfolio's foreign currency denominated portfolio securities and the use
of such techniques will subject a Portfolio to certain risks.
The matching of the increase in value of a forward contract and the
decline in the U.S. dollar equivalent value of the foreign currency
denominated asset that is the subject of the hedge generally will not be
precise. In addition, a Portfolio may not always be able to enter into
foreign currency forward contracts at attractive prices and this will limit
the Portfolio's ability to use such contract to hedge or cross-hedge its
assets. Also, with regard to a Portfolio's use of cross-hedges, there can
be no assurance that historical correlations between the movement of
certain foreign currencies relative to the U.S. dollar will continue. Thus,
at any time poor correlation may exist between movements in the exchange
rates of the foreign currencies underlying a Portfolio's cross-hedges and
the movements in the exchange rates of the foreign currencies in which the
Portfolio's assets that are the subject of such cross-hedges are
denominated.
Rating Services
The ratings of rating services represent their opinions as to the
quality of the securities that they undertake to rate. It should be
emphasized, however, that ratings are relative and subjective and are not
absolute standards of quality. Although these ratings are an initial
criterion for selection of portfolio investments, Bankers Trust also makes
its own evaluation of these securities, subject to review by the Board of
Trustees. After purchase by a Portfolio, an obligation may cease to be
rated or its rating may be reduced below the minimum required for purchase
by the Portfolio. Neither event would require a Fund to eliminate the
obligation from its portfolio, but Bankers Trust will consider such an
event in its determination of whether a Fund should continue to hold the
obligation. A description of the ratings used herein and in the Funds'
Prospectus is set forth in the Appendix herein.
Investment Restrictions
The following investment restrictions are "fundamental policies" of
each Fund and each Portfolio and may not be changed with respect to the
Fund or the Portfolio without the approval of a "majority of the
outstanding voting securities" of the Fund or the Portfolio, as the case
may be. "Majority of the outstanding voting securities" under the 1940 Act,
and as used in this Statement of Additional Information and the Prospectus,
means, with respect to the Fund (or the Portfolio), the lesser of (i) 67%
or more of the outstanding voting securities of the Fund (or of the total
beneficial interests of the Portfolio) present at a meeting, if the holders
of more than 50% of the outstanding voting securities of the Fund or of the
total beneficial interests of the Portfolio) are present or represented by
proxy or (ii) more than 50% of the outstanding voting securities of the
Fund (or of the total beneficial interests of the Portfolio). Whenever the
Trust is requested to vote on a fundamental policy of a Portfolio, the
Trust will hold a meeting of the corresponding Fund's shareholders and will
cast its vote as instructed by that Fund's shareholders. Fund shareholders
who do not vote will not affect the Trust's votes at the Portfolio meeting.
The percentage of the Trust's votes representing Fund shareholders not
voting will be voted by the Trustees of the Trust in the same proportion as
the Fund shareholders who do, in fact, vote.
As a matter of fundamental policy, no Portfolio (or Fund) may (except
that no investment restriction of a Fund shall prevent a Fund from
investing all of its Assets in an open-end investment company with
substantially the same investment objectives):
(1) borrow money or mortgage or hypothecate assets of the Portfolio
(Fund), except that in an amount not to exceed 1/3 of the current value of
the Portfolio's (Fund's) assets, it may borrow money as a temporary measure
for extraordinary or emergency purposes and enter into reverse repurchase
agreements or dollar roll transactions, and except that it may pledge,
mortgage or hypothecate not more than 1/3 of such assets to secure such
borrowings (it is intended that money would be borrowed only from banks and
only either to accommodate requests for the withdrawal of beneficial
interests (redemption of shares) while effecting an orderly liquidation of
portfolio securities or to maintain liquidity in the event of an
unanticipated failure to complete a portfolio security transaction or other
similar situations) or reverse repurchase agreements, provided that
collateral arrangements with respect to options and futures, including
deposits of initial deposit and variation margin, are not considered a
pledge of assets for purposes of this restriction and except that assets
may be pledged to secure letters of credit solely for the purpose of
participating in a captive insurance company sponsored by the Investment
Company Institute; for additional related restrictions, see clause (i)
under the caption "Additional Restrictions" below (as an operating policy,
the Portfolios may not engage in dollar roll transactions);
(2) underwrite securities issued by other persons except insofar as
the Portfolios (Trust or the Funds) may technically be deemed an
underwriter under the 1933 Act in selling a portfolio security;
(3) make loans to other persons except: (a) through the lending of the
Portfolio's (Fund's) portfolio securities and provided that any such loans
not exceed 30% of the Portfolio's (Fund's) total assets (taken at market
value); (b) through the use of repurchase agreements or the purchase of
short-term obligations; or (c) by purchasing a portion of an issue of debt
securities of types distributed publicly or privately;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or commodity
contracts (except futures and option contracts) in the ordinary course of
business (except that the Portfolio (Trust) may hold and sell, for the
Portfolio's (Fund's) portfolio, real estate acquired as a result of the
Portfolio's (Fund's) ownership of securities);
(5) concentrate its investments in any particular industry (excluding
U.S. government securities), but if it is deemed appropriate for the
achievement of a Portfolio's (Fund's) investment objective(s), up to 25% of
its total assets may be invested in any one industry; and
(6) issue any senior security (as that term is defined in the
1940 Act) if such issuance is specifically prohibited by the 1940 Act or
the rules and regulations promulgated thereunder, provided that collateral
arrangements with respect to options and futures, including deposits of
initial deposit and variation margin, are not considered to be the issuance
of a senior security for purposes of this restriction.
Additional Restrictions. In order to comply with certain statutes and
policies each Portfolio (or the Trust, on behalf of each Fund) will not as
a matter of operating policy (except that no operating policy shall prevent
a Fund from investing all of its Assets in an open-end investment company
with substantially the same investment objectives):
(i) borrow money (including through reverse repurchase or forward
roll transactions) for any purpose in excess of 5% of the Portfolio's
(Fund's) total assets (taken at cost), except that the Portfolio
(Fund) may borrow for temporary or emergency purposes up to 1/3 of its
total assets;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10%
of the Portfolio's (Fund's) total assets (taken at market value),
provided that collateral arrangements with respect to options and
futures, including deposits of initial deposit and variation margin,
and reverse repurchase agreements are not considered a pledge of
assets for purposes of this restriction;
(iii) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the
clearance of purchases and sales of securities may be obtained and
except that deposits of initial deposit and variation margin may be
made in connection with the purchase, ownership, holding or sale of
futures;
(iv) sell securities it does not own such that the dollar amount of
such short sales at any one time exceeds 25% of the net equity of the
Portfolio (Fund), and the value of securities of any one issuer in
which the Portfolio (Fund) is short exceeds the lesser of 2.0% of the
value of the Portfolio's (Fund's) net assets or 2.0% of the securities
of any class of any U.S. issuer and, provided that short sales may be
made only in those securities which are fully listed on a national
securities exchange or a foreign exchange (This provision does not
include the sale of securities of the Portfolio (Fund)
contemporaneously owns or has the right to obtain securities
equivalent in kind and amount to those sold, i.e., short sales against
the box.) (the Portfolios (Funds) have no current intention to engage
in short selling);
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a sponsor
or dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation; provided,
however, that securities of any investment company will not be
purchased for the Portfolio (Fund) if such purchase at the time
thereof would cause: (a) more than 10% of the Portfolio's (Fund's)
total assets (taken at the greater of cost or market value) to be
invested in the securities of such issuers; (b) more than 5% of the
Portfolio's (Fund's) total assets (taken at the greater of cost or
market value) to be invested in any one investment company; or
(c) more than 3% of the outstanding voting securities of any such
issuer to be held for the Portfolio (Fund); provided further that,
except in the case of a merger or consolidation, the Portfolio (Fund)
shall not purchase any securities of any open-end investment company
unless the Portfolio (Fund) (1) waives the investment advisory fee
with respect to assets invested in other open-end investment companies
and (2) incurs no sales charge in connection with the investment (as
an operating policy, each Portfolio will not invest in another open-
end registered investment company);
(vii) invest more than 10% of the Portfolio's (Fund's) total assets
(taken at the greater of cost or market value) in securities that are
restricted as to resale under the 1933 Act (other than Rule 144A
securities deemed liquid by the Portfolio's (Fund's) Board of
Trustees);
(viii) invest more than 15% of the Portfolio's (Fund's) net assets
(taken at the greater of cost or market value) in securities that are
illiquid or not readily marketable not including (a) Rule 144A
securities that have been determined to be liquid by the Board of
Trustees; and (b) commercial paper that is sold under section 4(2) of
the 1933 Act which: (i) is not traded flat or in default as to
interest or principal; and (ii) is rated in one of the two highest
categories by at least two nationally recognized statistical rating
organizations and the Portfolio's (Fund's) Board of Trustees have
determined the commercial paper to be liquid; or (iii) is rated in one
of the two highest categories by one nationally recognized statistical
rating agency and the Portfolio's (Fund's) Board of Trustees have
determined that the commercial paper is equivalent quality and is
liquid;
(ix) no more than 5% of the Portfolio's (Fund's) total assets are
invested in securities issued by issuers which (including
predecessors) have been in operation less than three years;
(x) with respect to 75% of the Portfolio's (Fund's) total assets,
purchase securities of any issuer if such purchase at the time thereof
would cause the Portfolio (Fund) to hold more than 10% of any class of
securities of such issuer, for which purposes all indebtedness of an
issuer shall be deemed a single class and all preferred stock of an
issuer shall be deemed a single class, except that futures or option
contracts shall not be subject to this restriction;
(xi) if the Portfolio (Fund) is a "diversified" fund with respect to
75% of its assets, invest more than 5% of its total assets in the
securities (excluding U.S. government securities) of any one issuer;
(xii) invest in securities issued by an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of
the Portfolio (Trust), or is an officer or partner of the Adviser, if
after the purchase of the securities of such issuer for the Portfolio
(Fund) one or more of such persons owns beneficially more than 1/2 of
1% of the shares or securities, or both, all taken at market value, of
such issuer, and such persons owning more than 1/2 of 1% of such
shares or securities together own beneficially more than 5% of such
shares or securities, or both, all taken at market value;
(xiii) invest in warrants (other than warrants acquired by the Portfolio
(Fund) as part of a unit or attached to securities at the time of
purchase) if, as a result, the investments (valued at the lower of
cost or market) would exceed 5% of the value of the Portfolio's
(Fund's) net assets or if, as a result, more than 2% of the
Portfolio's (Fund's) net assets would be invested in warrants not
listed on a recognized United States or foreign stock exchange, to the
extent permitted by applicable state securities laws;
(xiv) write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is
within the Investment Practices of the Portfolio (Fund) and the option
is issued by the Options Clearing Corporation, except for put and call
options issued by non-U.S. entities or listed on non-U.S. securities
or commodities exchanges; (b) the aggregate value of the obligations
underlying the puts determined as of the date the options are sold
shall not exceed 5% of the Portfolio's (Fund's) net assets; (c) the
securities subject to the exercise of the call written by the
Portfolio (Fund) must be owned by the Portfolio (Fund) at the time the
call is sold and must continue to be owned by the Portfolio (Fund)
until the call has been exercised, has lapsed, or the Portfolio (Fund)
has purchased a closing call, and such purchase has been confirmed,
thereby extinguishing the Portfolio's (Fund's) obligation to deliver
securities pursuant to the call it has sold; and (d) at the time a put
is written, the Portfolio (Fund) establishes a segregated account with
its custodian consisting of cash or short-term U.S. government
securities equal in value to the amount the Portfolio (Fund) will be
obligated to pay upon exercise of the put (this account must be
maintained until the put is exercised, has expired, or the Portfolio
(Fund) has purchased a closing put, which is a put of the same series
as the one previously written); and
(xv) buy and sell puts and calls on securities, stock index futures or
options on stock index futures, or financial futures or options on
financial futures unless such options are written by other persons
and: (a) the options or futures are offered through the facilities of
a national securities association or are listed on a national
securities or commodities exchange, except for put and call options
issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate premiums paid on all such
options which are held at any time do not exceed 20% of the
Portfolio's (Fund's) total net assets; and (c) the aggregate margin
deposits required on all such futures or options thereon held at any
time do not exceed 5% of the Portfolio's (Fund's) total assets.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or
total assets, in the securities rating of the investment, or any other
later change.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Adviser is responsible for decisions to buy and sell securities,
futures contracts and options on such securities and futures for each
Portfolio, the selection of brokers, dealers and futures commission
merchants to effect transactions and the negotiation of brokerage
commissions, if any. Broker-dealers may receive brokerage commissions on
portfolio transactions, including options, futures and options on futures
transactions and the purchase and sale of underlying securities upon the
exercise of options. Orders may be directed to any broker-dealer or futures
commission merchant, including to the extent and in the manner permitted by
applicable law, Bankers Trust or its subsidiaries or affiliates. Purchases
and sales of certain portfolio securities on behalf of a Portfolio are
frequently placed by the Adviser with the issuer or a primary or secondary
market-maker for these securities on a net basis, without any brokerage
commission being paid by the Portfolio. Trading does, however, involve
transaction costs. Transactions with dealers serving as market-makers
reflect the spread between the bid and asked prices. Transaction costs may
also include fees paid to third parties for information as to potential
purchasers or sellers of securities. Purchases of underwritten issues may
be made which will include an underwriting fee paid to the underwriter.
The Adviser seeks to evaluate the overall reasonableness of the
brokerage commissions paid (to the extent applicable) in placing orders for
the purchase and sale of securities for a Portfolio taking into account
such factors as price, commission (negotiable in the case of national
securities exchange transactions), if any, size of order, difficulty of
execution and skill required of the executing broker-dealer through
familiarity with commissions charged on comparable transactions, as well as
by comparing commissions paid by the Portfolio to reported commissions paid
by others. The Adviser reviews on a routine basis commission rates,
execution and settlement services performed, making internal and external
comparisons.
The Adviser is authorized, consistent with Section 28(e) of the
Securities Exchange Act of 1934, as amended, when placing portfolio
transactions for a Portfolio with a broker to pay a brokerage commission
(to the extent applicable) in excess of that which another broker might
have charged for effecting the same transaction on account of the receipt
of research, market or statistical information. The term "research, market
or statistical information" includes advice as to the value of securities;
the advisability of investing in, purchasing or selling securities; the
availability of securities or purchasers or sellers of securities; and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of
accounts.
Consistent with the policy stated above, the Rules of Fair Practice of
the NASD and such other policies as the Trustees of the Portfolio may
determine, the Adviser may consider sales of shares of the Fund as a factor
in the selection of broker-dealers to execute portfolio transactions.
Bankers Trust will make such allocations if commissions are comparable to
those charged by nonaffiliated, qualified broker-dealers for similar
services.
Higher commissions may be paid to firms that provide research services
to the extent permitted by law. Bankers Trust may use this research
information in managing each Portfolio's assets, as well as the assets of
other clients.
Except for implementing the policies stated above, there is no
intention to place portfolio transactions with particular brokers or
dealers or groups thereof. In effecting transactions in over-the-counter
securities, orders are placed with the principal market-makers for the
security being traded unless, after exercising care, it appears that more
favorable results are available otherwise.
Although certain research, market and statistical information from
brokers and dealers can be useful to a Portfolio and to the Adviser, it is
the opinion of the management of the Portfolios that such information is
only supplementary to the Adviser's own research effort, since the
information must still be analyzed, weighed and reviewed by the Adviser's
staff. Such information may be useful to the Adviser in providing services
to clients other than the Portfolios, and not all such information is used
by the Adviser in connection with the Portfolios. Conversely, such
information provided to the Adviser by brokers and dealers through whom
other clients of the Adviser effect securities transactions may be useful
to the Adviser in providing services to the Portfolios.
In certain instances there may be securities which are suitable for a
Portfolio as well as for one or more of the Adviser's other clients.
Investment decisions for a Portfolio and for the Adviser's other clients
are made with a view to achieving their respective investment objectives.
It may develop that a particular security is bought or sold for only one
client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more
clients when one or more clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the
same security is suitable for the investment objectives of more than one
client. When two or more clients are simultaneously engaged in the purchase
or sale of the same security, the securities are allocated among clients in
a manner believed to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of
the security as far as a Portfolio is concerned. However, it is believed
that the ability of a Portfolio to participate in volume transactions will
produce better executions for the Portfolio.
For the years ended December 31, 1996, 1995, and 1994, Equity 500
Index Portfolio paid brokerage commissions in the amount of $289,791,
$172,924, and $97,069, respectively.
For the period from July 10, 1996 (Commencement of Operations) to
December 31, 1996, the Small Cap Index Portfolio, paid brokerage
commissions in the amount of $55,569.
For the period from January 24, 1996 (Commencement of Operations) to
December 31, 1996, the EAFE Equity Index Portfolio, paid brokerage
commissions in the amount of 66,791.
{PRIVATE }PERFORMANCE INFORMATION{TC \L 1 "PERFORMANCE INFORMATION"}
STANDARD PERFORMANCE INFORMATION
From time to time, quotations of a Fund's performance may be included
in advertisements, sales literature or shareholder reports. These
performance figures are calculated in the following manner:
YIELD: Yields for a Fund used in advertising are computed by dividing
the Fund's interest and dividend income for a given 30-day or one-
month period, net of expenses, by the average number of shares
entitled to receive distributions during the period, dividing this
figure by the Fund's net asset value per share at the end of the
period, and annualizing the result (assuming compounding of income) in
order to arrive at an annual percentage rate. Income is calculated for
purpose of yield quotations in accordance with standardized methods
applicable to all stock and bond mutual funds. Dividends from equity
investments are treated as if they were accrued on a daily basis,
solely for the purpose of yield calculations. In general, interest
income is reduced with respect to bonds trading at a premium over
their par value by subtracting a portion of the premium from income on
a daily basis, and is increased with respect to bonds trading at a
discount by adding a portion of the discount to daily income. Capital
gains and losses generally are excluded from the calculation.
Income calculated for the purposes of calculating a Fund's yield
differs from income as determined for other accounting purposes.
Because of the different accounting methods used, and because of the
compounding assumed in yield calculations, the yield quoted for a Fund
may differ from the rate of distributions of the Fund paid over the
same period or the rate of income reported in the Fund's financial
statements.
TOTAL RETURN: A Fund's average annual total return is calculated for
certain periods by determining the average annual compounded rates of
return over those periods that would cause an investment of $1,000
(made at the maximum public offering price with all distributions
reinvested) to reach the value of that investment at the end of the
periods. A Fund may also calculate total return figures which
represent aggregate performance over a period or year-by-year
performance.
PERFORMANCE RESULTS: Any total return quotation provided for a Fund
should not be considered as representative of the performance of the
Fund in the future since the net asset value and public offering price
of shares of the Fund will vary based not only on the type, quality
and maturities of the securities held in the corresponding Portfolio,
but also on changes in the current value of such securities and on
changes in the expenses of the Fund and the corresponding Portfolio.
These factors and possible differences in the methods used to
calculate total return should be considered when comparing the total
return of a Fund to total returns published for other investment
companies or other investment vehicles. Total return reflects the
performance of both principal and income.
COMPARISON OF FUND PERFORMANCE
Comparison of the quoted nonstandardized performance of various
investments is valid only if performance is calculated in the same manner.
Since there are different methods of calculating performance, investors
should consider the effect of the methods used to calculate performance
when comparing performance of a Fund with performance quoted with respect
to other investment companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or
to unmanaged indices which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management
costs.
Evaluations of a Fund's performance made by independent sources may
also be used in advertisements concerning the Fund. Sources for a Fund's
performance information could include the following:
Asian Wall Street Journal, a weekly Asian newspaper that often reviews
U.S. mutual funds investing internationally.
Barron's, a Dow Jones and Company, Inc. business and financial weekly
that periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports
the performance rankings and ratings of a variety of mutual funds investing
abroad.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
Consumer Digest, a monthly business/financial magazine that includes a
"Money Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time
to time articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a
"Market Watch" department reporting on activities in the mutual fund
industry.
Forbes, a national business publication that from time to time reports
the performance of specific investment companies in the mutual fund
industry.
Fortune, a national business publication that periodically rates the
performance of a variety of mutual funds.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
Investor's Daily, a daily newspaper that features financial, economic
and business news.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a
weekly publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both
specific funds and the mutual fund industry as a whole.
Morningstar Inc., a publisher of financial information and mutual fund
research.
New York Times, a nationally distributed newspaper which regularly
covers financial news.
Personal Investing News, a monthly news publication that often reports
on investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that
includes a "Mutual Funds Outlook" section reporting on mutual fund
performance measures, yields, indices and portfolio holdings.
Success, a monthly magazine targeted to the world of entrepreneurs and
growing business, often featuring mutual fund performance data.
U.S. News and World Report, a national business weekly that
periodically reports mutual fund performance data.
Value Line, a biweekly publication that reports on the largest 15,000
mutual funds.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.
Weisenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient
features, management results, income and dividend records, and price
ranges.
Working Women, a monthly publication that features a "Financial
Workshop" section reporting on the mutual fund/financial industry.
VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND
Equity and debt securities (other than short-term debt obligations
maturing in 60 days or less), including listed securities and securities
for which price quotations are available, will normally be valued on the
basis of market valuations furnished by a pricing service. Short-term debt
obligations and money market securities maturing in 60 days or less are
valued at amortized cost, which approximates market.
Securities for which market quotations are not available are valued by
Bankers Trust pursuant to procedures adopted by each Portfolio's Board of
Trustees. It is generally agreed that securities for which market
quotations are not readily available should not be valued at the same value
as that carried by an equivalent security which is readily marketable.
The problems inherent in making a good faith determination of value
are recognized in the codification effected by SEC Financial Reporting
Release No. 1 ("FRR 1" (formerly Accounting Series Release No. 113)) which
concludes that there is "no automatic formula" for calculating the value of
restricted securities. It recommends that the best method simply is to
consider all relevant factors before making any calculation. According to
FRR 1 such factors would include consideration of the:
type of security involved, financial statements, cost at date of
purchase, size of holding, discount from market value of
unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as to
any transactions or offers with respect to the security,
existence of merger proposals or tender offers affecting the
security, price and extent of public trading in similar
securities of the issuer or comparable companies, and other
relevant matters.
To the extent that a Portfolio purchases securities which are
restricted as to resale or for which current market quotations are not
available, the Adviser of the Portfolio will value such securities based
upon all relevant factors as outlined in FRR 1.
The Trust, on behalf of each Fund, and each Portfolio reserve the
right, if conditions exist which make cash payments undesirable, to honor
any request for redemption or repurchase order by making payment in whole
or in part in readily marketable securities chosen by the Trust, or the
Portfolio, as the case may be, and valued as they are for purposes of
computing the Fund's or the Portfolio's net asset value, as the case may be
(a redemption in kind). If payment is made to a Fund shareholder in
securities, an investor, including the Fund, the shareholder may incur
transaction expenses in converting these securities into cash. The Trust,
on behalf of each Fund, and each Portfolio have elected, however, to be
governed by Rule 18f-1 under the 1940 Act as a result of which each Fund
and each Portfolio are obligated to redeem shares or beneficial interests,
as the case may be, with respect to any one investor during any 90-day
period, solely in cash up to the lesser of $250,000 or 1% of the net asset
value of the Fund or the Portfolio, as the case may be, at the beginning of
the period.
Each Portfolio has agreed to make a redemption in kind to the
corresponding Fund whenever the Fund wishes to make a redemption in kind
and therefore shareholders of the Fund that receive redemptions in kind
will receive portfolio securities of the corresponding Portfolio and in no
case will they receive a security issued by the Portfolio. The Portfolio
has advised the Trust that the Portfolio will not redeem in kind except in
circumstances in which the Fund is permitted to redeem in kind or unless
requested by the Fund.
Each investor in a Portfolio, including the corresponding Fund, may
add to or reduce its investment in the Portfolio on each day the Portfolio
determines its net asset value. At the close of each such business day, the
value of each investor's beneficial interest in the Portfolio will be
determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, which represents that investor's share
of the aggregate beneficial interests in the Portfolio. Any additions or
withdrawals which are to be effected as of the close of business on that
day will then be effected. The investor's percentage of the aggregate
beneficial interests in the Portfolio will then be recomputed as the
percentage equal to the fraction (i) the numerator of which is the value of
such investor's investment in the Portfolio as of the close of business on
such day plus or minus, as the case may be, the amount of net additions to
or withdrawals from the investor's investment in the Portfolio effected as
of the close of business on such day, and (ii) the denominator of which is
the aggregate net asset value of the Portfolio as of the close of business
on such day plus or minus, as the case may be, the amount of net additions
to or withdrawals from the aggregate investments in the Portfolio by all
investors in the Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in the Portfolio
as the close of business on the following business day.
Each Fund may, at its own option, accept securities in payment for
shares. The securities delivered in payment for shares are valued by the
method described under "Net Asset Value" as of the day the Fund receives
the securities. This is a taxable transaction to the shareholder.
Securities may be accepted in payment for shares only if they are, in the
judgment of Bankers Trust, appropriate investments for the Fund's
corresponding Portfolio. In addition, securities accepted in payment for
shares must: (i) meet the investment objective and policies of the
acquiring Fund's corresponding Portfolio; (ii) be acquired by the
applicable Fund for investment and not for resale (other than for resale to
the Fund's corresponding Portfolio); (iii) be liquid securities which are
not restricted as to transfer either by law or liquidity of market; and
(iv) if stock, have a value which is readily ascertainable as evidenced by
a listing on a stock exchange, over-the-counter market or by readily
available market quotations from a dealer in such securities. When
securities are used as payment for shares or as a redemption in kind from
the fund, the transaction fee will not be assessed. However, the
shareholder will be charged the costs associated with receiving or
delivering the securities. These costs include security movement costs and
taxes and registration costs. Each Fund reserves the right to accept or
reject at its own option any and all securities offered in payment for its
shares.
{PRIVATE }MANAGEMENT OF THE TRUSTS AND THE PORTFOLIOS{TC \L 1 "MANAGEMENT
OF THE TRUSTS AND THE PORTFOLIOS"}
Each Board of Trustees is composed of persons experienced in financial
matters who meet throughout the year to oversee the activities of the Funds
or Portfolios they represent. In addition, the Trustees review contractual
arrangements with companies that provide services to the Funds/Portfolios
and review the Funds' performance.
The Trustees and officers of the Trusts and Portfolios their
birthdates, their principal occupations during the past five years, and
addresses are set forth below. Their titles may have varied during that
period. Asterisks indicate those Trustees who are "interested persons" (as
defined in the 1940 Act) of the Trust. Unless otherwise indicated, the
address of each officer is Clearing Operations, P.O. Box 897, Pittsburgh,
Pennsylvania 15230-0897.
TRUSTEES OF THE BT ADVISOR FUNDS
{PRIVATE }{TC \L 1 ""}
PHILIP W. COOLIDGE* (birthdate: September 2, 1951) - President and
Trustee; Chairman, Chief Executive Officer and President, Signature
Financial Group, Inc. ("SFG") (since December, 1988) and Signature (since
April, 1989). His address is 6 St. James Avenue, Boston, Massachusetts
02116.
MARTIN J. GRUBER (birthdate: July 15, 1937) - Trustee; Chairman of the
Finance Department and Nomura Professor of Finance, Leonard N. Stern School
of Business, New York University (since 1964). His address is 229 S.
Irving Street, Ridgewood, New Jersey 07450.
RICHARD J. HERRING (birthdate: February 18, 1946) - Trustee;
Professor, Finance Department, The Wharton School, University of
Pennsylvania. His address is The Wharton School, University of Pennsylvania
Finance Department, 3303 Steinberg Hall/Dietrich Hall, Philadelphia,
Pennsylvania 19104.
BRUCE E. LANGTON (birthdate: May 10, 1931) - Trustee; Retired;
Director, Adela Investment Co. and University Patents, Inc.; formerly
Assistant Treasurer of IBM Corporation (until 1986). His address is 99
Jordan Lane, Stamford, Connecticut 06903.
HARRY VAN BENSCHOTEN (birthdate: February 18, 1928) - Trustee; Retired
(since 1987); Corporate Vice President, Newmont Mining Corporation (prior
to 1987); Director, Canada Life Insurance Company of New York and
Competitive Technologies, Inc., a public company listed on the American
Stock Exchange. His address is 6581 Ridgewood Drive, Naples, Florida 33963.
TRUSTEES OF BT PYRAMID MUTUAL FUNDS
PHILIP W. COOLIDGE* (birthdate: September 2, 1951) - President and
Trustee; Chairman, Chief Executive Officer and President, SFG (since
December, 1988) and Signature (since April, 1989). His address is 6 St.
James Avenue, Boston, Massachusetts 02116.
MARTIN J. GRUBER (birthdate: July 15, 1937) - Trustee; Chairman of the
Finance Department and Nomura Professor of Finance, Leonard N. Stern School
of Business, New York University (since 1964). His address is 229 S. Irving
Street, Ridgewood, New Jersey 07450.
KELVIN J. LANCASTER (birthdate: December 12, 1924) - Trustee;
Professor, Department of Economics, Columbia University. His address is
35 Claremont Avenue, New York, New York 10027.
HARRY VAN BENSCHOTEN (birthdate: February 18, 1928) - Trustee; retired
(since 1987); Corporate Vice President, Newmont Mining Corporation (prior
to 1987); Director, Canada Life Insurance Company of New York and
Competitive Technologies, Inc., a public company listed on the American
Stock Exchange. His address is 6581 Ridgewood Drive, Naples, Florida 33963.
* Indicates and `interested person'' as defined by the 1940 Act.
TRUSTEES OF THE PORTFOLIOS
CHARLES P. BIGGAR (birthdate: October 13, 1930) - Trustee; Retired;
Director of Chase/NBW Bank Advisory Board; Director, Batemen, Eichler, Hill
Richards Inc.; formerly Vice President of International Business Machines
and President of the National Services and the Field Engineering Divisions
of IBM. His address is 12 Hitching Post Lane, Chappaqua, New York 10514.
PHILIP W. COOLIDGE* (birthdate: September 2, 1951) - President and
Trustee; Chairman, Chief Executive Officer and President, SFG (since
December, 1988) and Signature (since April, 1989). His address is 6 St.
James Avenue, Boston, Massachusetts 02116.
S. LELAND DILL (birthdate: March 28, 1930) - Trustee; Retired;
Director, Coutts Group, Coutts (U.S.A.) International; Coutts Trust Ltd.;
Director, Zweig Series Trust; formerly Partner of KPMG Peat Marwick;
Director, Vinters International Company Inc.; General Partner of Pemco (an
investment company registered under the 1940 Act). His address is 5070
North Ocean Drive, Singer Island, Florida 33404.
PHILIP SAUNDERS, JR. (birthdate: October 11, 1935) - Trustee;
Principal, Philip Saunders Associates (Consulting); former Director of
Financial Industry Consulting, Wolf & Company; President, John Hancock Home
Mortgage Corporation; and Senior Vice President of Treasury and Financial
Services, John Hancock Mutual Life Insurance Company, Inc. His address is
445 Glen Road, Weston, Massachusetts 02193.
* Indicates and `interested person'' as defined by the 1940 Act.
OFFICERS OF THE TRUSTS AND PORTFOLIOS
Unless otherwise specified, each officer listed below holds the same
position with each Trust and each Portfolio.
RONALD M. PETNUCH - (birthdate: February 27, 1960) - President and
Treasurer; Senior Vice President; Federated Services Company ("FSC");
formerly, Director of Proprietary Client Services, Federated Administrative
Services ("FAS"), and Associate Corporate Counsel, Federated Investors
("FI").
CHARLES L. DAVIS, JR. - (birthdate: March 23, 1960) - Vice President
and Assistant Treasurer; Vice President, FAS.
JAY S. NEUMAN - (birthdate: April 22, 1950) - Secretary; Corporate
Counsel, FI.
Messrs. Coolidge, Petnuch, Davis & Neuman also hold similar
positions for other investment companies for which Signature or Edgewood,
respectively serves as the principal underwriter.
No person who is an officer or director of Bankers Trust is an officer
or Trustee of the Trusts or the Portfolios. No director, officer or
employee of Edgewood or any of its affiliates will receive any compensation
from the Trusts or the Portfolios for serving as an officer or Trustee of
the Trusts or the Portfolios.
Bankers Trust reimbursed the BT Investment Equity 500 Index Fund and
Equity 500 Index Portfolio for a portion of its their Trustees fees for the
period above. See "Investment Adviser" and "Administrator" below.
As of December 31, 1996, the Trustees and officers of the Trusts and
the Portfolios owned in the aggregate less than 1% of the shares of any
Fund or Trust (all series taken together).
The following table reflects fees paid to the Trustees for the year
ended December 31, 1996.
AGGREGATE AGGREGATE TOTAL COMPENSATION
NAME OF PERSON, COMPENSATION COMPENSATION FROM FUND
COMPLEX
POSITION FROM TRUST FROM PYRAMID TRUST PAID TO
TRUSTEES*
Philip W. Coolidge
Trustee of the Trust,
Pyramid Trust, and Portfolio None None $1,250
Martin J. Gruber,
Trustee of the Trust
and Pyramid Trust $2,580 $2,400 $27,500
Kelvin J. Lancaster,
Trustee of Pyramid Trust None $2,400 $26,250
Harry Van Benschoten,
Trustee of the Trust
and Pyramid Trust $2,580 $2,400 $27,500
Bruce E. Langton
Trustee of the Trust $2,571 None $27,500
Richard J. Herring
Trustee of the Trust $2,571 None $27,500
Charles P. Biggar,
Trustee of Portfolios $150 None $28,750
S. Leland Dill,
Trustee of Portfolios $150 None $28,750
Philip Saunders, Jr.,
Trustee of Portfolios $150 None $28,750
*Aggregated information is furnished for the BT Family of Funds which
consists of the following: BT Investment Funds, BT Institutional Funds, BT
Pyramid Mutual Funds, BT Advisor Funds, BT Investment Portfolios, Cash
Management Portfolio, Treasury Money Portfolio, Tax Free Money Portfolio,
NY Tax Free Money Portfolio, International Equity Portfolio, Utility
Portfolio, Short Intermediate US Government Securities Portfolio,
Intermediate Tax Free Portfolio, Asset Management Portfolio, Equity 500
Index Portfolio, and Capital Appreciation Portfolio.
As of December 31, 1996, the following shareholders of record owned 5% or
more of the outstanding Advisor Class Shares of the Small Cap Index Fund:
Zachary Smith, San Francisco, California, owned approximately 3,500 shares
(50.06%); Bankers Trust Company custodian for IRA R/O Michael G. Deluca,
Massetequa Park, New York, owned approximately 2,580 shares (36.9%); Larry
P. Witmer, Davidson, North Carolina, owned approximately 857 shares
(12.25%); Kevin C. Weeks, Monroe, New York, owned approximately 663 shares
(9.49%); Philip N. Russo, Huntington Bay, New York, owned approximately 534
shares (7.64%); and Gerald W. Schulz, Appleton, Wisconsin, owned
approximately 464 shares (6.64%).
As of December 31, 1996, the following shareholders of record owned 5% or
more of the outstanding Advisor Class Shares of the EAFE Equity Index Fund:
Charles Schwab, San Francisco, California, owned approximately 17,719
shares (25.05%); Linsco Private Ledger, San Diego, California, owned
approximately 15,847 shares (22.406%); Canterbury Trust Company TTEE FBO
Tricon Metals & Service Inc.; Birmingham, Alabama, owned approximately
9,358 shares (13.23%); Rocco Trust Co., Milwaukee, Wisconsin, owned
approximately 5,138 shares (7.264%); and Tray Stuard TR; Languna Hills,
California, owned approximately 5,121 shares (7.24%).
INVESTMENT ADVISER
Under the terms of each Portfolio's investment advisory agreement with
Bankers Trust (the "Advisory Agreement"), Bankers Trust manages the
Portfolio subject to the supervision and direction of the Board of Trustees
of the Portfolio. Bankers Trust will: (i) act in strict conformity with
each Portfolio's Declaration of Trust, the 1940 Act and the Investment
Advisers Act of 1940, as the same may from time to time be amended; (ii)
manage each Portfolio in accordance with the Portfolio's investment
objectives, restrictions and policies; (iii) make investment decisions for
each Portfolio; and (iv) place purchase and sale orders for securities and
other financial instruments on behalf of each Portfolio.
Bankers Trust bears all expenses in connection with the performance of
services under each Advisory Agreement. The Trust and each Portfolio bears
certain other expenses incurred in its operation, including: taxes,
interest, brokerage fees and commissions, if any; fees of Trustees of the
Trust or the Portfolio who are not officers, directors or employees of
Bankers Trust, Edgewood or any of their affiliates; SEC fees and state Blue
Sky qualification fees; charges of custodians and transfer and dividend
disbursing agents; certain insurance premiums; outside auditing and legal
expenses; costs of maintenance of corporate existence; costs attributable
to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports and
meetings of shareholders, officers and Trustees of the Trust or the
Portfolio; and any extraordinary expenses.
For the years ended December 31, 1996, 1995, and 1994, Bankers Trust
earned $1,505,963, $770,530, and $428,346, respectively, as compensation
for investment advisory services provided to the Equity 500 Index
Portfolio. During the same periods, Bankers Trust reimbursed $870,024,
$418,814, and $249,230, respectively, to the Portfolio to cover expenses.
For the period from July 1, 1996 (Commencement of Operations) to
December 31, 1996, Bankers Trust earned $34,759, for investment advisory
services provided to the Small Cap Index Portfolio. During the same
periods, Bankers Trust reimbursed $26,968, to the Portfolio to cover
expenses.
For the period from January 24, 1996 (Commencement of Operations) to
December 31, 1996, Bankers Trust earned $68,584, for investment advisory
services provided to the EAFE Equity Index Portfolio. During the same
period, Bankers Trust reimbursed $30,591, to the Portfolio to cover
expenses.
As of December 31, 1996, the U.S. Bond Index Fund (Portfolio) and the
Equity 500 Equal Weighted Index Fund (Portfolio) had not commenced
operations.
Bankers Trust may have deposit, loan and other commercial banking
relationships with the issuers of obligations which may be purchased on
behalf of the Portfolios, including outstanding loans to such issuers which
could be repaid in whole or in part with the proceeds of securities so
purchased. Such affiliates deal, trade and invest for their own accounts in
such obligations and are among the leading dealers of various types of such
obligations. Bankers Trust has informed the Portfolios that, in making its
investment decisions, it does not obtain or use material inside information
in its possession or in the possession of any of its affiliates. In making
investment recommendations for the Portfolios, Bankers Trust will not
inquire or take into consideration whether an issuer of securities proposed
for purchase or sale by a Portfolio is a customer of Bankers Trust, its
parent or its subsidiaries or affiliates and, in dealing with its
customers, Bankers Trust, its parent, subsidiaries and affiliates will not
inquire or take into consideration whether securities of such customers are
held by any fund managed by Bankers Trust or any such affiliate.
The prospectus contains disclosure as to the amount of Bankers Trust's
investment advisory and administration and services fees, including waivers
thereof. Bankers Trust may not recoup any of its waived investment advisory
or administration and services fees. Such waivers by Bankers Trust shall
stay in effect for at least 12 months.
Administrator
Under the Administration and Services Agreements, Bankers Trust is
obligated on a continuous basis to provide such administrative services as
the Board of Trustees of the Trusts and the Portfolios reasonably deem
necessary for the proper administration of the Trusts or the Portfolios.
Bankers Trust will: generally assist in all aspects of each class of shares
of each Funds' and Portfolios' operations; supply and maintain office
facilities (which may be in Bankers Trust's own offices), statistical and
research data, data processing services, clerical, accounting, bookkeeping
and recordkeeping services (including without limitation the maintenance of
such books and records as are required under the 1940 Act and the rules
thereunder, except as maintained by other agents), internal auditing,
executive and administrative services, and stationery and office supplies;
prepare reports to shareholders or investors; prepare and file tax returns;
supply financial information and supporting data for reports to and filings
with the SEC and various state Blue Sky authorities; supply supporting
documentation for meetings of the Board of Trustees; provide monitoring
reports and assistance regarding compliance with Declarations of Trust,
by-laws, investment objectives and policies and with Federal and state
securities laws; arrange for appropriate insurance coverage; calculate net
asset values, net income and realized capital gains or losses; and
negotiate arrangements with, and supervise and coordinate the activities
of, agents and others to supply services.
Pursuant to a sub-administration agreement (the "Sub-Administration
Agreement"), FSC performs such sub-administration duties for the Trusts and
the Portfolios as from time to time may be agreed upon by Bankers Trust and
FSC. The Sub-Administration Agreement provides that FSC will receive such
compensation as from time to time may be agreed upon by FSC and Bankers
Trust. All such compensation will be paid by Bankers Trust.
For the years ended December 31, 1996, 1995, and 1994, Bankers Trust
earned $1,049,314, $686,078, and $447,359, respectively as compensation for
administrative and other services provided to BT Investment Equity 500
Index Fund. During the same periods, Bankers Trust reimbursed $595,135,
$412,383, and $341,939, respectively, to BT Investment Equity 500 Index
Fund to cover expenses.
For the period from August 8, 1996 (Commencement of Operations) to
December 31, 1996, Bankers Trust earned $26 as compensation for
administrative and other services provided to Small Cap Index Fund Advisor
Class Shares. During the same period, Bankers Trust reimbursed $2,322, to
Small Cap Index Fund Advisor Class Shares to cover expenses.
For the period from June 21, 1996 (Commencement of Operations to
December 31, 1996, Bankers Trust earned $528 as compensation for
administrative and other services provided to EAFE Equity Index Fund
Advisor Class Shares. During the same period, Bankers Trust reimbursed
$2,792, to EAFE Equity Index Fund Advisor Class Shares to cover expenses.
For the period from July 10, 1996 (Commencement of Operations) to
December 31, 1996, Bankers Trust earned $11,586, as compensation for
administrative and other services provided to the Small Cap Index
Portfolio.
For the period from January 24, 1996 (Commencement of Operations) to
December 31, 1996, Bankers Trust earned $27,433, as compensation for
administrative and other services provided to the EAFE Equity Index
Portfolio.
For the years ended December 31, 1996, 1995, and 1994, Bankers Trust
earned $752,981, $385,265, and $214,173, respectively, as compensation for
administrative and other services provided to the Equity 500 Index
Portfolio.
Bankers Trust has agreed that if in any fiscal year the aggregate
expenses of any Fund and its respective Portfolio (including fees pursuant
to the Advisory Agreement, but excluding interest, taxes, brokerage and, if
permitted by the relevant state securities commissions, extraordinary
expenses) exceed the expense limitation of any state having jurisdiction
over a Fund or Class, Bankers Trust will reimburse that Fund for the excess
expense to the extent required by state law. As of the date of this
Statement of Additional Information, the most restrictive annual expense
limitation applicable to any Fund or Class is 2.50% of the Fund's or Class'
first $30 million of average annual net assets, 2.00% of the next
$70 million of average annual net assets and 1.50% of the remaining average
annual net assets.
Custodian and Transfer Agent
Bankers Trust, 280 Park Avenue, New York, New York 10017, serves as
Custodian for the Trusts and for the Portfolios pursuant to the
administration and services agreements. As Custodian, it holds the Funds'
and each Portfolio's assets. Bankers Trust also serves as transfer agent of
the Trusts and of each Portfolio pursuant to the respective administration
and services agreement. Under its transfer agency agreement with the
Trusts, Bankers Trust maintains the shareholder account records for each
Class of shares of each Fund, handles certain communications between
shareholders and the Trusts and causes to be distributed any dividends and
distributions payable by the Trusts. Bankers Trust may be reimbursed by the
Funds or the Portfolios for its out-of-pocket expenses. Bankers Trust will
comply with the self-custodian provisions of Rule 17f-2 under the 1940 Act.
Use of Name
The Trusts and Bankers Trust have agreed that each Trust may use "BT"
as part of its name for so long as Bankers Trust serves as investment
adviser to the Portfolios. The Trusts have acknowledged that the term "BT"
is used by and is a property right of certain subsidiaries of Bankers Trust
and that those subsidiaries and/or Bankers Trust may at any time permit
others to use that term.
Each Trust may be required, on 60 days' notice from Bankers Trust at
any time, to abandon use of the acronym "BT" as part of its name. If this
were to occur, the Trustees would select an appropriate new name for each
Trust, but there would be no other material effect on the Trusts, their
shareholders or activities.
Banking Regulatory Matters
Bankers Trust has been advised by its counsel that in its opinion
Bankers Trust may perform the services for the Portfolios contemplated by
the Advisory Agreements and other activities for the Funds and the
Portfolios described in the Prospectuses and this Statement of Additional
Information without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. However, counsel has pointed out that future
changes in either Federal or state statutes and regulations concerning the
permissible activities of banks or trust companies, as well as future
judicial or administrative decisions or interpretations of present and
future statutes and regulations, might prevent Bankers Trust from
continuing to perform those services for the Trusts and the Portfolios.
State laws on this issue may differ from the interpretations of relevant
Federal law and banks and financial institutions may be required to
register as dealers pursuant to state securities law. If the circumstances
described above should change, the Boards of Trustees would review the
relationships with Bankers Trust and consider taking all actions necessary
in the circumstances.
Counsel and Independent Accountants
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street,
New York, New York 10022-4669, serves as Counsel to the Trusts and each
Portfolio. Coopers & Lybrand L.L.P., 1100 Main Street, Suite 900, Kansas
City, Missouri 64105 acts as Independent Accountants of the Trusts and each
Portfolio.
ORGANIZATION OF THE TRUSTS
Shares of each Trust do not have cumulative voting rights, which means
that holders of more than 50% of the shares voting for the election of
Trustees can elect all Trustees. Shares are transferable but have no
preemptive, conversion or subscription rights. Shareholders generally vote
by Fund, except with respect to the election of Trustees and the
ratification of the selection of independent accountants.
Massachusetts law provides that shareholders could under certain
circumstances be held personally liable for the obligations of each Trust.
However, each Trust's Declaration of Trust disclaims shareholder liability
for acts or obligations of the respective Trust and requires that notice of
this disclaimer be given in each agreement, obligation or instrument
entered into or executed by a Trust or a Trustee. The Declaration of Trust
provides for indemnification from each Trust's property for all losses and
expenses of any shareholder held personally liable for the obligations of
each Trust. Thus, the risk of a shareholder's incurring financial loss on
account of shareholder liability is limited to circumstances in which each
Trust itself would be unable to meet its obligations, a possibility that a
Trust believes is remote. Upon payment of any liability incurred by a
Trust, the shareholder paying the liability will be entitled to
reimbursement from the general assets of the respective Trust. The Trustees
intend to conduct the operations of each Trust in a manner so as to avoid,
as far as possible, ultimate liability of the shareholders for liabilities
of that Trust.
TAXATION
TAXATION OF THE FUNDS
The Trust intends to qualify annually and to elect each Fund to be
treated as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the `Code'').
As a regulated investment company, each Fund will not be subject to
U.S. Federal income tax on its investment company taxable income and net
capital gains (the excess of net long-term capital gains over net short-
term capital losses), if any, that it distributes to shareholders. The fund
intends to distribute to its shareholders, at least annually, substantially
all of its investment company taxable income and net capital gains, and
therefore does not anticipate incurring a Federal income tax liability.
DISTRIBUTIONS
Dividends paid out of the Fund's investment company taxable income
will be taxable to a U.S. shareholder as ordinary income. Distributions of
net capital gains, if any, designated as capital gain dividends are taxable
as long-term capital gains, regardless of how long the shareholder has held
the Fund's shares, and are not eligible for the dividends-received
deduction. Shareholders receiving distributions in the form of additional
shares, rather than cash, generally will have a cost basis in each such
share equal to the net asset value of a share of the Fund on the
reinvestment date. Shareholders will be notified annually as to the U.S.
Federal tax status of distributions. Shareholders should consult their own
tax adviser concerning the application of federal, state and local taxes to
the distributions they receive from the Fund.
TAXATION OF THE PORTFOLIOS
The Portfolios are not subject to the Federal income taxation.
Instead, the Fund and other investors investing in a Portfolio must take
into account, in computing their Federal income tax liability, their share
of the Portfolio's income, gains, losses, deductions, credits and tax
preference items, without regard to whether they have received any cash
distributions from the Portfolio.
BACKUP WITHHOLDING
A Fund may be required to withhold U.S. Federal income tax at the rate
of 31% of all taxable distributions payable to shareholders who fail to
provide the Fund with their correct taxpayer identification number or to
make required certifications, or who have been notified by the Internal
Revenue Service that they are subject to backup withholding. Corporate
shareholders and certain other shareholders specified in the Code generally
are exempt from such backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the
shareholder's U.S. Federal income tax liability.
FOREIGN SHAREHOLDERS
The tax consequences to a foreign shareholder of an investment in a
Fund may be different from those described herein. Foreign shareholders are
advised to consult their own tax advisers with respect to the particular
tax consequences to them of an investment in a Fund.
OTHER TAXATION
The Trust is organized as a Massachusetts business trust and, under
current law, neither the Trust nor any Fund is liable for any income or
franchise tax in the Commonwealth of Massachusetts, provided that the Fund
continues to qualify as a regulated investment company under Subchapter M
of the Code.
Each Portfolio is organized as a New York trust. Each Portfolio is not
subject to any income or franchise tax in the State of New York or the
Commonwealth of Massachusetts.
FOREIGN WITHHOLDING TAXES
Income received by a Portfolio from sources within foreign countries
may be subject to withholding and other taxes imposed by such countries.
FINANCIAL STATEMENTS
The financial statements for the Funds and the Portfolios for the
period ended December 31, 1996, are incorporated herein by reference to the
Funds' Annual Reports dated December 31, 1996. A copy of a Fund's Annual
Report may be obtained without charge by contacting the Fund.
APPENDIX
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered as medium-grade obligations, i.e. they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such, bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA - Bonds rated Ba are judged to have speculative elements. Their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both (good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other
terms of the contract over any long period of time may be small.
86
CAA - Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-
comings.
C - Bonds rated C are the lowest-rated class of bonds and issued so rated
can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond system. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
AAA - Debt rated AAA has the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
87
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to weakened capacity to pay interest
and repay principal for debt in this category than in higher-rated
categories.
BB - Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual
or implied BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay principal.
88
CC - Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C -The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed but
debt service payments are continued.
CI - The rating CI is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The D rating will also
be used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
89
INVESTMENT ADVISER OF EACH PORTFOLIO AND ADMINISTRATOR
BANKERS TRUST COMPANY
DISTRIBUTOR
EDGEWOOD SERVICES, INC.
CUSTODIAN AND TRANSFER AGENT
BANKERS TRUST COMPANY
INDEPENDENT ACCOUNTANTS
COOPERS & LYBRAND L.L.P.
COUNSEL
WILLKIE FARR & GALLAGHER
No person has been authorized to give any information or to make any
representations other than those contained in the Trust's Prospectuses, its
Statements of Additional Information or the Trust's official sales
literature in connection with the offering of the Trust's shares and, if
given or made, such other information or representations must not be relied
on as having been authorized by the Trust. Neither the Prospectuses nor
this Statement of Additional Information constitutes an offer in any state
in which, or to any person to whom, such offer may not lawfully be made.
o BT ADVISOR FUNDS
EAFE(R) Equity Index Fund
Institutional Class Shares
PROSPECTUS
Cusips:
05576L866
000000000
05576L858
05576L841
055847107
BT0466I(3/97)
FEBRUARY 28, 1997
BT Advisor Funds (the `Trust'') is an open-end, management investment
company (mutual fund) which consists of several funds. The diversified fund
listed above (the `Fund'') is a separate series of the Trust and offers
two classes of shares. The shares offered by this prospectus are the
Institutional Class Shares (the ``hares''). The Fund seeks to replicate as
i
closely as possible the performance of a selected market index before the
deduction of the expenses, allocable to the Shares of the Fund and the
Portfolio (the ``xpenses''). There is no assurance, however, that the Fund
will achieve its stated objective.
Please read this Prospectus before investing, and keep it on file for
future reference. It contains important information, including how the Fund
invests and the services available to shareholders.
To learn more about the Fund and its investments, investors can obtain a
copy of the Fund's Statement of Additional Information (the `SAI''), dated
February 28, 1997. The SAI has been filed with the Securities and Exchange
Commission (the ``EC'') and is incorporated herein by reference. For a
free copy of the SAI, call (800) 368-4031.
UNLIKE OTHER OPEN-END MANAGEMENT INVESTMENT COMPANIES (MUTUAL FUNDS), THE
FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS
INVESTABLE ASSETS (`ASSETS'') IN THE EAFE(R) EQUITY INDEX PORTFOLIO (THE
``ORTFOLIO'') WHICH IS A SEPARATE FUND WITH AN IDENTICAL INVESTMENT
OBJECTIVE. SEE `SPECIAL INFORMATION CONCERNING MASTER-FEEDER FUND
STRUCTURE''HEREIN.
BANKERS TRUST COMPANY (`BANKERS TRUST) IS THE INVESTMENT ADVISER (THE
``DVISER'') OF EACH PORTFOLIO. SHARES OF THE FUNDS ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, OR INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE U.S. GOVERNMENT, THE FEDERAL RESERVE
BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
LIKE SHARES OF ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
i
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
*The EAFE(R) Index is the exclusive property of Morgan Stanley. Morgan
Stanley Capital International is a service of Morgan Stanley and has been
licensed for use by Bankers Trust Company.
EDGEWOOD SERVICES, INC.
Clearing Operations o P.O. Box 897 o Pittsburgh, Pennsylvania o 15230-0897
TABLE OF CONTENTS
The Fund 3
Who May Want To Invest 3
Investment Principles and Risks 3
Summary of Fund Expenses 4
Financial Highlights 6
The Fund in Detail 7
Risk Factors and Certain Securities and Investment Practices
9
Performance Information and Reports
13
Management of the Trust and the Portfolio 14
Net Asset Value
15
Purchase and Redemption of Shares 16
Dividends, Distributions, and Taxes
21
Additional Information
22
i
THE FUND
The Trust seeks to achieve the investment objective of the Fund by
investing all the Assets of the Fund in the Portfolio.
The Portfolio seeks to replicate as closely as possible (before deduction
of Expenses) the total return of the Morgan Stanley Capital International
Europe, Australia, Far East (EAFE) Index with net dividends (the ``AFE
Index''or the ``Index''), a capitalization-weighted index containing
approximately 1,100 equity securities of companies located outside the
United States. The Portfolio will be invested primarily in equity
securities of business enterprises organized and domiciled outside of the
United States or for which the principal trading market is outside the
United States. Statistical methods will be employed to replicate the Index
by buying most of the relevant Index securities. Securities purchased for
the Portfolio will generally, but not necessarily, be traded on a foreign
securities exchange.
WHO MAY WANT TO INVEST
Shares of the Fund are offered through this Prospectus to institutional
investors.
The Portfolio is not managed according to traditional methods of ``ctive''
investment management, which involve the buying and selling of securities
based upon economic, financial and market analysis and investment judgment.
Instead, the Portfolio, utilizes a `passive'' or ``indexing'' investment
approach and attempts to duplicate the investment performance of its index
through statistical procedures.
The Fund may be appropriate for investors who want to pursue their
investment goals in markets outside of the United States. By including
i
international investments in their portfolio, investors can achieve an
extra level of diversification and also participate in opportunities around
the world. However, there are additional risks involved with international
investing. The performance of international funds depends upon currency
values, the political and regulatory environment, and overall economic
factors in the countries in which the Portfolio invests.
The Trust is intended to be a long-term investment vehicle and is not
designated to provide investors with a means of speculating on short-term
market movements. Investors who engage in excessive account activity
generate additional costs which are borne by all the Trust's shareholders.
In order to minimize such costs, the Trust has adopted the following
policies. The Trust reserves the right to reject any purchase request
(including exchange purchases from other BT Advisor Funds portfolios) that
is reasonably deemed to be disruptive to efficient portfolio management,
either because of the timing of the investment or previous excessive
trading by the investor. Additionally, the Trust has adopted exchange
privilege limitations as described in the section ``xchange Limitations''
herein. Finally, the Trust reserves the right to suspend the offering of
its shares.
The Fund is not in itself a balanced investment plan. Investors should
consider their investment objective and tolerance for risk when making an
investment decision.
When investors sell their Fund Shares, they may be worth more or less than
what they paid for them.
INVESTMENT PRINCIPLES AND RISKS
The value of the Portfolio's investments varies based on many factors.
Stock values fluctuate, sometimes dramatically, in response to the
activities of individual companies and general market and economic
i
conditions. Over time, however, stocks have shown greater long-term growth
potential than other types of securities.
Because many foreign investments are denominated in foreign currencies,
changes in the value of these currencies can significantly affect the
Fund's share price. General economic factors in the various world markets
can also impact the value of an investor's investment. When an investor
sells their Fund Shares, they may be worth more or less than what they paid
for them. See ``isk Factors and Certain Securities and Investment
Practices''herein for more information.
SUMMARY OF FUND EXPENSES
Annual operating expenses are paid out of the assets of the Portfolio and
Fund. The Portfolio pays an investment advisory fee and an administrative
services fee to Bankers Trust. The Fund incurs expenses such as maintaining
shareholder records and furnishing shareholder statements. The Fund must
provide financial reports.
The following table provides: (i) a summary of expenses relating to
purchases and sales of the Shares of the Fund and the annual operating
expenses of the Fund and expenses of the Portfolio, in the aggregate, as a
percentage of average daily net assets of the Fund; and (ii) an example
illustrating the dollar cost of such expenses on a $1,000 investment in the
Fund. The Trustees of the Trust believe that the Expenses of the Fund and
expenses of the Portfolio, in the aggregate, will be less than or
approximately equal to the expenses which the Fund would incur if the Trust
retained the services of an investment adviser and the Assets of the Fund
were invested directly in the type of securities being held by the
Portfolio.
Shareholder Transaction Expenses
Maximum Sales Charge on Purchases
i
(as a percentage of offering price)
None*
Maximum Sales Charge on Reinvested Distributions None
Redemption Fee
None*
Exchange Fee
None
Shareholder transaction expenses are charges paid when investors buy,
sell, exchange, or hold Shares of the Fund. See `Purchase and Redemption
of Shares''for an explanation of how and when these charges apply.
* A transaction fee of 0.25% is deducted from purchases, redemptions and
exchanges into and out of the Fund. These transaction fees are paid to the
Fund and are deducted automatically from the amount invested, exchanged or
redeemed. The fee applies to all redemptions and an initial investment in
the Fund and all subsequent purchases (including purchases made by exchange
from another BT Fund), but not to reinvested dividend or capital gain
distributions.
The purpose of the 0.25% transaction fee is to allocate transaction costs
associated with purchases, redemptions and exchanges to investors making
those purchases, redemptions and exchanges, thus insulating existing
shareholders from those transaction costs. These costs include: (1)
brokerage costs; (2) the effect of the `bid-ask'' spread in international
markets; and (3) taxes in some countries. Since the investors, not the
Fund, bears these costs, the Fund is expected to be able to track its
benchmark index more closely.
ANNUAL OPERATING EXPENSES
EAFE(R) Equity Index Fund
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Investment advisory fee (after reimbursement or waiver)
0.24%
Other expenses (after reimbursements or waivers)
0.16%
Total operating expenses (after reimbursements or waivers)
0.40%
Example Table Example:
1 Year 3 Years
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2) redemption
at the end of each time period:
$7 $16
The expense table and the example above show the costs and expenses that an
investor will bear directly or indirectly as a shareholder of the Fund.
Bankers Trust has voluntarily agreed to waive a portion of its investment
advisory fee with respect to the Portfolio. Without such waiver, the
Portfolio's investment advisory fee would be equal to 0.25%. The expense
table and the example reflect a voluntary undertaking by Bankers Trust to
waive or reimburse expenses such that the total operating expenses would
not exceed 0.40% of the Fund's-Institutional Class Shares average net
assets annually. In the absence of this undertaking, for the fiscal year
ended December 31, 1996, the total operating expenses would have been
approximately 0.88% of the Fund's-Institutional Class Shares average net
assets annually. The example should not be considered a representation of
past or future expenses and actual expenses may be greater or less than
those shown. Moreover, while each example assumes a 5% annual return,
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actual performance will vary and may result in a return greater or less
than 5%.
The Fund is distributed by Edgewood Services, Inc. ("Edgewood" or the
"Distributor") to customers of Bankers Trust or to customers of another
bank or a dealer or other institution that has a sub-shareholder servicing
agreement with Bankers Trust (along with Bankers Trust, a "Service Agent").
Some Service Agents may impose certain conditions on their customers in
addition to or different from those imposed by the Fund and may charge
their customers a direct fee for their services. Each Service Agent has
agreed to transmit to shareholders who are its customers appropriate
disclosures of any fees that it may charge them directly.
Currently, the Fund has issued two classes of Shares. The Fund offers by
separate prospectus another class of Shares. Because the expenses vary
between the classes, performance will vary with respect to each class.
Additional information concerning the Fund's other class of Shares is
available from Bankers Trust, as administrator, at (800) 368-4031.
For more information about the Fund's and the Portfolio's expenses see
``anagement of the Trust and the Portfolio'' herein.
FINANCIAL HIGHLIGHTS
The following table shows the selected data for a share outstanding,
total investment return, ratios to average net assets and other
supplemental data of the EAFE Equity Index Fund for the periods indicated.
The EAFE Equity Index Fund's Annual Report has been audited by Coopers &
Lybrand L.L.P., the Fund's independent accountants, whose report thereon
appears in the Fund's Annual Report. The Fund's Annual Report is
incorporated by reference in the Trusts' SAI.
i
Institutional Class Shares
Advisor Class Shares
For the
period January 24, 1996 For the period June 21,
1996
(Commencement
of Operations) (Commencement of Operations)
to
December 31, 1996 to
December 31, 1996
Per Share Operating Performance:
Net Asset Value, Beginning of Period $ 10.00
$ 10.00
Income from Investment Operations
Net Investment Income 0.12
0.02
Net Realized and Unrealized Gain on Investments and
Foreign Currency Transactions 0.60
0.12
Total from Investment Operations 0.72
0.14
Distributions to Shareholders
Net Investment Income (0.08)
(0.00)+
Net Realized Gain from Investment Transactions (0.02)
(0.00)+
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Total Distributions
(0.10) (0.00)+
Net Asset Value, End of Period $ 10.62
$ 10.14
Total Investment Return 7.22%
1.57%
Supplemental Data and Ratios:
Net Assets, End of Period (000s omitted) $ 39,667
$ 717
Ratios to Average Net Assets:
Net Investment Income 1.64%*
0.67%*
Expenses, including expenses of the
EAFE Equity Index Portfolio 0.40%*
0.65%*
Decrease Reflected In Above Expense Ratio Due
to Absorption of Expenses by Bankers Trust 0.48%*
1.70%*
*Annualized
+Less than $0.01
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated December 31, 1996, which can be obtained free of
charge.
THE FUND IN DETAIL
Investment Objectives and Policies
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The Trust seeks to achieve the investment objective of the Fund by
investing all of its Assets in the corresponding Portfolio, which has the
same investment objective as the Fund. Since the investment characteristics
of the Fund will correspond directly to those of the Portfolio, the
following is a discussion of the various investments of and techniques
employed by the Portfolio. Additional information about the investment
policies of the Portfolio appears in ``isk Factors and Certain Securities
and Investment Practices''herein and in the SAI. There can be no assurance
that the investment objective of either the Fund or the Portfolio will be
achieved.
The Portfolio seeks to replicate as closely as possible (before deduction
of Expenses) the total return of the EAFE Index. The Portfolio attempts to
achieve this objective by investing in a statistically selected sample of
the equity securities included in the EAFE Index.
Inclusion of a security in the EAFE Index in no way implies an opinion by
Morgan Stanley as to its attractiveness as an investment. Neither the Fund
nor the Portfolio is sponsored or affiliated with Morgan Stanley.
The EAFE Index is a capitalization-weighted index containing approximately
1,100 equity securities of companies located outside the United States. The
countries currently included in the EAFE Index are Australia, Austria,
Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy,
Japan, Malaysia, The Netherlands, New Zealand, Norway, Singapore, Spain,
Sweden, Switzerland and United Kingdom.
The Portfolio is constructed to have aggregate investment characteristics
similar to those of the EAFE Index. The Portfolio invests in a
statistically selected sample of the securities included in the EAFE Index,
although not all companies within a country will be represented in the
Portfolio at the same time. Stocks are selected for inclusion in the
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Portfolio based on country of origin, market capitalization, yield,
volatility and industry sector. Bankers Trust will manage the Portfolio
using advanced statistical techniques to determine which stocks are to be
purchased or sold to replicate the EAFE Index. From time to time,
adjustments may be made in the Portfolio because of changes in the
composition of the EAFE Index, but such changes should be infrequent.
This Fund is not sponsored, endorsed, sold or promoted by Morgan Stanley.
Morgan Stanley makes no representation or warranty, express or implied, to
the owners of this Fund or any member of the public regarding the
advisability of investing in securities generally or in this Fund
particularly or the ability of the EAFE Index to track general stock market
performance. Morgan Stanley is the licensor of certain trademarks, service
marks and trade names of Morgan Stanley and of the EAFE Index which is
determined, composed and calculated by Morgan Stanley without regard to the
issuer of this Fund or this Fund itself. Morgan Stanley has no obligation
to take the needs of the issuer of this Fund or the owners of this Fund
into consideration in determining, composing or calculating the EAFE Index.
Inclusion of a security in the EAFE Index in no way implies an opinion by
Morgan Stanley as to its attractiveness as an investment. Morgan Stanley is
not responsible for and has not participated in the determination of the
timing of, prices at, or quantities of this Fund to be issued or in the
determination or calculation of the equation by which this Fund is
redeemable for cash. Morgan Stanley has no obligation or liability to
owners of this Fund in connection with the administration, marketing or
trading of this Fund. This Fund is neither sponsored by nor affiliated with
Morgan Stanley.
Although Morgan Stanley shall obtain information for inclusion in or for
use in the calculation of the indexes from sources which Morgan Stanley
i
considers reliable, Morgan Stanley does not guarantee the accuracy and/or
the completeness of the indices or any data included therein. Morgan
Stanley makes no warranty, express or implied, as to results to be obtained
by licensee, licensee's customers and counterparties, owners of the
products, or any other person or entity from the use of the indices or any
data included therein in connection with the rights licensed hereunder or
for any other use. Morgan Stanley makes no express or implied warranties,
and hereby expressly disclaims all warranties of merchantability or fitness
for a particular purpose with respect to the indices or any data included
therein. Without limiting any of the foregoing, in no event shall Morgan
Stanley have any liability for any direct, indirect, special, punitive,
consequential or any other damages (including lost profits) even if
notified of the possibility of such damages.
For more information about the performance of the EAFE Index see the SAI.
General
Over time, the correlation between the performance of the Fund, before the
deduction of Expenses, and the respective Index is expected to be 0.95 or
higher before deduction of Expenses. A correlation of 1.00 would indicate
perfect correlation, which would be achieved when the net asset value of
the Fund, including the value of its dividend and any capital gain
distributions, increases or decreases in exact proportion to changes in the
Index. The Fund's ability to track the Index may be affected by, among
other things, transaction costs, administration and other expenses incurred
by the Fund or the Portfolio, changes in either the composition of the
Index or the assets of the Portfolio, and the timing and amount of
Portfolio investor contributions and withdrawals, if any. In the unlikely
event that a high correlation is not achieved, the Trust's Board of
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Trustees will consider alternatives. Because the Portfolio seeks to track
the respective index, Bankers Trust will not attempt to judge the merits of
any particular stock as an investment.
Under normal circumstances, the Portfolio will invest at least 80% of its
assets in the securities of its Index.
As a diversified fund, no more than 5% of the assets of the Portfolio may
be invested in the securities of one issuer (other than U.S. Government
Securities), except that up to 25% of the Portfolio's assets may be
invested without regard to this limitation. The Portfolio will not invest
more than 25% of its assets in the securities of issuers in any one
industry. These are fundamental investment policies of the Portfolio which
may not be changed without investor approval. No more than 15% of the
Portfolio's net assets may be invested in illiquid or not readily
marketable securities (including repurchase agreements and time deposits
maturing in more than seven days). Additional investment policies of the
Portfolio are contained in the SAI.
The Portfolio may maintain up to 25% of its assets in short-term debt
securities and money market instruments to meet redemption requests or to
facilitate investment in the securities of the Index. Securities index
futures contracts and related options, warrants, convertible securities and
swap agreements may be used for several reasons: to simulate full
investment in the underlying Index while retaining a cash balance for fund
management purposes, to facilitate trading, or to reduce transaction costs
or to seek higher investment returns when a futures contract, option,
warrant, convertible security or swap agreement is priced more attractively
than the underlying equity security or Index. These instruments may be
considered derivatives. See ``isk Factors and Certain Securities and
Investment Practices''herein.
i
The use of derivatives for non-hedging purposes may be considered
speculative. While each of these securities can be used as leveraged
investments, the Portfolio may not use them to leverage its net assets. The
Portfolio will not invest in such instruments as part of a temporary
defensive strategy (such as altering the aggregate maturity of the
Portfolio) to protect the Portfolio against potential market declines.
The Portfolio may lend its investment securities and purchase securities
on a when-issued and a delayed delivery basis. The Portfolio may engage in
foreign currency forward and futures transactions for the purpose of
enhancing portfolio returns or hedging against foreign exchange risk
arising from the Portfolio's investment or anticipated investment in
securities denominated in foreign currencies. See `Risk Factors and
Certain Securities and Investment Practices''herein and in the SAI for
more information about the investment practices of the Portfolio.
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of
instruments in which the Portfolio may invest and strategies Bankers Trust
may employ in pursuit of the Portfolio's investment objective. A summary of
risks and restrictions associated with these instrument types and
investment practices is included as well.
Bankers Trust may not buy all of these instruments or use all of these
techniques to the full extent permitted unless it believes that doing so
will help the Portfolio achieve its goal. Holdings and recent investment
strategies are described in the financial reports of the Fund and the
Portfolio, which are sent to Fund shareholders twice a year. For a free SAI
or financial report, call your Service Agent or Bankers Trust.
Market Risk
i
As a mutual fund investing primarily in common stocks, this Portfolio is
subject to market risk -- i.e., the possibility that common stock prices
will decline over short or even extended periods. The U.S. and foreign
stock markets tend to be cyclical, with periods when stock prices generally
rise and periods when prices generally decline.
Risks of Investing in Foreign Securities
Investors should realize that investing in securities of foreign issuers
involves considerations not typically associated with investing in
securities of companies organized and operated in the United States.
Investors should realize that the value of the Portfolio's foreign
investments may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or
imposition of (or change in) exchange control or tax regulations in foreign
countries. In addition, changes in government administrations or economic
or monetary policies in the United States or abroad could result in
appreciation or depreciation of portfolio securities and could favorably or
unfavorably affect the Portfolio's operations. Furthermore, the economies
of individual foreign nations may differ from the U.S. economy, whether
favorably or unfavorably, in areas such as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency
and balance of payments position; it may also be more difficult to obtain
and enforce a judgment against a foreign issuer. In general, less
information is publicly available with respect to foreign issuers than is
available with respect to U.S. companies. Most foreign companies are also
not subject to the uniform accounting and financial reporting requirements
applicable to issuers in the United States. Any foreign investments made by
the Portfolio must be made in compliance with U.S. and foreign currency
i
restrictions and tax laws restricting the amounts and types of foreign
investments.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, the value of the net assets of the
Portfolio as measured in U.S. dollars will be affected favorably or
unfavorably by changes in exchange rates. In order to protect against
uncertainty in the level of future foreign currency exchange rates, the
Portfolio is also authorized to enter into certain foreign currency
exchange transactions. Furthermore, the Portfolio's foreign investments may
be less liquid and their prices may be more volatile than comparable
investments in securities of U.S. companies. The settlement periods for
foreign securities, which are often longer than those for securities of
U.S. issuers, may affect portfolio liquidity. Finally, there may be
generally less government supervision and regulation of securities
exchanges, brokers and issuers in foreign countries than in the United
States.
Special Information Concerning Master-Feeder Fund Structure
Unlike other open-end management investment companies (mutual funds) which
directly acquire and manage their own portfolio securities, the Fund seeks
to achieve its investment objective by investing all of its Assets in the
Portfolio, a separate registered investment company with the same
investment objectives as the Fund. Therefore, an investor's interest in the
Portfolio's securities is indirect, like investments in other investment
companies and pooled investment vehicles. In addition to selling a
beneficial interest to the Fund, the Portfolio may sell beneficial
interests to other mutual funds or institutional investors. Such investors
will invest in the Portfolio on the same terms and conditions and will pay
a proportionate share of the Portfolio's expenses. However, the other
i
investors investing in the Portfolio are not required to sell their shares
at the same public offering price as the Fund due to variations in sales
commissions and other operating expenses. Therefore, investors in the Fund
should be aware that these differences may result in differences in returns
experienced by investors in the different funds that invest in the
Portfolio. Such differences in returns are also present in other mutual
fund structures. Information concerning other holders of interests in the
Portfolio is available from Bankers Trust, as the Administrator, at (800)
368-4031.
The master-feeder structure is relatively complex, so shareholders should
carefully consider this investment approach.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large
fund withdraws from the Portfolio, the remaining funds may experience
higher pro rata operating expenses, thereby producing lower returns
(however, this possibility exists as well for traditionally structured
funds which have large institutional investors). Additionally, the
Portfolio may become less diverse, resulting in increased portfolio risk.
Also, funds with a greater pro rata ownership in the Portfolio could have
effective voting control of the operations of the Portfolio. Except as
permitted by the SEC, whenever the Trust is requested to vote on matters
pertaining to the Portfolio, the Trust will hold a meeting of shareholders
of the Fund and will cast all of its votes in the same proportion as the
votes of the Fund's shareholders. Fund shareholders who do not vote will
not affect the Trust's votes at the Portfolio meeting. The percentage of
the Trust's votes representing Fund shareholders not voting will be voted
by the Trustees or officers of the Trust in the same proportion as the Fund
shareholders who do, in fact, vote. Certain changes in the Portfolio's
i
investment objectives, policies or restrictions may require the Fund to
withdraw its interest in the Portfolio. Any such withdrawal could result in
a distribution ``n kind'' of portfolio securities (as opposed to a cash
distribution from the Portfolio). If securities are distributed, the Fund
could incur brokerage, tax or other charges in converting the securities to
cash. In addition, the distribution in kind may result in a less
diversified portfolio of investments or adversely affect the liquidity of
the Fund. Notwithstanding the above, there are other means for meeting
redemption requests, such as borrowing.
The Fund may withdraw its investment from the Portfolio at any time, if the
Board of Trustees of the Trust determines that it is in the best interests
of the shareholders of the Fund to do so. Upon any such withdrawal, the
Board of Trustees of the Trust would consider what action might be taken,
including the investment of all the Assets of the Fund in another pooled
investment entity having the same investment objectives as the Fund or the
retaining of an investment adviser to manage the Fund's Assets in
accordance with the investment policies described herein with respect to
the corresponding Portfolio.
The Fund's investment objective is not a fundamental policy and may be
changed upon notice to but without the approval of the Fund's shareholders.
If there is a change in the Fund's investment objective, the Fund's
shareholders should consider whether the Fund remains an appropriate
investment in light of their then-current needs. The investment objective
of the Portfolio is also not a fundamental policy. Shareholders of the Fund
will receive 30 days prior written notice with respect to any change in the
investment objective of the Fund or the Portfolio. See ``isk Factors and
Certain Securities and Investment Practices''in the SAI for a description
of the fundamental policies of Portfolio that cannot be changed without
i
approval by `the vote of a majority of the outstanding voting securities''
(as defined in the Investment Company Act of 1940, as amended (the `1940
Act'') of the Portfolio.
For descriptions of the investment objective, policies and restrictions of
the Portfolio, see ``he Fund in Detail'' herein and ``Risk Factors and
Certain Securities and Investment Practices''in this Prospectus and in the
SAI. For descriptions of the management of the Trust and the Portfolio, see
``anagement of the Trust and the Portfolio'' herein and in the SAI. For
descriptions of the expenses of the Portfolio, see ``he Fund--Expense
Summary,''herein and ``Management of the Trust and the Portfolio'' herein
and in the SAI.
SECURITIES AND INVESTMENT PRACTICES
Short-Term Investments. The Portfolio may invest in certain short-term
fixed income securities. Such securities may be used to invest uncommitted
cash balances, to maintain liquidity to meet shareholder redemptions or to
serve as collateral for the obligations underlying the Portfolio's
investment in securities index futures or related options or warrants.
These securities include: obligations issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities (`U.S. Government
Securities') or by any of the states, repurchase agreements, time
deposits, certificates of deposit, bankers' acceptances and commercial
paper.
U.S. Government Securities. Some U.S. Government Securities, such as
Treasury bills, notes and bonds, are supported by the full faith and credit
of the United States; others, such as those of the Federal Home Loan Banks,
are supported by the right of the issuer to borrow from the Treasury;
others, such as those of the Federal National Mortgage Association, are
supported by the discretionary authority of the U.S. government to purchase
i
the agency's obligations; and still others, such as those of the Student
Loan Marketing Association, are supported only by the credit of the
instrumentality.
Securities Lending. The Portfolio may lend its investment securities to
qualified institutional investors for either short-term or long-term
purposes of realizing additional income. Loans of securities by the
Portfolio will be collateralized by cash, letters of credit, or U.S.
Government Securities. The collateral will equal at least 100% of the
current market value of the loaned securities, and such loans may not
exceed 30% of the value of the Portfolio's net assets. The risks in lending
portfolio securities, as with other extensions of credit, consist of
possible loss of rights in the collateral should the borrower fail
financially. In determining whether to lend securities, Bankers Trust will
consider all relevant facts and circumstances, including the
creditworthiness of the borrower.
When Issued and Delayed Delivery Securities. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and
payment for these securities may take place as long as a month or more
after the date of the purchase commitment. The value of these securities is
subject to market fluctuation during this period and no income accrues to
the Portfolio until settlement takes place. The Portfolio segregates with
the Custodian liquid securities in an amount at least equal to these
commitments.
Derivatives
The Portfolio may invest in various instruments that are commonly known
as `derivatives.'' Generally, a derivative is a financial arrangement, the
value of which is based on, or `derived'' from, a traditional security,
asset, or market index. Some ``erivatives'' such as mortgage-related and
i
other asset-backed securities are in many respects like any other
investment, although they may be more volatile or less liquid than more
traditional debt securities. There are, in fact, many different types of
derivatives and many different ways to use them. There are a range of risks
associated with those uses. Futures and options are commonly used for
traditional hedging purposes to attempt to protect a fund from exposure to
changing interest rates, securities prices, or currency exchange rates and
as a low cost method of gaining exposure to a particular securities market
without investing directly in those securities. Derivatives will not be
used to increase portfolio risk above the level that could be achieved
using only traditional investment securities or to acquire exposure to
changes in the value of assets or indices that by themselves would not be
purchased for the Portfolio.
Securities Index Futures and Related Options. The Portfolio may enter into
securities index futures contracts and related options provided that not
more than 5% of its assets are required as a margin deposit for futures
contracts or options and provided that not more than 20% of the Portfolio's
assets are invested in futures and options at any time. When the Portfolio
has cash from new investments in the Portfolio or holds a portion of its
assets in money market instruments, it may enter into index futures or
options to attempt to increase its exposure to the market. Strategies the
Portfolio could use to accomplish this include purchasing futures
contracts, writing put options, and purchasing call options. When the
Portfolio wishes to sell securities, because of shareholder redemptions or
otherwise, it may use index futures or options to hedge against market risk
until the sale can be completed. These strategies could include selling
futures contracts, writing call options, and purchasing put options.
i
Swap Agreements. The Portfolio may enter into swap agreements only to the
extent that obligations under such agreements represent not more than 10%
of the Portfolio's total assets. Swap agreements are contracts between
parties in which one party agrees to make payments to the other party based
on the change in market value of a specified index or asset. In return, the
other party agrees to make payments to the first party based on the return
of a different specified index or asset.
Although swap agreements entail the risk that a party will default on its
payment obligations thereunder, the Portfolio will minimize this risk by
entering into agreements that mark to market no less frequently than
quarterly. Swap agreements also bear the risk that the Portfolio will not
be able to meet its obligation to the counterparty. This risk will be
mitigated by investing the Portfolio in the specific asset for which it is
obligated to pay a return.
Warrants. The Portfolio's investment in warrants will not exceed more than
5% of its assets (2% with respect to warrants not listed on the New York or
American Stock Exchanges). Warrants are instruments which entitle the
holder to buy underlying equity securities at a specific price for a
specific period of time.
A warrant tends to be more volatile than its underlying securities and
ceases to have value if it is not exercised prior to its expiration date.
In addition, changes in the value of a warrant do not necessarily
correspond to changes in the value of its underlying securities.
Convertible Securities. The Portfolio may invest in convertible securities
which are a bond or preferred stock which may be converted at a stated
price within a specific period of time into a specified number of shares of
common stock of the same or different issuer. Convertible securities are
senior to common stock in a corporation's capital structure, but usually
i
are subordinated to non-convertible debt securities. While providing a
fixed income stream -- generally higher in yield than in the income derived
from a common stock but lower than that afforded by a non-convertible debt
security -- a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation of common stock into which it is convertible.
In general, the market value of a convertible security is the higher of its
investment value (its value as a fixed income security) or its conversion
value (the value of the underlying shares of common stock if the security
is converted). As a fixed income security, the market value of a
convertible security generally increases when interest rates decline and
generally decreases when interest rates rise; however, the price of a
convertible security generally increases as the market value of the
underlying stock increases, and generally decreases as the market value of
the underlying stock declines. Investments in convertible securities
generally entail less risk than investments in the common stock of the same
issuer.
Further risks associated with the use of futures contracts, options,
warrants, convertible securities and swap agreements. The risk of loss
associated with futures contracts in some strategies can be substantial due
to both the low margin deposits required and the extremely high degree of
leverage involved in futures pricing. As a result, a relatively small price
movement in a futures contract may result in an immediate and substantial
loss or gain. However, the Portfolio will not use futures contracts,
options, warrants, convertible securities and swap agreements for
speculative purposes or to leverage their net assets. Accordingly, the
primary risks associated with the use of futures contracts, options,
warrants, convertible securities and swap agreements by the Portfolio are:
i
(i) imperfect correlation between the change in market value of the
securities held by the Portfolio and the prices of futures contracts,
options, warrants, convertible securities and swap agreements; and (ii)
possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures position prior to its maturity date.
The risk of imperfect correlation will be minimized by investing only in
those contracts whose behavior is expected to resemble that of the
Portfolio's underlying securities. The risk that the Portfolio will be
unable to close out a futures position will be minimized by entering into
stock transactions on an exchange with an active and liquid secondary
market. However options, warrants, convertible securities and swap
agreements purchased or sold over-the-counter may be less liquid than
exchange-traded securities. Illiquid securities, in general, may not
represent more than 15% of the net assets of the Portfolio.
Foreign Currency Forward, Futures and Related Options Transactions. The
Portfolio may enter into foreign currency forward and foreign currency
futures contracts in order to maintain the same currency exposure as the
EAFE Index. The Portfolio may not enter into such contracts as a way of
protecting against anticipated adverse changes in exchange rates between
foreign currencies and the U.S. dollar. A foreign currency forward contract
is an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed
upon by the parties, at a price set at the time of the contract. Such
contracts do not eliminate fluctuations in the underlying prices of
securities held by the Portfolio. Although such contracts tend to minimize
the risk of loss due to a decline in the value of a currency that has been
sold forward, and the risk of loss due to an increase in the value of a
currency that has been purchased forward, at the same time they tend to
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limit any potential gain that might be realized should the value of such
currency increase.
Successful use of forward contracts depends on Bankers Trust's skill in
analyzing and predicting relative currency values. Forward contracts alter
the Portfolio's exposure to currency exchange rate activity and could
result in losses to the Portfolio if currencies do not perform as Bankers
Trust anticipates. The Portfolio may also incur significant costs when
converting assets from one currency to another.
Asset Coverage. To assure that the Portfolio's use of futures and related
options, as well as when-issued and delayed delivery securities, interest
rate swaps and foreign currency forward futures and related options
transactions are not used to achieve excessive investment leverage, the
Portfolio will cover such transactions, as required under applicable
interpretations of the SEC, either by owning the underlying securities,
entering into an off-setting transaction, or by segregating with the
Portfolio's Custodian liquid securities in an amount at all times equal to
or exceeding the Portfolio's commitment with respect to these instruments
or contracts.
Portfolio Turnover
The frequency of Portfolio transactions-the Portfolio's portfolio turnover
rate-will vary from year to year depending on market conditions and the
Portfolio's cash flows. The Portfolio's annual portfolio turnover rate is
not expected to exceed 100%. The portfolio turnover rate for the Portfolio
for the period from January 24, 1996 (Commencement of Operations) to
December 3,1 996, was 4%.
PERFORMANCE
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The Portfolio's recent strategies and holdings, and the Fund's performance,
is detailed twice a year in the Fund's financial reports (not available
during the first year for the Fund), which is sent to all Fund
shareholders.
For current Fund performance or a free copy of the Fund's financial report,
please contact your Service Agent or Bankers Trust.
Mutual fund performance is commonly measured as total return and/or yield.
The Fund's performance is affected by the expenses of the Fund.
Explanation of Terms
Total return is the change in value of an investment in the Fund over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative total return reflects actual performance over a stated period of
time. An average annual total return is a hypothetical rate of return that,
if achieved annually, would have produced the same cumulative total return
if performance had been constant over the entire period. Average annual
total return calculations smooth out variations in performance; they are
not the same as actual year-by-year results. Average annual total returns
covering periods of less than one year assume that performance will remain
constant for the rest of the year.
For the period from January 24, 1996 (Commencement of Operations) to
December 31, 1996, the Funds cumulative total return was 7.22%.
Yield refers to the income generated by an investment in the Fund over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all stock and bond
funds. Because this differs from other accounting methods, the quoted yield
may not equal the income actually paid to shareholders. This difference may
be significant for a Fund investing in a Portfolio whose investments are
denominated in foreign currencies.
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Yields
Performance information may include comparisons of the Fund's investment
results to various unmanaged indices or results of other mutual funds or
investment or savings vehicles. From time to time, Fund rankings may be
quoted from various sources, such as Lipper Analytical Services, Inc.,
Value Line and Morningstar, Inc.
Unlike some bank deposits or other investments which pay a fixed yield for
a stated period of time, the total return of the Fund will vary depending
upon interest rates, the current market value of the securities held by the
Portfolio and changes in the expenses of the Fund or Portfolio. In
addition, during certain periods for which total return may be provided,
Bankers Trust may have voluntarily agreed to waive portions of its fees, or
reimburse certain operating expenses of the Fund or Portfolio, on a month-
to-month basis. Such waivers will have the effect of increasing the Fund's
net income (and therefore its yield and total return) during the period
such waivers are in effect.
Total returns and yields are based on past results and are not an
indication of future performance.
MANAGEMENT OF THE TRUST AND THE PORTFOLIO
Board of Trustees
The Trust and the Portfolio is governed by a Board of Trustees which is
responsible for protecting the interests of investors. A majority of the
Trustees who are not ``nterested persons'' (as defined in the 1940 Act)
of the Trust or the Portfolio, as the case may be, have adopted written
procedures reasonably appropriate to deal with potential conflicts of
interest arising from the fact that the same individuals are Trustees of
the Trust and the Portfolio, up to and including creating separate boards
of trustees. See ``anagement of the Trust and the Portfolio'' in the SAI
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for more information with respect to the Trustees and officers of the Trust
and the Portfolio.
Investment Adviser
The Trust has not retained the services of an investment adviser since the
Trust seeks to achieve the investment objective of the Fund by investing
all the Assets of the Fund in the Portfolio. The Portfolio has retained the
services of Bankers Trust as investment adviser.
Bankers Trust Company and Its Affiliates
Bankers Trust Company, a New York banking corporation with principal
offices at 280 Park Avenue, New York, New York 10017, is a wholly owned
subsidiary of Bankers Trust New York Corporation. Bankers Trust conducts a
variety of general banking and trust activities and is a major wholesale
supplier of financial services to the international and domestic
institutional market.
As of December 31, 1996, Bankers Trust New York Corporation was the
seventh largest bank holding company in the United States with total assets
of approximately $120 billion. Bankers Trust is a worldwide merchant bank
dedicated to servicing the needs of corporations, governments, financial
institutions and private clients through a global network of over 120
offices in more than 40 countries. Investment management is a core business
of Bankers Trust, built on a tradition of excellence from its roots as a
trust bank founded in 1903. The scope of Bankers Trust's investment
management capability is unique due to its leadership positions in both
active and passive quantitative management and its presence in major equity
and fixed income markets around the world. Bankers Trust is one of the
nation's largest and most experienced investment managers with
approximately $227 billion in assets under management globally. Of that
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total, approximately $92 billion are in U.S. equity index assets alone.
Bankers Trust has more than 50 years of experience managing retirement
assets for the nation's largest corporations and institutions. In the past,
these clients have been serviced through separate account and commingled
fund structures. Now, the BT Family of Funds brings Bankers Trust's
extensive investment management expertise - once available to only the
largest institutions in the U.S. - to individual investors. Bankers Trust's
officers have had extensive experience in managing investment portfolios
having objectives similar to those of the Portfolio.
Bankers Trust, subject to the supervision and direction of the Board of
Trustees of the Portfolio, manages the Portfolio in accordance with the
Portfolio's investment objective and stated investment policies, makes
investment decisions for the Portfolio, places orders to purchase and sell
securities and other financial instruments on behalf of the Portfolio and
employs professional investment managers and securities analysts who
provide research services to the Portfolio. Bankers Trust may utilize the
expertise of any of its world wide subsidiaries and affiliates to assist it
in its role as investment adviser. All orders for investment transactions
on behalf of the Portfolio are placed by Bankers Trust with broker-dealers
and other financial intermediaries that it selects, including those
affiliated with Bankers Trust. A Bankers Trust affiliate will be used in
connection with a purchase or sale of an investment for the Portfolio only
if Bankers Trust believes that the affiliate's charge for the transaction
does not exceed usual and customary levels. The Portfolio will not invest
in obligations for which Bankers Trust or any of its affiliates is the
ultimate obligor or accepting bank. The Portfolio may, however, invest in
the obligations of correspondents and customers of Bankers Trust.
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The Investment Advisory Agreement provides for the Portfolio to pay Bankers
Trust a fee from the Portfolio, accrued daily and paid monthly, equal on an
annual basis to 0.25% of the average daily net assets of the Portfolio for
its then-current fiscal year.
Bankers Trust has been advised by its counsel that, in counsel's opinion,
Bankers Trust currently may perform the services for the Trust and the
Portfolio described in this Prospectus and the SAI without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. State
laws on this issue may differ from the interpretations of relevant Federal
law, and banks and financial institutions may be required to register as
dealers pursuant to state securities law.
Bankers Trust investment personnel may invest in securities for their own
account pursuant to a code of ethics that establishes procedures for
personal investing and restricts certain transactions.
Portfolio Manager
Richard J. Vella, Managing Director of Bankers Trust, is responsible for
the day-to-day management of the Portfolio. Mr. Vella has been employed by
Bankers Trust since 1985 and has ten years of trading and investment
experience.
Administrator
Under its Administration and Services Agreement with the Trust, Bankers
Trust calculates the net asset value of the Fund and generally assists the
Board of Trustees of the Trust in all aspects of the administration and
operation of the Fund. The Administration and Services Agreement provides
for the Trust to pay Bankers Trust a fee, accrued daily and paid monthly
equal on an annual basis to 0.15% of the average daily net assets of the
Fund, attributable to the Class, for its then-current fiscal year.
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Under an Administration and Services Agreement with the Portfolio, Bankers
Trust calculates the value of the assets of the Portfolio and generally
assists the Board of Trustees in all aspects of the administration and
operation of the Portfolio. The Administration and Services Agreement
provides for the Portfolio to pay Bankers Trust a fee, accrued daily and
paid monthly, equal on an annual basis to 0.10% of the Portfolio's average
daily net assets for its then-current fiscal year. Under the Administration
and Services Agreement, Bankers Trust may delegate one or more of its
responsibilities to others, including affiliates of Edgewood, at Bankers
Trust's expense.
Distributor
Edgewood Services, Inc. is the principal distributor for the Shares of the
Fund. In addition, Edgewood and its affiliates provide the Trust with
office facilities, and currently provide administration and distribution
services for other registered investment companies. The principal business
address of Edgewood and its affiliates is Clearing Operations, P.O. Box
897, Pittsburgh, Pennsylvania 15230-0897.
Custodian and Transfer Agent
Bankers Trust acts as custodian of the assets of the Trust and the
Portfolio and serves as the transfer agent (the `Transfer Agent'') for
the Trust and the Portfolio under the Administration and Services Agreement
with the Trust and the Portfolio.
NET ASSET VALUE
The Fund is open for business each day that the NYSE and the Tokyo Stock
Exchange is open (a Valuation Day).. The Fund's net asset value (`NAV'')
is calculated as of the close of regular trading on the NYSE, currently
4:00 p.m. Eastern time (``aluation Time''). The Fund will not process
orders on any day when either the NYSE or the Tokyo Stock Exchange is
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closed. Orders received on such days will be priced on the next day the
Fund computes its NAV. As such, investors may experience a delay in
purchasing or redeeming Shares of the Fund.
The Fund's NAV per share is the value of a single Share. The NAV per share
of the Fund is computed by dividing the value of the Fund's Assets (i.e.,
the value of its investment in the Portfolio and other assets), less all
liabilities, allocable to the Institutional Class Shares by the total
number of its Shares outstanding. The Portfolio's securities and other
assets are valued primarily on the basis of market quotations or, if
quotations are not readily available, by Bankers Trust pursuant to
procedures adopted by the Portfolio's Board of Trustees. These procedures
require Bankers Trust to value such a security at the same value as an
equivalent security which is readily marketable and, in making such
comparisons, to consider all relevant factors under applicable guidelines
of the SEC.
Under procedures adopted by the Board, a NAV for the Fund later determined
to have been inaccurate for any reason will be recalculated. Purchases and
redemptions made at NAV determined to have been inaccurate will be
adjusted, although in certain circumstances, such as where the difference
between the original NAV and the recalculated NAV divided by the
recalculated NAV is 0.005 (1/2 of 1%) or less or shareholder transactions
are otherwise insubstantially affected, further action is not required.
PURCHASE AND REDEMPTION OF SHARES
How To Buy Shares
The Trust accepts purchase orders for shares of the Fund at the NAV per
share next determined after the order is received on each Valuation Day.
See `Net Asset Value'' herein. Shares of the Fund may be available through
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Investment Professionals, such as broker/dealers and investment advisers
(including Service Agents).
Purchase orders for shares of the Fund (including those purchased through a
Service Agent) that are transmitted to the Trust's Transfer Agent (the
``ransfer Agent''), prior to the Valuation Time on any Valuation Day will
be effective at that day's Valuation Time. The Trust and Transfer Agent
reserve the right to reject any purchase order.
Shares must be purchased in accordance with procedures established by the
Transfer Agent and each Service Agent. It is the responsibility of each
Service Agent to transmit to the Transfer Agent purchase and redemption
orders and to transmit to Bankers Trust as the Trust's custodian (the
``ustodian'') purchase payments by the following business day (trade date
+ 1) after an order for shares is placed. A shareholder must settle with
the Service Agent for his or her entitlement to an effective purchase or
redemption order as of a particular time. Because Bankers Trust is the
Custodian and Transfer Agent of the Trust, funds may be transferred
directly from or to a customer's account held with Bankers Trust to settle
transactions with the Fund without incurring the additional costs or delays
associated with the wiring of Federal funds.
Certificates for shares will not be issued. Each shareholder's account
will be maintained by a Service Agent or Transfer Agent.
If orders are placed through an Investment Professional, it is the
responsibility of the Investment Professional to transmit the order to buy
shares of each class to the Transfer Agent before 4:00 p.m. Eastern time.
The Transfer Agent must receive payment within one business day after an
order for shares is placed; otherwise, the purchase order may be canceled
and the investor could be held liable for resulting fees and/or losses.
Minimum Investments
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To Open an Account $5 million
To Add to an Account No minimum
Minimum Balance $1 million
If you are new to BT Advisor Funds, complete and sign an account
application and mail it along with your check to the address listed below.
If there is no account application accompanying this Prospectus, call the
BT Service Center at 1-800-368-4031.
BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
Overnight mailings:
BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
If you already have money invested in a fund in the BT Family of Funds, you
can:
o Mail an account application with a check,
o Wire money into your account,
o Open an account by exchanging from another fund in the BT Family of
Funds, or
o Contact your Service Agent or Investment Professional.
If you are investing through a tax-sheltered retirement plan, such as an
IRA, for the first time, you will need a special application. Contact your
Investment Professional for more information and a retirement account
application.
Additional Information About Buying Shares
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To Open an
Account To Add to an Account
By Wire Call the BT Service Center at
Call your Investment Professional or wire
1-800-368-4031 to
receive additional investment to:
wire instructions for
account
establishment.
Routing No.: 021001033
Attn: Bankers Trust/IFTC Deposit
DDA No.: 00-226-296
FBO: (Account name)
(Account number)
Credit: Fund Number
EAFE(R) Equity Index Fund - 514
Specify the complete name of the Fund of
your choice, and include your account num-
i
ber and your name.
By Phone Contact your Service Agent,
Contact your Service Agent,
Investment Professional, or
call Investment Professional, or call
BT's Service Center at 1-800-
368-4031. BT's Service Center at 1-800-368-4031.
If you are an existing
shareholder, If you are an
you may exchange from another
BT existing shareholder, you may
account with the same
registration, exchange from another BT account
including, name, address, and
taxpayer with the same registration, including,
ID number.
name, address, and taxpayer ID number.
By Mail Complete and sign the account appli-
Make your check payable to the complete
cation. Make your check
payable to name of the Fund of your choice. Indicate
the complete name of the Fund
of your Fund account number on your check
your choice. Mail to the
appropriate and mail to the address printed on your
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address indicated on the
application. account statement.
How to Sell Shares
You can arrange to take money out of your Fund account at any time by
selling (redeeming) some or all of your shares. Your shares shall be sold
at the next NAV calculated after an order is received by the Transfer
Agent. Redemption requests should be transmitted by customers in accordance
with procedures established by the Transfer Agent and the Shareholder's
Service Agent. Redemption requests for shares of the Fund received by the
Service Agent and transmitted to the Transfer Agent prior to the Valuation
Time on each Valuation Day will be effective at that day's Valuation Time
and the redemption proceeds normally will be delivered to the shareholder's
account the next day, but in any event within seven calendar days following
receipt of the request.
Service Agents may allow redemptions or exchanges by telephone and may
disclaim liability for following instructions communicated by telephone
that the Service Agent reasonably believes to be genuine. The Service Agent
must provide the investor with an opportunity to choose whether or not to
utilize the telephone redemption or exchange privilege. The Transfer Agent
and the Service Agent must employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. If the Shareholder
Servicing Agent does not do so, it may be liable for any losses due to
unauthorized or fraudulent instructions. Such procedures may include, among
others, requiring some form of personal identification prior to acting upon
instructions received by telephone, providing written confirmation of such
transactions and/or tape recording of telephone instructions.
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Redemption orders are processed without charge by the Trust. A Service
Agent may on at least 30 days' notice involuntarily redeem a shareholder's
account with the Fund having a balance below the minimum, but not if an
account is below the minimum due to a change in market value. See `Minimum
Investments''herein for minimum balance amounts.
To sell Shares in a retirement account, your request must be made in
writing, except for exchanges to other eligible funds in the BT Family of
Funds, which can be requested by phone or in writing. For information on
retirement distributions, contact your Service Agent or call the BT Service
Center at 1-800-368-4031.
If you are selling some but not all of your non-retirement account shares,
leave at least $1,000 worth of shares in the account to keep it open.
To sell shares by bank wire you will need to sign up for these services in
advance when completing your account application.
Certain requests must include a signature guarantee to protect you and
Bankers Trust from fraud. Redemption requests in writing must include a
signature guarantee if any of the following situations apply:
o Your account registration has changed within the last 30 days,
o The check is being mailed to a different address than the one on
your account (record address),
o The check is being made payable to someone other than the account
owner,
o The redemption proceeds are being transferred to a BT account with
a different registration, or
o You wish to have redemption proceeds wired to a non-predesignated
bank account.
A signature guarantee is also required if you change the pre-designated
bank information for receiving redemption proceeds on your account.
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You should be able to obtain a signature guarantee from a bank, broker,
dealer, credit union (if authorized under state law), securities exchange
or association, clearing agency, or savings association. A notary public
cannot provide a signature guarantee.
Additional Information About Selling Shares
By Wire - You must sign up for the wire feature before using it. To
verify that it is in place, call 1-800-368-4031. Minimum wire: $1,000.
Your wire redemption request must be received by the Transfer Agent before
4:00 p.m. Eastern time for money to be wired on the next business day.
In Writing - Write a signed `letter of instruction'' with your name, the
Fund's name and Fund's number, your Fund account number, the dollar amount
or number of Shares to be redeemed, and mail to one of the following
addresses:
BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
Overnight mailings:
BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
For Trust accounts, the trustee must sign the letter indicating capacity as
trustee. If the trustee's name is not on the account registration, provide
a copy of the trust document certified within the last 60 days.
For a Business or Organization account, at least one person authorized by
corporate resolution to act on the account must sign the letter.
Unless otherwise instructed, the Transfer Agent will send a check to the
account address of record. The Trust reserves the right to close investor
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accounts via 30 day notice in writing if the Fund account balance falls
below the Fund minimums.
Investor Services
BT Advisor Funds provide a variety of services to help you manage your
account.
Information Services
Statements and reports that your Investment Professional or the Transfer
Agent may send to you include the following:
o Confirmation statements (after every transaction that affects
your account balance, including distributions or your account registration)
o Account statements (monthly)
o Financial reports (every six months)
To reduce expenses, only one copy of most financial reports will be
mailed, even if you have more than one account in the Fund. Call your
Investment Professional or the BT Service Center at 1-800-368-4031 if you
need additional copies of financial reports.
Exchange Privilege
Shareholders may exchange their shares for shares of certain other funds in
the BT Family of Funds registered in their state. The Fund reserves the
right to terminate or modify the exchange privilege in the future. To make
an exchange, follow the procedures indicated in `How to Buy Shares'' and
``ow to Sell Shares'' herein. Before making an exchange, please note the
following:
o Call your Service Agent for information and a prospectus. Read the
prospectus for relevant information.
o Complete and sign an application, taking care to register your new
account in the same name, address and taxpayer identification number as
your existing account(s).
i
o Each exchange represents the sale of shares of one fund and the
purchase of shares of another, which may produce a gain or loss for tax
purposes. Your Service Agent will receive a written confirmation of each
exchange transaction.
o Exchanges between the Fund described in this Prospectus and funds
described in other BT Family of Funds' Prospectuses, with the exception of
other passively managed BT Funds, are restricted during the 90 days
following purchase.
o Because excessive trading can hurt Fund performance and shareholders,
the Fund reserves the right to temporarily or permanently terminate the
exchange privilege of any investor who makes more than four exchanges out
of the Fund per calendar year. Accounts under common ownership or control,
including accounts with the same taxpayer identification number, will be
counted together for purposes of the four exchange limit.
o The Fund reserves the right to refuse exchange purchases by any person
or group if, in Bankers Trust's judgment, the Fund would be unable to
invest the money effectively in accordance with its investment objective
and policies, or would otherwise potentially be adversely affected.
o Exchanges may be restricted or refused if the Fund receives or
anticipates simultaneous orders affecting significant portions of the
Fund's assets. In particular, a pattern of exchanges that coincide with a
``arket timing'' strategy may be disruptive to the Fund.
Systematic Programs
To move money from your bank account to BT Advisor Funds
Minimum Minimum Frequency
Setting up or changing
Initial Subsequent
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$1,000 $100 Monthly, bimonthly,
For a new account, complete the appropriate section
quarterly or
semi- on the application.
annually
For existing accounts, call your Investment
Professional for an application.
To change the amount or frequency of your
investment, contact your Investment
Professional directly or call 1-800-368-4031.
Call at least 10 business days prior to your next
scheduled investment date.
Systematic Withdrawal Program lets you set up periodic redemptions from
your account.
Minimum Frequency
Setting up or changing
$100 Monthly, quarterly, semi-annually or To
establish, call your Investment Professional or call
annually
1-800-368-4031 after your account is open. The accounts
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from which the withdrawals be processed must have a
minimum balance of $10,000.
Tax-Saving Retirement Plans
Retirement plans offer significant tax savings and are available to
individuals, partnerships, small businesses, corporations, nonprofit
organizations and other institutions. Contact Bankers Trust for further
information. Bankers Trust can set up your new account in the Fund under a
number of several tax-savings or tax-deferred plans. Minimums may differ
from those listed elsewhere in this Prospectus.
o Individual Retirement Accounts (IRAs): personal savings plans that
offer tax advantages for individuals to set aside money for retirement and
allow new contributions of $2,000 per tax year.
o Rollover IRAs: tax-deferred retirement accounts that retain the
special tax advantages of lump sum distributions from qualified retirement
plans and transferred IRA accounts.
o Simplified Employee Pension Plans (SEP): a relatively easy and
inexpensive alternative to retirement planning for sole proprietors,
partnerships and corporations. Under a SEP, employers make tax-deductible
contributions to their own and to eligible employees' IRA accounts.
Employee contributions are available through a `Salary Deferral'' SEP for
businesses with fewer than 25 eligible employees.
o Keogh Plans: defined contribution plans available to individuals with
self-employed income and nonincorporated businesses such as sole
proprietors, professionals and partnerships. Contributions are tax-
deductible to the employer and earnings are tax-sheltered until
distribution.
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o Corporate Profit-Sharing and Money-Purchase Plans: defined
contribution plans available to corporations to benefit their employees by
making contributions on their behalf and in some cases permitting their
employees to make contributions.
o 401(k) Programs: defined contribution plans available to corporations
allowing tax-deductible employer contributions and permitting employees to
contribute a percentage of their wages on a tax-deferred basis.
o 403(b) Custodian Accounts: defined contribution plans open to
employees of most non-profit organizations and educational institutions.
o Deferred Benefit Plans: plan sponsors may invest all or part of their
pension assets in the Fund.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
The Fund distributes substantially all of its net income and capital gains
to shareholders each year. The Fund distributes capital gains annually.
Normally, income dividends for the Fund are distributed annually.
The Fund intends to qualify as a regulated investment company, as
defined in the Internal Revenue Code of 1986, as amended (the ``ode'').
Provided the Fund meets the requirements imposed by the Code, the Fund will
not pay any Federal income or excise taxes. Dividends paid by the Fund from
its taxable net investment income and distribution by the Fund of its net
realized short-term capital gains are taxable to shareholders as ordinary
income, whether received in cash or reinvested in additional shares of the
Fund. The Funds dividends and distributions will not qualify for the
dividends-received deduction for corporations.
Distribution Options
When you open an account, specify on your account application how you want
to receive distributions. The Trust offers four options:
i
1. Reinvestment Option. Your dividend and capital gain distributions will
be automatically reinvested in additional Shares of the Fund. If you do not
indicate a choice on your application you will be assigned this option.
2. Income-Earned Option. Your capital gain distributions will be
automatically reinvested in additional Shares of the Fund, but you will be
sent a check for each dividend distribution.
3. Cash Option. You will be sent a check for your dividend and capital
gain distributions.
4. Automatic Dividends Program. Your dividend and capital gain
distributions be automatically invested in Shares of another fund in the BT
Family of Funds as long as the minimums for that account are met.
If you select distribution option 2 or 3 and the U.S. Postal Service cannot
deliver your checks, or if your checks remain uncashed for six months,
those checks will be reinvested in your account at the current NAV and your
election may be converted to the Reinvestment Option. You may change
distribution option at anytime by notifying the Transfer Agent in writing.
For retirement accounts, all distributions are automatically reinvested.
When you are over 59 1/2 years old, you can receive distributions in cash.
If distributions from a retirement account for any taxable year following
the year in which the participant reaches age 70 1/2 are less than the
``inimum required distribution'' for that taxable year, an excise tax
equal to 50% of the deficiency may be imposed by the Internal Revenue
Service (the `IRS''). The administrator, trustee or custodian of such a
retirement account will be responsible for reporting distributions from
such accounts to the IRS.
When the Fund deducts a distribution from its NAV, the reinvestment price
is the Fund's NAV at the close of business that day. Distribution checks
i
will be mailed within seven days, or longer for a December ex-dividend
date.
Taxes
As with any investment, you should consider how an investment in the Fund
could affect you. Below are some of the Fund's tax implications. If your
account is not a tax-deferred retirement account beware of these tax
implications.
Taxes on Distributions. Distributions from the Fund are subject to federal
income tax and may also be subject to state or local taxes. Annual
Statements as to the federal tax status of distributions, and distributions
that are attributable to state and local income and personal taxes, if
applicable, will be mailed to shareholders shortly after the end of the
year. If living outside the United States, your distributions from the Fund
could also be taxed by the country in which you reside.
For federal tax purposes, income and short-term capital gain distributions
from the Fund are taxed as dividends; long-term capital gain distributions
are taxed as long-term capital gains.
Mutual fund dividends from U.S. government securities are generally free
from state and local income taxes. However, particular states may limit
this benefit, and some types of securities, such as repurchase agreements
and some agency-backed securities, may not qualify for the benefit. In
addition, some states may impose intangible property taxes. You should
consult your own tax adviser for details and up-to-date information on the
tax laws in your state.
Distributions are taxable when they are paid, whether you take them in cash
or reinvest them. However, distributions declared in December and paid in
January are taxable as if they were paid on December 31.
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Every January, the Transfer Agent will send the IRS a statement showing the
taxable distributions paid to you in the previous year.
Taxes on Transactions. Your redemptions, including exchanges, are subject
to capital gains tax. A capital gain or loss is the difference between the
cost of your Shares and the price you receive when you sell them.
Whenever you sell Shares of the Fund, the Transfer Agent will send you or
your Service Agent a confirmation statement showing how many Shares you
sold and at what price. You also receive a consolidated transaction
statement at least quarterly. However, it is up to you or your tax preparer
to determine whether this sale resulted in a capital gain and, if so, the
amount of tax to be paid. Be sure to keep your regular account statements;
the information they contain will be essential in calculating the amount of
your capital gains.
`Buying a dividend.'' If you buy Shares just before the Fund deducts a
capital gain distribution or dividend distribution, as applicable, from its
NAV, you will pay the full price for the Shares and then receive a portion
of the price back in the form of a taxable distribution.
Currency considerations. If the Fund's dividends exceed its taxable income
in any year, which is sometimes the result of currency-related losses, all
or a portion of the Fund's dividends may be treated as a return of capital
to shareholders for tax purposes. To minimize the risk of a return of
capital, the Fund may adjust its dividends to take currency fluctuations
into account, which may cause the dividends to vary. Any return of capital
will reduce the cost basis of your Shares, which will result in a higher
reported capital gain or a lower reported capital loss when you sell your
Shares. The statement you receive in January will specify whether any
distributions included a return of capital.
i
Undistributed net gains from currency transactions, if any, will generally
be distributed as a separate dividend in December.
There are tax requirements that all Funds must follow in order to avoid
federal taxation. In its effort to adhere to these requirements, the Fund
may have to limit its investment activity in some types of instruments.
ADDITIONAL INFORMATION
The Fund is a mutual fund: an investment that pools shareholders' money and
invests it toward a specified goal. The Fund is a separate diversified
series of BT Advisor Funds, a Massachusetts business trust. The Fund offers
two classes of Shares of beneficial interest, Institutional Class Shares
and Advisor Class Shares. The Portfolio is a separate diversified series of
BT Investment Portfolios, a New York master trust fund. The Trust and BT
Investment Portfolios reserve the right to add additional series in the
future. The Trust also reserves the right to issue additional classes of
Shares of the Fund.
The Trust or the Portfolio may hold special meetings and mail proxy
materials. These meetings may be called to elect or remove trustees, change
fundamental policies, approve Portfolio's investment advisory agreement, or
for other purposes. Shareholders not attending these meetings are
encouraged to vote by proxy. The Trust's Transfer Agent will mail proxy
materials in advance, including a voting card and information about the
proposals to be voted on.
When matters are submitted for shareholder vote, shareholders of the Fund
will have one vote for each full share held and proportionate, fractional
votes for fractional shares held. A separate vote of the Fund or classes is
required on any matter affecting only the Fund or class on which
shareholders are entitled to vote. Shareholders of the Fund or class are
not entitled to vote on Trust matters that do not affect the Fund or class,
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respectively, and do not require a separate vote of the Fund or class. All
series of the Trust and all classes will vote together on certain matters,
such as electing trustees or approving independent public auditors. There
normally will be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of Trustees
holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election
of Trustees. Any Trustee may be removed from office upon the vote of
shareholders holding at least two-thirds of that Trust's outstanding shares
at a meeting called for that purpose. The Trustees are required to call
such a meeting upon the written request of shareholders holding at least
10% of that Trust's outstanding shares. The Trust will also assist
shareholders in communicating with one another as provided for in the 1940
Act.
As of December 31, 1996, Bankers Trust Custodian for the benefit of
Presbyterian Health Care Systems, Houston, Texas, owned 55.59% of the
voting Institutional Class securities of the EAFE Equity Index Fund, and,
therefore, may for certain purposes, be deemed to control the Fund and be
able to affect the outcome of certain matters presented for a vote of
shareholders.
As of December 31, 1996, Bankers Trust as Trustee for Pacificorp Master
Retirement Trust, Portland Oregon, owned 40.44% of the voting Institutional
Class securities of the EAFE Equity Index Fund, and, therefore, may for
certain purposes, be deemed to control the Fund and be able to affect the
outcome of certain matters presented for a vote of shareholders.
Each series of the Trust will vote separately on any matter involving the
Portfolio. Shareholders of all of the series of the Trust will, however,
vote together to elect Trustees of the Trust and for certain other matters.
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Under certain circumstances, the shareholders of one or more series could
control the outcome of these votes. The series of BT Investment Portfolios
will vote together or separately on matters in the same manner, and in the
same circumstances, as do the series of the Trust. As with the Trust, the
investors in one or more series of BT Investment Portfolios could control
the outcome of these votes.
The Trust is an entity of the type commonly known as a ``assachusetts
business trust.''Under Massachusetts law, shareholders of such a business
trust may, under certain circumstances, be held personally liable as
partners for its obligations. However, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to
circumstances in which both inadequate insurance existed and the Trust
itself was unable to meet its obligations.
The Declaration of Trust of the of BT Investment Portfolio provides that
the Fund and other entities investing in the Portfolio (e.g., other
investment companies, insurance company separate accounts and common and
commingled trust funds) will each be liable for all obligations of the
Portfolio. However, the risk of the Fund incurring financial loss on
account of such liability is limited to circumstances in which both
inadequate insurance existed and the Portfolio itself was unable to meet
its obligations. Accordingly, the Trustees of the Trust believe that
neither the Fund nor its shareholders will be adversely affected by reason
of the Fund's investing in the Portfolio. No series of BT Investment
Portfolio has any preference over any other series.
(THIS PAGE INTENTIONALLY LEFT BLANK)
(THIS PAGE INTENTIONALLY LEFT BLANK)
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BT ADVISOR FUNDS
EAFE(R) Equity Index Fund
Investment Adviser of the Portfolio and Administrator
BANKERS TRUST COMPANY
280 Park Avenue
New York, NY 10017
Distributor
Edgewood Services, Inc.
Clearing Operations
P.O. Box 897
Pittsburgh, PA 15230-0897
Custodian and Transfer Agent
BANKERS TRUST COMPANY
280 Park Avenue
New York, NY 10017
Independent Accountants
COOPERS & LYBRAND L.L.P.
1100 Main Street, Suite 900
Kansas City, MO 64105
Counsel
WILLKIE FARR & GALLAGHER
153 East 53rd Street
i
New York, NY 10022
No person has been authorized to give any information or to make any
representations other than those contained in the Trusts' Prospectuses, the
corresponding SAIs or the Trusts' official sales literature in connection
with the offering of the Trust's Shares and, if given or made, such other
information or representations must not be relied on as having been
authorized by a Trust. This Prospectus does not constitute an offer in any
state in which, or to any person to whom, such offer may not lawfully be
made.
Cusip #05576L874
STA514300 (3/97)
o BT ADVISOR FUNDS
Small Cap Index Fund
Institutional Class Shares
PROSPECTUS
FEBRUARY 28, 1997
BT Advisor Funds (the ``rust'') is an open-end, management investment
company (mutual fund) which consists of several funds. The Small Cap Index
Fund (the ``und'') is a separate series of the Trust and offers two
classes of shares. The shares offered by this prospectus are the
Institutional Class Shares (the ``hares''). The Fund seeks to replicate as
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closely as possible the performance of the Russell 2000 Small Stock Index
before the deduction of the expenses allocable to the Shares of the Fund
and the Small Cap Index Portfolio (the `Expenses''). There is no
assurance, however, that the Fund will achieve its stated objective.
Please read this Prospectus before investing, and keep it on file for
future reference. It contains important information, including how the Fund
invests and the services available to shareholders.
To learn more about the Fund and its investments, investors can obtain a
copy of the Fund's Statement of Additional Information (the `SAI''), dated
February 28, 1997. The SAI has been filed with the Securities and Exchange
Commission (the ``EC'') and is incorporated herein by reference. For a
free copy of the SAI, call (800) 368-4031.
UNLIKE OTHER OPEN-END MANAGEMENT INVESTMENT COMPANIES (MUTUAL FUNDS), THE
FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS
INVESTABLE ASSETS (`ASSETS'') IN THE SMALL CAP INDEX PORTFOLIO (``THE
PORTFOLIO') WHICH IS A SEPARATE FUND WITH AN IDENTICAL INVESTMENT
OBJECTIVE. THE INVESTMENT PERFORMANCE OF THE FUND WILL CORRESPOND DIRECTLY
TO THE INVESTMENT PERFORMANCE OF THE PORTFOLIO. SEE ``PECIAL INFORMATION
CONCERNING MASTER-FEEDER FUND STRUCTURE''HEREIN.
BANKERS TRUST COMPANY (`BANKERS TRUST'') IS THE INVESTMENT ADVISER (THE
``DVISER'') OF THE PORTFOLIO. SHARES OF THE FUND ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, BANKERS TRUST OR ANY OTHER
BANKING OR DEPOSITORY INSTITUTION. SHARES ARE NOT FEDERALLY GUARANTEED OR
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE U.S. GOVERNMENT,
i
THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
LIKE SHARES OF ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
EDGEWOOD SERVICES, INC.
Clearing Operations o P.O. Box 897 o Pittsburgh, Pennsylvania o 15230-0897
TABLE OF CONTENTS
The Fund 3
Who May Want To Invest 3
Investment Principles and Risks 3
Summary of Fund Expenses 4
Financial Highlights 5
The Fund in Detail 6
Risk Factors and Certain Securities and Investment Practices 7
Performance Information and Reports
11
Management of the Trust and the Portfolio 11
Net Asset Value 13
Purchase and Redemption of Shares 14
i
Dividends, Distributions and Taxes 18
Additional Information 20
THE FUND
The Trust seeks to achieve the investment objective of the Fund by
investing all the Assets of the Fund in the Portfolio.
The Small Cap Index Fund seeks to replicate as closely as possible (before
deduction of Expenses) the total return of the Russell 2000 Small Stock
Index (the `Russell 2000'' or the ``Index''), an index consisting of 2,000
small-capitalization common stocks. The Fund will include the common stock
of one or more companies included in the Russell 2000 Index, on the basis
of computer-generated statistical data, that are deemed representative of
the industry diversification of the entire Russell 2000 Index. The Fund
invests all of its Assets in the Small Cap Index Portfolio.
WHO MAY WANT TO INVEST
Shares of the Fund are offered through this Prospectus to institutional
investors.
The Portfolio is not managed according to traditional methods of `active''
investment management, which involve the buying and selling of securities
based upon economic, financial and market analysis and investment judgment.
Instead, the Portfolio, utilizing a `passive'' or ``indexing'' investment
approach, attempts to replicate the investment performance of the Index
through statistical procedures.
i
The Fund may be appropriate for investors who are willing to ride out
domestic stock market fluctuations in pursuit of potentially higher long-
term returns. The Portfolio invests for growth and does not pursue income.
Over time, stocks, although more volatile, have shown greater growth
potential than other types of securities. In the shorter term, however,
stock prices can fluctuate dramatically in response to market factors.
The Trust is intended to be a long-term investment vehicle and is not
designated to provide investors with a means of speculating on short-term
market movements. Investors who engage in excessive account activity
generate additional costs which are borne by all the Trust's shareholders.
In order to minimize such costs, the Trust has adopted the following
policies. The Trust reserves the right to reject any purchase request
(including exchange purchases from other BT Advisor Funds) that is
reasonably deemed to be disruptive to efficient portfolio management,
either because of the timing of the investment or previous excessive
trading by the investor. Additionally, the Trust has adopted exchange
privilege limitations as described in the section `Exchange Limitations.''
Finally, the Trust reserves the right to suspend the offering of its
shares.
The Fund is not in itself a balanced investment plan. Investors should
consider their investment objective and tolerance for risk when making an
investment decision. When investors sell their Fund Shares, they may be
worth more or less than what they paid for them.
INVESTMENT PRINCIPLES AND RISKS
The value of the Portfolio's investments varies based on many factors.
i
Stock values fluctuate, sometimes dramatically, in response to the
activities of individual companies and general market and economic
conditions. Over time, however, stocks have shown greater long-term growth
potential than other types of securities.
When investors sell their Fund Shares, they may be worth more or less than
what they paid for them. See `Risk Factors and Certain Securities and
Investment Practices''herein for more information.
SUMMARY OF FUND EXPENSES
Annual operating expenses are paid out of the assets of the Portfolio and
Fund. The Portfolio pays an investment advisory fee and an administrative
services fee to Bankers Trust. The Fund incurs expenses such as maintaining
shareholder records and furnishing shareholder statements. The Fund must
provide financial reports.
The following table provides: (i) a summary of expenses relating to
purchases and sales of the Shares of the Fund and the annual operating
expenses of the Fund and expenses of the Portfolio, in the aggregate, as a
percentage of average daily net assets of the Fund; and (ii) an example
illustrating the dollar cost of such expenses on a $1,000 investment in the
Fund. THE TRUSTEES OF THE TRUST BELIEVE THAT THE EXPENSES OF THE FUND AND
EXPENSES OF THE PORTFOLIO, IN THE AGGREGATE, WILL BE LESS THAN OR
APPROXIMATELY EQUAL TO THE EXPENSES WHICH THE FUND WOULD INCUR IF THE TRUST
RETAINED THE SERVICES OF AN INVESTMENT ADVISER AND THE ASSETS OF THE FUND
i
WERE INVESTED DIRECTLY IN THE TYPE OF SECURITIES BEING HELD BY THE
PORTFOLIO.
Shareholder Transaction Expenses
Maximum Sales Charge on Purchases
(as a percentage of offering price)
None*
Maximum Sales Charge on Reinvested Distributions None*
Redemption Fee
None
Exchange Fee
None*
Shareholder transaction expenses are charges paid when investors buy,
sell, exchange, or hold Shares of the Fund. See `Purchase and Redemption
of Shares''for an explanation of how and when these charges apply.
* A transaction fee of 0.25% is deducted from purchases, redemptions and
exchanges into and out of the Fund. These transaction fees are paid to the
Fund and are deducted automatically from the amount invested, exchanged or
redeemed. The fee applies to all redemptions and an initial investment in
the Fund and all subsequent purchases (including purchases made by exchange
from another BT Fund), but not to reinvested dividend or capital gain
distributions.
i
The purpose of the 0.25% transaction fee is to allocate transaction costs
associated with purchases, redemptions and exchanges to investors making
those purchases, redemptions and exchanges, thus insulating existing
shareholders from those transaction costs. These costs include: (1)
brokerage costs; and (2) the effect of the ``id-ask'' spread in small and
medium sized company stock markets. Since the investors, not the Fund, bear
these costs, the Fund is expected to be able to track its benchmark index
more closely.
Annual Operating Expenses
(as a percentage of daily net assets of the Fund-Institutional Class Shares
Small Cap Index Fund
Investment advisory fee (after reimbursements or waiver)
0.08%
Other expenses (after reimbursements or waivers)
0.17%
Total operating expenses (after reimbursements or waivers)
0.25%
Example Table Example:
1 Year 3 Years
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2) redemption
at the end of each time period:
$5 $11
i
The expense table and the example above show the costs and expenses that
an investor will bear directly or indirectly as a shareholder of the Fund.
Bankers Trust has voluntarily agreed to waive a portion of its investment
advisory fee with respect to the Portfolio. Without such waiver, the
Portfolio's investment advisory fee would be equal to 0.15%. The expense
table and the example reflect a voluntary undertaking by Bankers Trust to
waive or reimburse expenses such that the total operating expenses will not
exceed 0.25% of the Fund's- Institutional Class Shares average net assets
annually. In the absence of this undertaking, for the fiscal year ended
December 31, 1996, the total operating expenses would have been
approximately 0.87% of the Fund's-Institutional Class Shares average net
assets annually. The example should not be considered a representation of
past or future expenses and actual expenses may be greater or less than
those shown. Moreover, while each example assumes a 5% annual return,
actual performance will vary and may result in a return greater or less
than 5%.
The Fund is distributed by Edgewood Services, Inc. ("Edgewood" or the
"Distributor") to customers of Bankers Trust or to customers of another
bank or a dealer or other institution that has a sub-shareholder servicing
agreement with Bankers Trust (along with Bankers Trust, a "Service Agent").
Some Service Agents may impose certain conditions on their customers in
addition to or different from those imposed by the Fund and may charge
their customers a direct fee for their services. Each Service Agent has
agreed to transmit to shareholders who are its customers appropriate
disclosures of any fees that it may charge them directly.
i
Currently, the Fund has issued two classes of Shares. The Fund offers by
separate prospectus another class of Shares. Because the expenses vary
between the classes, performance will vary with respect to each class.
Additional information concerning the Fund's other class of Shares is
available from Bankers Trust, as administrator, at (800) 368-4031.
For more information about the Fund's and the Portfolio's expenses see
`Management of the Trust and the Portfolio'' herein.
FINANCIAL HIGHLIGHTS
The following table shows the selected data for a share outstanding, total
investment return, ratios to average net assets and other supplemental data
of the Small Cap Index Fund for the periods indicated. The Small Cap Index
Fund's Annual Report has been audited by Coopers & Lybrand L.L.P., the
Fund's independent accountants, whose report thereon appears in the Fund's
Annual Report. The Fund's Annual Report is incorporated by reference in the
Trusts' SAI.
Institutional Class Shares
Advisor Class Shares
For the
period July 10, 1996 For the period August 8,
1996
i
(Commencement
of Operations) (Commencement of Operations)
to
December 31, 1996 to
December 31, 1996
Per Share Operating Performance:
Net Asset Value, Beginning of Period $ 10.00
$ 10.00
Income from Investment Operations
Net Investment Income 0.04
0.02
Net Realized and Unrealized Gain on Investments and
Futures Transactions 0.90
1.06
Total from Investment Operations 0.94
1.08
Distributions to Shareholders
Net Investment Income (0.04)
(0.04)
Net Realized Gain from Investment Transactions (0.00)+
(0.00)+
Total Distributions
(0.04) (0.04)+
Net Asset Value, End of Period $ 10.90
$ 11.04
Total Investment Return 9.47%
10.87%
Supplemental Data and Ratios:
i
Net Assets, End of Period (000s omitted) $ 61,558
$ 77
Ratios to Average Net Assets:
Net Investment Income 1.71%*
1.61%*
Expenses, including expenses of the
Small Cap Index Portfolio
0.25%* 0.45%*
Decrease Reflected In Above Expense Ratio Due
to Absorption of Expenses by Bankers Trust 0.62%*
22.69%*
*Annualized
+Less than $0.01
Further information about Fund's performance is contained in the Fund's
Annual Report, dated December 31, 1996, which can be obtained free of
charge.
THE FUND IN DETAIL
Investment Objectives and Policies
The Trust seeks to achieve the investment objective of the Fund by
investing all of its Assets in the Portfolio, which has the same investment
objective as the Fund. Since the investment characteristics of the Fund
will correspond directly to those of the Portfolio, the following is a
discussion of the various investments of and techniques employed by the
i
Portfolio. Additional information about the investment policies of the
Portfolio appears in `Risk Factors and Certain Securities and Investment
Practices''herein and in the Fund's SAI. There can be no assurance that
the investment objective of either the Fund or the Portfolio will be
achieved.
The Small Cap Index Portfolio seeks to replicate as closely as possible
(before deduction of Expenses) the total return of the Russell 2000.
The Russell 2000 is composed of approximately 2,000 small-capitalization
common stocks. A company's stock market capitalization is the total market
value of its floating outstanding shares. As of December 31, 1996, the
average stock market capitalization of the Russell 2000 was $360 million
and the weighted average stock market capitalization of the Russell 2000
was $640 million.
The Portfolio is neither sponsored by nor affiliated with the Frank Russell
Company. Frank Russell's only relationship to the Portfolio is the
licensing of the use of the Russell 2000. Frank Russell Company is the
owner of the trademarks and copyrights relating to the Russell indices.
The Portfolio invests in a statistically selected sample of the
approximately 2,000 stocks included in the Russell 2000. The stocks of the
Russell 2000 to be included in the Portfolio will be selected utilizing a
statistical sampling technique known as ``ptimization.'' This process
selects stocks for the Portfolio so that various industry weightings,
market capitalizations and fundamental characteristics (e.g. price-to-book,
price-to-earnings, debt-to-asset ratios, and dividend yields) closely
i
approximate those of the Russell 2000. For instance, if 10% of the
capitalization of the Russell 2000 consists of utility companies with
relatively small capitalizations, then the Portfolio is constructed so that
approximately 10% of the Portfolio's assets are invested in the stocks of
utility companies with relatively small capitalizations. The stocks held by
the Portfolio are weighted to make the Portfolio's aggregate investment
characteristics similar to those of the Russell 2000 as a whole.
For more information about the historical performance of the Russell 2000,
see the SAI.
General
Over time, the correlation between the performance of the Fund and the
Index is expected to be 0.95 or higher before deduction of Expenses of the
Fund and expenses of the Portfolio. A correlation of 1.00 would indicate
perfect correlation, which would be achieved when the net asset value of
the Fund, including the value of its dividend and any capital gain
distributions, increases or decreases in exact proportion to changes in the
Index. The Fund's ability to track its Index may be affected by, among
other things, transaction costs, administration and other expenses incurred
by the Fund or the Portfolio, changes in either the composition of the
Index or the assets of the Portfolio, and the timing and amount of
Portfolio investor contributions and withdrawals, if any. In the unlikely
event that a high correlation is not achieved, the Trust's Board of
Trustees will consider alternatives. Because the Portfolio seeks to track
the Index, Bankers Trust will not attempt to judge the merits of any
particular stock as an investment.
i
Under normal circumstances, the Portfolio will invest at least 80% of its
assets in the securities of the Index.
As a diversified fund, no more than 5% of the assets of the Portfolio may
be invested in the securities of one issuer (other than U.S. government
securities), except that up to 25% of the Portfolio's assets may be
invested without regard to this limitation. The Portfolio will not invest
more than 25% of its assets in the securities of issuers in any one
industry. These are fundamental investment policies of the Portfolio which
may not be changed without investor approval. No more than 15% of the
Portfolio's net assets may be invested in illiquid or not readily
marketable securities (including repurchase agreements and time deposits
maturing in more than seven days). Additional investment policies of the
Portfolio are contained in the SAI.
The Portfolio may maintain up to 25% of its assets in short-term debt
securities and money market instruments to meet redemption requests or to
facilitate investment in the securities of the Index. Securities index
futures contracts and related options, warrants, convertible securities and
swap agreements may be used for several reasons: to simulate full
investment in the underlying Index while retaining a cash balance for fund
management purposes, to facilitate trading, or to reduce transaction costs
or to seek higher investment returns when a futures contract, option,
warrant, convertible security or swap agreement is priced more attractively
than the underlying equity security or Index. These instruments may be
considered derivatives. See ``isk Factors and Certain Securities and
Investment Practices" herein.
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The use of derivatives for non-hedging purposes may be considered
speculative. While each of these securities can be used as leveraged
investments, the Portfolio may not use them to leverage its net assets. The
Portfolio will not invest in such instruments as part of a temporary
defensive strategy (such as altering the aggregate maturity of the
Portfolio) to protect the Portfolio against potential market declines.
The Portfolio may lend its investment securities and purchase securities
on a when-issued and a delayed delivery basis. See ``isk Factors and
Certain Securities and Investment Practices''herein and in the SAI for
more information about the investment practices of the Portfolio.
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of
instruments in which the Portfolio may invest and strategies Bankers Trust
may employ in pursuit of the Portfolio's investment objective. A summary of
risks and restrictions associated with these instrument types and
investment practices is included as well.
Bankers Trust may not buy all of these instruments or use all of these
techniques to the full extent permitted unless it believes that doing so
will help the Portfolio achieve its goal. Holdings and recent investment
strategies are described in the financial reports of the Fund and the
Portfolio, which are sent to Fund shareholders twice a year. For a free SAI
or financial report, call your Service Agent or Bankers Trust.
Market Risk
i
As a mutual fund investing primarily in common stocks, this Portfolio is
subject to market risk -- i.e., the possibility that common stock prices
will decline over short or even extended periods. The U.S. and foreign
stock markets tend to be cyclical, with periods when stock prices generally
rise and periods when prices generally decline.
Risks of Investing in Medium- and Small-Capitalization Stocks
Historically, medium- and small-capitalization stocks have been more
volatile in price than the larger-capitalization stocks included in the
Standard & Poor's 500 Composite Stock Price Index (the ``&P 500''). Among
the reasons for the greater price volatility of these securities 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
medium- and small-size companies to changing economic conditions. In
addition to exhibiting greater volatility, medium-- and small-size company
stocks may fluctuate independently of larger company stocks. Medium- and
small-size company stocks may decline in price as large company stocks
rise, or rise in prices as large company stocks decline.
Special Information Concerning Master-Feeder Fund Structure
Unlike other open-end management investment companies (mutual funds) which
directly acquire and manage their own portfolio securities, the Fund seeks
to achieve its investment objective by investing all of its Assets in the
Portfolio, a separate registered investment company with the same
investment objectives as the Fund. Therefore, an investor's interest in the
Portfolio's securities is indirect, like investments in other investment
companies and pooled investment vehicles. In addition to selling a
i
beneficial interest to the Fund, the Portfolio may sell beneficial
interests to other mutual funds or institutional investors. Such investors
will invest in the Portfolio on the same terms and conditions and will pay
a proportionate share of the Portfolio's expenses. However, the other
investors investing in the Portfolio are not required to sell their shares
at the same public offering price as the Fund due to variations in sales
commissions and other operating expenses. Therefore, investors in the Fund
should be aware that these differences may result in differences in returns
experienced by investors in the different funds that invest in the
Portfolio. Such differences in returns are also present in other mutual
fund structures. Information concerning other holders of interests in the
Portfolio is available from Bankers Trust, as the Administrator, at (800)
368-4031.
The master-feeder structure has been developed relatively recently, so
shareholders should carefully consider this investment approach.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large
fund withdraws from the Portfolio, the remaining funds may experience
higher pro rata operating expenses, thereby producing lower returns
(however, this possibility exists as well for traditionally structured
funds which have large institutional investors). Additionally, the
Portfolio may become less diverse, resulting in increased portfolio risk.
Also, funds with a greater pro rata ownership in the Portfolio could have
effective voting control of the operations of the Portfolio. Except as
permitted by the SEC, whenever the Trust is requested to vote on matters
pertaining to a Portfolio, the Trust will hold a meeting of shareholders of
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the Fund and will cast all of its votes in the same proportion as the votes
of the Fund's shareholders. Fund shareholders who do not vote will not
affect a Trust's votes at the Portfolio meeting. The percentage of the
Trust's votes representing Fund shareholders not voting will be voted by
the Trustees or officers of the Trust in the same proportion as the Fund
shareholders who do, in fact, vote. Certain changes in the Portfolio's
investment objectives, policies or restrictions may require the Fund to
withdraw its interest in the Portfolio. Any such withdrawal could result in
a distribution ``n kind'' of portfolio securities (as opposed to a cash
distribution from the Portfolio). If securities are distributed, the Fund
could incur brokerage, tax or other charges in converting the securities to
cash. In addition, the distribution in kind may result in a less
diversified portfolio of investments or adversely affect the liquidity of
the Fund. Notwithstanding the above, there are other means for meeting
redemption requests, such as borrowing.
The Fund may withdraw its investment from the Portfolio at any time, if the
Board of Trustees of the Trust determines that it is in the best interests
of the shareholders of the Fund to do so. Upon any such withdrawal, the
Board of Trustees of the Trust would consider what action might be taken,
including the investment of all the Assets of the Fund in another pooled
investment entity having the same investment objectives as the Fund or the
retaining of an investment adviser to manage the Fund's Assets in
accordance with the investment policies described herein with respect to
the Portfolio.
The Fund's investment objective is not a fundamental policy and may be
changed upon notice to but without the approval of the Fund's shareholders.
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If there is a change in the Fund's investment objective, the Fund's
shareholders should consider whether the Fund remains an appropriate
investment in light of their then-current needs. The investment objective
of the Portfolio is also not a fundamental policy. Shareholders of the Fund
will receive 30 days prior written notice with respect to any change in the
investment objective of the Fund or the Portfolio. See `Risk Factors and
Certain Securities and Investment Practices''in the SAI for a description
of the fundamental policies of the Portfolio that cannot be changed without
approval by `the vote of a majority of the outstanding voting securities''
(as defined in the Investment Company Act of 1940, as amended (the ``940
Act'') of the Portfolio.
For descriptions of the investment objective, policies and restrictions
of the Portfolio, see ``he Fund in Detail'' herein and ``Risk Factors and
Certain Securities and Investment Practices''herein and in the SAI. For
descriptions of the management and expenses of the Trust and the Portfolio,
see `Management of the Trust and the Portfolio'' herein and in the SAI.
SECURITIES AND INVESTMENT PRACTICES
Short-Term Investments. The Portfolio may invest in certain short-term
fixed income securities. Such securities may be used to invest uncommitted
cash balances, to maintain liquidity to meet shareholder redemptions or to
serve as collateral for the obligations underlying the Portfolio's
investment in securities index futures or related options or warrants.
These securities include: obligations issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities (`U.S. Government
Securities') or by any of the states, repurchase agreements, time
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deposits, certificates of deposit, bankers' acceptances and commercial
paper.
U.S. Government Securities. Some U.S. Government Securities, such as
Treasury bills, notes and bonds, are supported by the full faith and credit
of the United States; others, such as those of the Federal Home Loan Banks,
are supported by the right of the issuer to borrow from the Treasury;
others, such as those of the Federal National Mortgage Association, are
supported by the discretionary authority of the U.S. government to purchase
the agency's obligations; and still others, such as those of the Student
Loan Marketing Association, are supported only by the credit of the
instrumentality.
Securities Lending. The Portfolio may lend its investment securities to
qualified institutional investors for either short-term or long-term
purposes of realizing additional income. Loans of securities by the
Portfolio will be collateralized by cash, letters of credit, or U.S.
Government Securities or its agencies. The collateral will equal at least
100% of the current market value of the loaned securities, and such loans
may not exceed 30% of the value of the Portfolio's net assets. The risks in
lending portfolio securities, as with other extensions of credit, consist
of possible loss of rights in the collateral should the borrower fail
financially. In determining whether to lend securities, Bankers Trust will
consider all relevant facts and circumstances, including the
creditworthiness of the borrower.
When Issued and Delayed Delivery Securities. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and
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payment for these securities may take place as long as a month or more
after the date of the purchase commitment. The value of these securities is
subject to market fluctuation during this period and no income accrues to
the Portfolio until settlement takes place. The Portfolio segregates with
the Custodian a liquid securities in an amount at least equal to these
commitments.
Derivatives
The Portfolio may invest in various instruments that are commonly known as
``erivatives.'' Generally, a derivative is a financial arrangement, the
value of which is based on, or ``erived'' from, a traditional security,
asset, or market index. Some `derivatives'' such as mortgage-related and
other asset-backed securities are in many respects like any other
investment, although they may be more volatile or less liquid than more
traditional debt securities. There are, in fact, many different types of
derivatives and many different ways to use them. There are a range of risks
associated with those uses. Futures and options are commonly used for
traditional hedging purposes to attempt to protect a fund from exposure to
changing interest rates, securities prices, or currency exchange rates and
as a low cost method of gaining exposure to a particular securities market
without investing directly in those securities. Derivatives will not be
used to increase portfolio risk above the level that could be achieved
using only traditional investment securities or to acquire exposure to
changes in the value of assets or indices that by themselves would not be
purchased for the Portfolio.
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Securities Index Futures and Related Options. The Portfolio may enter into
securities index futures contracts and related options provided that not
more than 5% of its assets are required as a margin deposit for futures
contracts or options and provided that not more than 20% of the Portfolio's
assets are invested in futures and options at any time. When the Portfolio
has cash from new investments in the Portfolio or holds a portion of its
assets in money market instruments, it may enter into index futures or
options to attempt to increase its exposure to the market. Strategies the
Portfolio could use to accomplish this include purchasing futures
contracts, writing put options, and purchasing call options. When the
Portfolio wishes to sell securities, because of shareholder redemptions or
otherwise, it may use index futures or options to hedge against market risk
until the sale can be completed. These strategies could include selling
futures contracts, writing call options, and purchasing put options.
Swap Agreements. The Portfolio may enter into swap agreements only to the
extent that obligations under such agreements represent not more than 10%
of the Portfolio's total assets. Swap agreements are contracts between
parties in which one party agrees to make payments to the other party based
on the change in market value of a specified index or asset. In return, the
other party agrees to make payments to the first party based on the return
of a different specified index or asset.
Although swap agreements entail the risk that a party will default on its
payment obligations thereunder, the Portfolio will minimize this risk by
entering into agreements that mark to market no less frequently than
quarterly. Swap agreements also bear the risk that the Portfolio will not
be able to meet its obligation to the counterparty. This risk will be
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mitigated by investing the Portfolio in the specific asset for which it is
obligated to pay a return.
Warrants. The Portfolio's investment in warrants will not exceed more than
5% of its assets (2% with respect to warrants not listed on the New York or
American Stock Exchanges). Warrants are instruments which entitle the
holder to buy underlying equity securities at a specific price for a
specific period of time.
A warrant tends to be more volatile than its underlying securities and
ceases to have value if it is not exercised prior to its expiration date.
In addition, changes in the value of a warrant do not necessarily
correspond to changes in the value of its underlying securities.
Convertible Securities. The Portfolio may invest in convertible securities
which are a bond or preferred stock which may be converted at a stated
price within a specific period of time into a specified number of shares of
common stock of the same or different issuer. Convertible securities are
senior to common stock in a corporation's capital structure, but usually
are subordinated to non-convertible debt securities. While providing a
fixed income stream -- generally higher in yield than in the income derived
from a common stock but lower than that afforded by a non-convertible debt
security -- a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation of common stock into which it is convertible.
In general, the market value of a convertible security is the higher of its
investment value (its value as a fixed income security) or its conversion
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value (the value of the underlying shares of common stock if the security
is converted). As a fixed income security, the market value of a
convertible security generally increases when interest rates decline and
generally decreases when interest rates rise; however, the price of a
convertible security generally increases as the market value of the
underlying stock increases, and generally decreases as the market value of
the underlying stock declines. Investments in convertible securities
generally entail less risk than investments in the common stock of the same
issuer.
Further risks associated with the use of futures contracts, options,
warrants, convertible securities and swap agreements. The risk of loss
associated with futures contracts in some strategies can be substantial due
to both the low margin deposits required and the extremely high degree of
leverage involved in futures pricing. As a result, a relatively small price
movement in a futures contract may result in an immediate and substantial
loss or gain. However, the Portfolio will not use futures contracts,
options, warrants, convertible securities and swap agreements for
speculative purposes or to leverage their net assets. Accordingly, the
primary risks associated with the use of futures contracts, options,
warrants, convertible securities and swap agreements by the Portfolio are:
(i) imperfect correlation between the change in market value of the
securities held by the Portfolio and the prices of futures contracts,
options, warrants, convertible securities and swap agreements; and (ii)
possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures position prior to its maturity date.
The risk of imperfect correlation will be minimized by investing only in
those contracts whose behavior is expected to resemble that of the
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Portfolio's underlying securities. The risk that the Portfolio will be
unable to close out a futures position will be minimized by entering into
stock transactions on an exchange with an active and liquid secondary
market. However options, warrants, convertible securities and swap
agreements purchased or sold over-the-counter may be less liquid than
exchange-traded securities. Illiquid securities, in general, may not
represent more than 15% of the net assets of the Portfolio.
Asset Coverage. To assure that the Portfolio's use of futures and
related options, as well as when-issued and delayed delivery securities,
interest rate swaps and foreign currency forward futures and related
options transactions are not used to achieve excessive investment leverage,
the Portfolio will cover such transactions, as required under applicable
interpretations of the SEC, either by owning the underlying securities,
entering into an off-setting transaction, or by segregating with the
Portfolio's Custodian liquid securities in an amount at all times equal to
or exceeding the Portfolio's commitment with respect to these instruments
or contracts.
Portfolio Turnover
The frequency of Portfolio transactions-the Portfolio's portfolio turnover
rate-will vary from year to year depending on market conditions and the
Portfolio's cash flows. The Portfolio's annual portfolio turnover rate is
not expected to exceed 100%. The portfolio turnover rate of the Portfolio
for the period from July 1, 1996 (Commencement of Operations) to December
31, 1996, was 16%.
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PERFORMANCE INFORMATION AND REPORTS
The Portfolio's recent strategies and holdings, and the Fund's performance,
is detailed twice a year in the Fund's financial reports, which are sent to
all Fund shareholders.
For current Fund performance or a free copy of the Fund's financial report,
please contact your Service Agent or Bankers Trust.
Mutual fund performance is commonly measured as total return and/or yield.
The Fund's performance is affected by the expenses of the Fund.
Explanation of Terms
Total return is the change in value of an investment in the Fund over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative total return reflects actual performance over a stated period of
time. An average annual total return is a hypothetical rate of return that,
if achieved annually, would have produced the same cumulative total return
if performance had been constant over the entire period. Average annual
total return calculations smooth out variations in performance; they are
not the same as actual year-by-year results. Average annual total returns
covering periods of less than one year assume that performance will remain
constant for the rest of the year.
For the period from July 10, 1996 (Commencement of Operations) to December
31, 1996, the cumulative total return for the Institutional Class Shares of
the Fund was 9.47%.
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Yield refers to the income generated by an investment in a Fund over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all stock and bond
funds. Because this differs from other accounting methods, the quoted yield
may not equal the income actually paid to shareholders.
Performance information may include comparisons of the Fund's investment
results to various unmanaged indices or results of other mutual funds or
investment or savings vehicles. From time to time, Fund rankings may be
quoted from various sources, such as Lipper Analytical Services, Inc.,
Value Line and Morningstar, Inc.
Unlike some bank deposits or other investments which pay a fixed yield for
a stated period of time, the total return of the Fund will vary depending
upon interest rates, the current market value of the securities held by the
Portfolio and changes in the expenses of the Fund or Portfolio. In
addition, during certain periods for which total return may be provided,
Bankers Trust may have voluntarily agreed to waive portions of its fees, or
reimburse certain operating expenses of the Fund or the Portfolio, on a
month-to-month basis. Such waivers will have the effect of increasing the
Fund's net income (and therefore its yield and total return) during the
period such waivers are in effect.
Total returns and yields are based on past results and are not an
indication of future performance.
MANAGEMENT OF THE TRUST AND THE PORTFOLIO
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Board of Trustees
The Trust and the Portfolio is governed by a Board of Trustees which is
responsible for protecting the interests of investors. A majority of the
Trustees who are not ``nterested persons'' (as defined in the 1940 Act) of
the Trust or the Portfolio, as the case may be, have adopted written
procedures reasonably appropriate to deal with potential conflicts of
interest arising from the fact that the same individuals are Trustees of
the Trust and the Portfolio, up to and including creating separate boards
of trustees. See `Management of the Trust and the Portfolio'' in the SAI
for more information with respect to the Trustees and officers of the Trust
and the Portfolio.
Investment Adviser
The Trust has not retained the services of an investment adviser since the
Trust seeks to achieve the investment objective of the Fund by investing
all the Assets of the Fund in the Portfolio. The Portfolio has retained the
services of Bankers Trust as investment adviser.
Bankers Trust Company and Its Affiliates
Bankers Trust Company, a New York banking corporation with principal
offices at 280 Park Avenue, New York, New York 10017, is a wholly owned
subsidiary of Bankers Trust New York Corporation. Bankers Trust conducts a
variety of general banking and trust activities and is a major wholesale
supplier of financial services to the international and domestic
institutional market.
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As of December 31, 1996, Bankers Trust New York Corporation was the
seventh largest bank holding company in the United States with total assets
of approximately $120 billion. Bankers Trust is a worldwide merchant bank
dedicated to servicing the needs of corporations, governments, financial
institutions and private clients through a global network of over 120
offices in more than 40 countries. Investment management is a core business
of Bankers Trust, built on a tradition of excellence from its roots as a
trust bank founded in 1903. The scope of Bankers Trust's investment
management capability is unique due to its leadership positions in both
active and passive quantitative management and its presence in major equity
and fixed income markets around the world. Bankers Trust is one of the
nation's largest and most experienced investment managers with
approximately $227 billion in assets under management globally. Of that
total, approximately $92 billion are in U.S. equity index assets alone.
Bankers Trust has more than 50 years of experience managing retirement
assets for the nation's largest corporations and institutions. In the past,
these clients have been serviced through separate account and commingled
fund structures. Now, the BT Family of Funds brings Bankers Trust's
extensive investment management expertise -- once available to only the
largest institutions in the U.S. -- to individual investors. Bankers
Trust's officers have had extensive experience in managing investment
portfolios having objectives similar to those of the Portfolio.
Bankers Trust, subject to the supervision and direction of the Board of
Trustees of the Portfolio, manages the Portfolio in accordance with the
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Portfolio's investment objective and stated investment policies, makes
investment decisions for the Portfolio, places orders to purchase and sell
securities and other financial instruments on behalf of the Portfolio and
employs professional investment managers and securities analysts who
provide research services to the Portfolio. Bankers Trust may utilize the
expertise of any of its world wide subsidiaries and affiliates to assist it
in its role as investment adviser. All orders for investment transactions
on behalf of the Portfolio are placed by Bankers Trust with broker-dealers
and other financial intermediaries that it selects, including those
affiliated with Bankers Trust. A Bankers Trust affiliate will be used in
connection with a purchase or sale of an investment for the Portfolio only
if Bankers Trust believes that the affiliate's charge for the transaction
does not exceed usual and customary levels. The Portfolio will not invest
in obligations for which Bankers Trust or any of its affiliates is the
ultimate obligor or accepting bank. The Portfolio may, however, invest in
the obligations of correspondents and customers of Bankers Trust.
The Investment Advisory Agreement provides for the Portfolio to pay Bankers
Trust a fee, accrued daily and paid monthly, equal on an annual basis to
0.15% of the average daily net assets of the Portfolio for its then-current
fiscal year.
Bankers Trust has been advised by its counsel that, in counsel's opinion,
Bankers Trust currently may perform the services for the Trust and the
Portfolio described in this Prospectus and the SAI without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. State
laws on this issue may differ from the interpretations of relevant Federal
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law, and banks and financial institutions may be required to register as
dealers pursuant to state securities law.
Bankers Trust investment personnel may invest in securities for their own
account pursuant to a code of ethics that establishes procedures for
personal investing and restricts certain transactions.
Portfolio Manager
Frank Salerno, Managing Director of Bankers Trust, is responsible for the
management of the Portfolio. Mr. Salerno oversees administration,
management and trading of international and domestic equity index
strategies. He has been employed by Bankers Trust since 1981 and has
managed the Portfolio's assets since the Portfolio commenced operations.
Administrator
Under its Administration and Services Agreement with the Trust, Bankers
Trust calculates the net asset value of the Fund and generally assists the
Board of Trustees of the Trust in all aspects of the administration and
operation of the Fund. The Administration and Services Agreement provides
for the Trust to pay Bankers Trust a fee, accrued daily and paid monthly
equal on an annual basis to 0.20% of the average daily net assets of the
Fund, attributable to the Class, for its then-current fiscal year.
Under an Administration and Services Agreement with the Portfolio, Bankers
Trust calculates the value of the assets of the Portfolio and generally
assists the Board of Trustees in all aspects of the administration and
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operation of the Portfolio. The Administration and Services Agreement
provides for the Portfolio to pay Bankers Trust a fee, accrued daily and
paid monthly, equal on an annual basis to 0.05% of the Portfolio's average
daily net assets for its then-current fiscal year. Under the Administration
and Services Agreement, Bankers Trust may delegate one or more of its
responsibilities to others, including affiliates of Edgewood, at Bankers
Trust's expense.
Distributor
Edgewood Services, Inc. is the principal distributor for the Shares of the
Fund. In addition, Edgewood and its affiliates provide the Trust with
office facilities, and currently provide administration and distribution
services for other registered investment companies. The principal business
address of Edgewood and its affiliates is Clearing Operations, P.O. Box
897, Pittsburgh, Pennsylvania 15230-0897.
Custodian and Transfer Agent
Bankers Trust acts as custodian of the assets of the Trust and the
Portfolio and serves as the transfer agent (the ``ransfer Agent'') for the
Trust and the Portfolio under the Administration and Services Agreement
with the Trust and the Portfolio.
NET ASSET VALUE
The Fund is open for business each day the New York Stock Exchange, Inc.
(the `NYSE'') is open (a ``Valuation Day''). The Fund's net asset value
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(`NAV'') is calculated as of the close of regular trading on the NYSE,
currently 4:00 p.m. Eastern time (``aluation Time'').
The Fund's NAV per share is the value of a single Share. The NAV per
share of the Fund is computed by dividing the value of the Fund's Assets
(i.e., the value of its investment in the Portfolio and other assets), less
all liabilities, allocable to the Institutional Class Shares by the total
number of its Shares outstanding. The Portfolio's securities and other
assets are valued primarily on the basis of market quotations or, if
quotations are not readily available, by Bankers Trust pursuant to
procedures adopted by the Portfolio's Board of Trustees. These procedures
require Bankers Trust to value such a security at the same value as an
equivalent security which is readily marketable and, in making such
comparisons, to consider all relevant factors under applicable guidelines
of the SEC.
Under procedures adopted by the Board, a NAV for the Fund later determined
to have been inaccurate for any reason will be recalculated. Purchases and
redemptions made at NAV determined to have been inaccurate will be
adjusted, although in certain circumstances, such as where the difference
between the original NAV and the recalculated NAV divided by the
recalculated NAV is 0.005 (1/2 of 1%) or less or shareholder transactions
are otherwise insubstantially affected, further action is not required.
PURCHASE AND REDEMPTION OF SHARES
How To Buy Shares
The Trust accepts purchase orders for shares of the Fund at the NAV per
share next determined after the order is received on each Valuation Day.
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See `Net Asset Value'' herein. Shares of the Fund may be available through
Investment Professionals, such as broker/dealers and investment advisers
(including Service Agents).
Purchase orders for shares of the Fund (including those purchased through a
Service Agent) that are transmitted to the Trust's Transfer Agent (the
`Transfer Agent''), prior to the Valuation Time on any Valuation Day will
be effective at that day's Valuation Time. The Trust and Transfer Agent
reserve the right to reject any purchase order.
Shares must be purchased in accordance with procedures established by the
Transfer Agent and each Service Agent. It is the responsibility of each
Service Agent to transmit to the Transfer Agent purchase and redemption
orders and to transmit to Bankers Trust as the Trust's custodian (the
``ustodian'') purchase payments by the following business day (trade date
+ 1) after an order for shares is placed. A shareholder must settle with
the Service Agent for his or her entitlement to an effective purchase or
redemption order as of a particular time. Because Bankers Trust is the
Custodian and Transfer Agent of the Trust, funds may be transferred
directly from or to a customer's account held with Bankers Trust to settle
transactions with the Fund without incurring the additional costs or delays
associated with the wiring of Federal funds.
Certificates for shares will not be issued. Each shareholder's account
will be maintained by a Service Agent or Transfer Agent.
If orders are placed through an Investment Professional, it is the
responsibility of the Investment Professional to transmit the order to buy
shares of each class to the Transfer Agent before 4:00 p.m. Eastern time.
The Transfer Agent must receive payment within one business day after an
order for shares is placed; otherwise, the purchase order may be canceled
and the investor could be held liable for resulting fees and/or losses.
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Minimum Investments
To Open an Account $5 million
To Add to an Account No minimum
Minimum Balance $1 million
If you are new to BT Advisor Funds, complete and sign an account
application and mail it along with your check to the address listed below.
If there is no account application accompanying this Prospectus, call the
BT Service Center at 1-800-368-4031.
BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
Overnight mailings:
BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
If you already have money invested in a fund in the BT Family of Funds, you
can:
o Mail an account application with a check,
o Wire money into your account,
o Open an account by exchanging from another fund in the BT Family of
Funds, or
o Contact your Service Agent or Investment Professional.
If you are investing through a tax-sheltered retirement plan, such as an
IRA, for the first time, you will need a special application. Contact your
Investment Professional for more information and a retirement account
application.
Additional Information About Buying Shares
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To Open an
Account To Add to an Account
By Wire Call the BT Service Center at
Call your Investment Professional or wire
1-800-368-4031 to
receive additional investment to:
wire instructions for
account
establishment.
Routing No.: 021001033
Attn: Bankers Trust/IFTC Deposit
DDA No.: 00-226-296
FBO: (Account name)
(Account number)
Credit: Fund Number
Small Cap Index Fund - 513
Specify the complete name of the Fund of
your choice, and include your account num-
i
ber and your name.
By Phone Contact your Service Agent,
Contact your Service Agent,
Investment Professional, or
call Investment Professional, or call
BT's Service Center at 1-800-
368-4031. BT's Service Center at 1-800-368-4031.
If you are an existing
shareholder, If you are an
you may exchange from another
BT existing shareholder, you may
account with the same
registration, exchange from another BT account
including, name, address, and
taxpayer with the same registration, including,
ID number.
name, address, and taxpayer ID number.
By Mail Complete and sign the account appli-
Make your check payable to the complete
cation. Make your check
payable to name of the Fund of your choice. Indicate
the complete name of the Fund
of your Fund account number on your check
your choice. Mail to the
appropriate and mail to the address printed on your
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address indicated on the
application. account statement.
How to Sell Shares
You can arrange to take money out of your Fund account at any time by
selling (redeeming) some or all of your shares. Your shares shall be sold
at the next NAV calculated after an order is received by the Transfer
Agent. Redemption requests should be transmitted by customers in accordance
with procedures established by the Transfer Agent and the Shareholder's
Service Agent. Redemption requests for shares of the Fund received by the
Service Agent and transmitted to the Transfer Agent prior to the Valuation
Time on each Valuation Day will be effective at that day's Valuation Time
and the redemption proceeds normally will be delivered to the shareholder's
account the next day, but in any event within seven calendar days following
receipt of the request.
Service Agents may allow redemptions or exchanges by telephone and may
disclaim liability for following instructions communicated by telephone
that the Service Agent reasonably believes to be genuine. The Service Agent
must provide the investor with an opportunity to choose whether or not to
utilize the telephone redemption or exchange privilege. The Transfer Agent
and the Service Agent must employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. If the Shareholder
Servicing Agent does not do so, it may be liable for any losses due to
unauthorized or fraudulent instructions. Such procedures may include, among
others, requiring some form of personal identification prior to acting upon
instructions received by telephone, providing written confirmation of such
transactions and/or tape recording of telephone instructions.
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Redemption orders are processed without charge by the Trust. A Service
Agent may on at least 30 days' notice involuntarily redeem a shareholder's
account with the Fund having a balance below the minimum, but not if an
account is below the minimum due to a change in market value. See ``inimum
Investments''above for minimum balance amounts.
To sell Shares in a retirement account, your request must be made in
writing, except for exchanges to other eligible funds in the BT Family of
Funds, which can be requested by phone or in writing. For information on
retirement distributions, contact your Service Agent or call the BT Service
Center at 1-800-368-4031.
If you are selling some but not all of your non-retirement account shares,
leave at least $1,000 worth of shares in the account to keep it open.
To sell shares by bank wire you will need to sign up for these services in
advance when completing your account application.
Certain requests must include a signature guarantee to protect you and
Bankers Trust from fraud. Redemption requests in writing must include a
signature guarantee if any of the following situations apply:
o Your account registration has changed within the last 30 days,
o The check is being mailed to a different address than the one on
your account (record address),
o The check is being made payable to someone other than the account
owner,
o The redemption proceeds are being transferred to a BT account with
a different registration, or
o You wish to have redemption proceeds wired to a non-predesignated
bank account.
A signature guarantee is also required if you change the pre-designated
bank information for receiving redemption proceeds on your account.
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You should be able to obtain a signature guarantee from a bank, broker,
dealer, credit union (if authorized under state law), securities exchange
or association, clearing agency, or savings association. A notary public
cannot provide a signature guarantee.
Additional Information About Selling Shares
By Wire - You must sign up for the wire feature before using it. To
verify that it is in place, call 1-800-368-4031 Minimum wire: $1,000. Your
wire redemption request must be received by the Transfer Agent before 4:00
p.m. Eastern time for money to be wired on the next business day.
In Writing - Write a signed `letter of instruction'' with your name, the
Fund's name and Fund's number, your Fund account number, the dollar amount
or number of Shares to be redeemed, and mail to one of the following
addresses:
BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
Overnight mailings:
BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
For Trust accounts, the trustee must sign the letter indicating capacity as
trustee. If the trustee's name is not on the account registration, provide
a copy of the trust document certified within the last 60 days.
For a Business or Organization account, at least one person authorized by
corporate resolution to act on the account must sign the letter.
Unless otherwise instructed, the Transfer Agent will send a check to the
account address of record. The Trust reserves the right to close investor
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accounts via 30 day notice in writing if the Fund account balance falls
below the Fund minimums.
Investor Services
BT Advisor Funds provide a variety of services to help you manage your
account.
Information Services
Statements and reports that your Investment Professional or the Transfer
Agent may send to you include the following:
o Confirmation statements (after every transaction that affects
your account balance, including distributions or your account registration)
o Account statements (monthly)
o Financial reports (every six months)
To reduce expenses, only one copy of most financial reports will be
mailed, even if you have more than one account in the Fund. Call your
Investment Professional or the BT Service Center at 1-800-368-4031 if you
need additional copies of financial reports.
Exchange Privilege
Shareholders may exchange their shares for shares of certain other funds in
the BT Family of Funds registered in their state. The Fund reserves the
right to terminate or modify the exchange privilege in the future. To make
an exchange, follow the procedures indicated in `How to Buy Shares'' and
``ow to Sell Shares'' herein. Before making an exchange, please note the
following:
o Call your Service Agent for information and a prospectus. Read the
prospectus for relevant information.
o Complete and sign an application, taking care to register your new
account in the same name, address and taxpayer identification number as
your existing account(s).
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o Each exchange represents the sale of shares of one fund and the
purchase of shares of another, which may produce a gain or loss for tax
purposes. Your Service Agent will receive a written confirmation of each
exchange transaction.
o Exchanges between the Fund described in this Prospectus and funds
described in other BT Family of Funds' Prospectuses, with the exception of
other passively managed BT Funds, are restricted during the 90 days
following purchase.
o Because excessive trading can hurt Fund performance and shareholders,
the Fund reserves the right to temporarily or permanently terminate the
exchange privilege of any investor who makes more than four exchanges out
of the Fund per calendar year. Accounts under common ownership or control,
including accounts with the same taxpayer identification number, will be
counted together for purposes of the four exchange limit.
o The Fund reserves the right to refuse exchange purchases by any person
or group if, in Bankers Trust's judgment, the Fund would be unable to
invest the money effectively in accordance with its investment objective
and policies, or would otherwise potentially be adversely affected.
o Exchanges may be restricted or refused if the Fund receives or
anticipates simultaneous orders affecting significant portions of the
Fund's assets. In particular, a pattern of exchanges that coincide with a
``arket timing'' strategy may be disruptive to the Fund.
Systematic Programs
To move money from your bank account to BT Advisor Funds
Minimum Minimum Frequency
Setting up or changing
Initial Subsequent
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$1,000 $100 Monthly, bimonthly,
For a new account, complete the appropriate section
quarterly or
semi- on the application.
annually
For existing accounts, call your Investment
Professional for an application.
To change the amount or frequency of your
investment, contact your Investment
Professional directly or call 1-800-368-4031.
Call at least 10 business days prior to your next
scheduled investment date.
Systematic Withdrawal Program lets you set up periodic redemptions from
your account.
Minimum Frequency
Setting up or changing
$100 Monthly, quarterly, semi-annually or To
establish, call your Investment Professional or call
annually
1-800-368-4031 after your account is open. The accounts
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from which the withdrawals be processed must have a
minimum balance of $10,000.
Tax-Saving Retirement Plans
Retirement plans offer significant tax savings and are available to
individuals, partnerships, small businesses, corporations, nonprofit
organizations and other institutions. Contact Bankers Trust for further
information. Bankers Trust can set up your new account in the Fund under a
number of several tax-savings or tax-deferred plans. Minimums may differ
from those listed elsewhere in this Prospectus.
o Individual Retirement Accounts (IRAs): personal savings plans that
offer tax advantages for individuals to set aside money for retirement and
allow new contributions of $2,000 per tax year.
o Rollover IRAs: tax-deferred retirement accounts that retain the
special tax advantages of lump sum distributions from qualified retirement
plans and transferred IRA accounts.
o Simplified Employee Pension Plans (SEP): a relatively easy and
inexpensive alternative to retirement planning for sole proprietors,
partnerships and corporations. Under a SEP, employers make tax-deductible
contributions to their own and to eligible employees' IRA accounts.
Employee contributions are available through a ``alary Deferral'' SEP for
businesses with fewer than 25 eligible employees.
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o Keogh Plans: defined contribution plans available to individuals with
self-employed income and nonincorporated businesses such as sole
proprietors, professionals and partnerships. Contributions are tax-
deductible to the employer and earnings are tax-sheltered until
distribution.
o Corporate Profit-Sharing and Money-Purchase Plans: defined
contribution plans available to corporations to benefit their employees by
making contributions on their behalf and in some cases permitting their
employees to make contributions.
o 401(k) Programs: defined contribution plans available to corporations
allowing tax-deductible employer contributions and permitting employees to
contribute a percentage of their wages on a tax-deferred basis.
o 403(b) Custodian Accounts: defined contribution plans open to
employees of most non-profit organizations and educational institutions.
o Deferred Benefit Plans: plan sponsors may invest all or part of their
pension assets in the Fund.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
The Fund distributes substantially all of its net income and capital gains
to shareholders each year. Normally, income dividends and capital gains are
distributed annually.
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The Fund intends to qualify as a regulated investment company, as
defined in the Internal Revenue Code of 1986, as amended (the ``ode'').
Provided the Fund meets the requirements imposed by the Code, the Fund will
not pay any Federal income or excise taxes. Dividends paid by the Fund from
its taxable net investment income and distribution by the Fund of its net
realized short-term capital gains are taxable to shareholders as ordinary
income, whether received in cash or reinvested in additional shares of the
Fund. The Funds dividends and distributions will not qualify for the
dividends-received deduction for corporations.
Distribution Options
When you open an account, specify on your account application how you want
to receive distributions. The Trust offers four options:
1. Reinvestment Option. Your dividend and capital gain distributions will
be automatically reinvested in additional Shares of the Fund. If you do not
indicate a choice on your application you will be assigned this option.
2. Income-Earned Option. Your capital gain distributions will be
automatically reinvested in additional Shares of the Fund, but you will be
sent a check for each dividend distribution.
3. Cash Option. You will be sent a check for your dividend and capital
gain distributions.
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4. Automatic Dividends Program. Your dividend and capital gain
distributions be automatically invested in Shares of another fund in the BT
Family of Funds as long as the minimums for that account are met.
If you select distribution option 2 or 3 and the U.S. Postal Service cannot
deliver your checks, or if your checks remain uncashed for six months,
those checks will be reinvested in your account at the current NAV and your
election may be converted to the Reinvestment Option. You may change
distribution option at anytime by notifying the Transfer Agent in writing.
For retirement accounts, all distributions are automatically reinvested.
When you are over 59 years old, you can receive distributions in cash. If
-
distributions from a retirement account for any taxable year following the
year in which the participant reaches age 70 are less than the `minimum
-
required distribution''for that taxable year, an excise tax equal to 50%
of the deficiency may be imposed by the Internal Revenue Service (the
``RS''). The administrator, trustee or custodian of such a retirement
account will be responsible for reporting distributions from such accounts
to the IRS.
When the Fund deducts a distribution from its NAV, the reinvestment price
is the Fund's NAV at the close of business that day. Distribution checks
will be mailed within seven days, or longer for a December ex-dividend
date.
Taxes
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As with any investment, you should consider how an investment in the Fund
could affect you. Below are some of the Fund's tax implications. If your
account is not a tax-deferred retirement account beware of these tax
implications.
Taxes on Distributions. Distributions from the Fund are subject to federal
income tax and may also be subject to state or local taxes. Annual
Statements as to the federal tax status of distributions, and distributions
that are attributable to state and local income and personal taxes, if
applicable, will be mailed to shareholders shortly after the end of the
year. If living outside the United States, your distributions from the Fund
could also be taxed by the country in which you reside.
For federal tax purposes, income and short-term capital gain distributions
from the Fund are taxed as dividends; long-term capital gain distributions
are taxed as long-term capital gains.
Mutual fund dividends from U.S. government securities are generally free
from state and local income taxes. However, particular states may limit
this benefit, and some types of securities, such as repurchase agreements
and some agency-backed securities, may not qualify for the benefit. In
addition, some states may impose intangible property taxes. You should
consult your own tax adviser for details and up-to-date information on the
tax laws in your state.
Distributions are taxable when they are paid, whether you take them in cash
or reinvest them. However, distributions declared in December and paid in
January are taxable as if they were paid on December 31.
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Every January, the Transfer Agent will send the IRS a statement showing the
taxable distributions paid to you in the previous year.
Taxes on Transactions. Your redemptions, including exchanges, are subject
to capital gains tax. A capital gain or loss is the difference between the
cost of your Shares and the price you receive when you sell them.
Whenever you sell Shares of the Fund, the Transfer Agent will send you or
your Service Agent a confirmation statement showing how many Shares you
sold and at what price. You also receive a consolidated transaction
statement at least quarterly. However, it is up to you or your tax preparer
to determine whether this sale resulted in a capital gain and, if so, the
amount of tax to be paid. Be sure to keep your regular account statements;
the information they contain will be essential in calculating the amount of
your capital gains.
`Buying a dividend.'' If you buy Shares just before the Fund deducts a
capital gain distribution or dividend distribution, as applicable, from its
NAV, you will pay the full price for the Shares and then receive a portion
of the price back in the form of a taxable distribution.
There are tax requirements that all Funds must follow in order to avoid
federal taxation. In its effort to adhere to these requirements, the Fund
may have to limit its investment activity in some types of instruments.
ADDITIONAL INFORMATION
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The Fund is a mutual fund: an investment that pools shareholders' money and
invests it toward a specified goal. The Fund is a separate diversified
series of BT Advisor Funds, a Massachusetts business trust. The Fund offers
two classes of Shares of beneficial interest, Institutional Class Shares
and Advisor Class Shares. The Small Cap Index Portfolio is a separate
diversified series of BT Investment Portfolios, a New York master trust
fund.
The Portfolio is a separate subtrust (or ``eries'') of BT Investment
Portfolios. The Trust and BT Investment Portfolios reserves the right to
add additional series in the future. The Trust also reserves the right to
issue additional classes of Shares of the Fund.
The Trust or the Portfolio may hold special meetings and mail proxy
materials. These meetings may be called to elect or remove trustees, change
fundamental policies, approve Portfolio's investment advisory agreement, or
for other purposes. Shareholders not attending these meetings are
encouraged to vote by proxy. The Trust's Transfer Agent will mail proxy
materials in advance, including a voting card and information about the
proposals to be voted on.
When matters are submitted for shareholder vote, shareholders of the Fund
will have one vote for each full share held and proportionate, fractional
votes for fractional shares held. A separate vote of the Fund or classes is
required on any matter affecting only the Fund or class on which
shareholders are entitled to vote. Shareholders of the Fund or class are
not entitled to vote on Trust matters that do not affect the Fund or class,
respectively, and do not require a separate vote of the Fund or class. All
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series of the Trust and all classes will vote together on certain matters,
such as electing trustees or approving independent public auditors. There
normally will be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of Trustees
holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election
of Trustees. Any Trustee may be removed from office upon the vote of
shareholders holding at least two-thirds of that Trust's outstanding shares
at a meeting called for that purpose. The Trustees are required to call
such a meeting upon the written request of shareholders holding at least
10% of that Trust's outstanding shares. The Trust will also assist
shareholders in communicating with one another as provided for in the 1940
Act.
As of December 31, 1996, Merck & Co. Inc. Employee Benefit/Merck & Co. Inc.
Group Lifetrust, Whitehouse Station, New Jersey owned 27.87% of the voting
Institutional Class securities of the Small Cap Index Fund, and, therefore,
may for certain purposes, be deemed to control the Fund and be able to
affect the outcome of certain matters presented for a vote of shareholders.
As of December 31, 1996, Miami Valley Equipment, Inc., Dayton, Ohio owned
25.05% of the voting Institutional Class securities of the Small Cap Index
Fund, and, therefore, may for certain purposes, be deemed to control the
Fund and be able to affect the outcome of certain matters presented for a
vote of shareholders.
Each series of the Trust will vote separately on any matter involving a
Portfolio. Shareholders of all of the series of the Trust will, however,
vote together to elect Trustees of the Trust and for certain other matters.
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Under certain circumstances, the shareholders of one or more series could
control the outcome of these votes. The series of BT Investment Portfolios
will vote together or separately on matters in the same manner, and in the
same circumstances, as do the series of the Trust. As with the Trust, the
investors in one or more series of BT Investment Portfolios could control
the outcome of these votes.
The Trust is an entity of the type commonly known as a ``assachusetts
business trust.''Under Massachusetts law, shareholders of such a business
trust may, under certain circumstances, be held personally liable as
partners for its obligations. However, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to
circumstances in which both inadequate insurance existed and the Trust
itself was unable to meet its obligations.
The Declaration of Trust of BT Investment Portfolios provides that the Fund
and other entities investing in a Portfolio (e.g., other investment
companies, insurance company separate accounts and common and commingled
trust funds) will each be liable for all obligations of the Portfolio.
However, the risk of the Fund incurring financial loss on account of such
liability is limited to circumstances in which both inadequate insurance
existed and the Portfolio itself was unable to meet its obligations.
Accordingly, the Trustees of the Trust believe that neither the Fund nor
its shareholders will be adversely affected by reason of the Fund's
investing in the Portfolio. No series of BT Investment Portfolios has any
preference over any other series.
(THIS PAGE INTENTIONALLY LEFT BLANK)
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(THIS PAGE INTENTIONALLY LEFT BLANK)
BT ADVISOR FUNDS
Small Cap Index Fund
Investment Adviser of the Portfolio and Administrator
BANKERS TRUST COMPANY
280 Park Avenue
New York, NY 10017
Distributor
Edgewood Services, Inc.
Clearing Operations
P.O. Box 897
Pittsburgh, PA 15230-0897
Custodian and Transfer Agent
BANKERS TRUST COMPANY
280 Park Avenue
New York, NY 10017
Independent Accountants
COOPERS & LYBRAND L.L.P.
1100 Main Street, Suite 900
Kansas City, MO 64105
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Counsel
WILLKIE FARR & GALLAGHER
153 East 53rd Street
New York, NY 10022
No person has been authorized to give any information or to make any
representations other than those contained in the Trusts' Prospectuses, the
corresponding SAIs or the Trusts' official sales literature in connection
with the offering of the Trust's Shares and, if given or made, such other
information or representations must not be relied on as having been
authorized by a Trust. This Prospectus does not constitute an offer in any
state in which, or to any person to whom, such offer may not lawfully be
made.
Cusip #05576L882
STA513300 (3/97)
BT ADVISOR FUNDS
U.S. Bond Index Fund
Institutional Class Shares
PROSPECTUS
FEBRUARY 28, 1997
BT Advisor Funds (the `Trust'') is an open-end, management investment
company (mutual fund) which consists of several funds. The U.S. Bond Index
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Fund (the `Fund'') is a separate series of the Trust and offers two
classes of shares. The shares offered by this prospectus are the
Institutional Class Shares (the ``hares''). The Fund seeks to replicate as
closely as possible the performance of the Lehman Brothers Aggregate Bond
Index before the deduction of the expenses allocable to the Shares of the
Fund and the U.S. Bond Index Portfolio (the `Expenses''). There is no
assurance, however, that the Fund will achieve its stated objective.
Please read this Prospectus before investing, and keep it on file for
future reference. It contains important information, including how the Fund
invests and the services available to shareholders.
To learn more about the Fund and its investments, investors can obtain a
copy of the Fund's Statement of Additional Information (the ``AI''), dated
February 28, 1997. The SAI has been filed with the Securities and Exchange
Commission (the ``EC'') and is incorporated herein by reference. For a
free copy of this document, call (800) 368-4031.
Unlike other open-end management investment companies (Mutual Funds), the
Fund seeks to achieve its investment objective by investing all of its
investable assets (`Assets'') in the U.S. Bond Index Portfolio (``the
Portfolio') which is a separate fund with an identical investment
objective. The investment performance of the Fund will correspond directly
to the investment performance of the Portfolio. See `Special Information
Concerning Master-Feeder Fund Structure''herein.
Bankers Trust Company (``ankers Trust'') is the investment adviser (the
`Adviser'') of each Portfolio. Shares of the Funds are not deposits or
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obligations of, or guaranteed or endorsed by, or insured by the Federal
Deposit Insurance Corporation, the U.S. government, the Federal Reserve
Board or any other agency, and are subject to investment risk, including
the possible loss of principal amount invested.
LIKE SHARES OF ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Edgewood Services, Inc.
Clearing Operations o P.O. Box 897 o Pittsburgh, Pennsylvania o 15230-0897
TABLE OF CONTENTS
The Fund 3
Who May Want To Invest 3
Investment Principles and Risks 3
Summary of Fund Expenses 4
The Fund in Detail 5
Risk Factors and Certain Securities and Investment Practices 7
Performance Information and Reports 11
Management of the Trust and the Portfolio 12
Net Asset Value 13
Purchase and Redemption of Shares 14
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Dividends, Distributions and Taxes 19
Additional Information 20
THE FUND
The Trust seeks to achieve the investment objective of the Fund by
investing all the Assets of the Fund in the Portfolio.
The U.S. Bond Index Fund seeks to replicate as closely as possible (before
deduction of Expenses) the investment performance of the Lehman Brothers
Aggregate Bond Index (the ``ggregate Bond Index'' or the ``Index''), a
broad market weighted index which encompasses U.S. Treasury and agency
securities, corporate investment grade bonds, international (dollar-
denominated) investment grade bonds, and mortgage-backed securities. The
Fund will be invested primarily in fixed income securities of the U.S.
government or any agency thereof, publicly issued fixed rate domestic debt
of industrial, financial, and utility corporations, and U.S. dollar
denominated fixed income securities of foreign and supranational entities
issued publicly in the United States. The Fund will also invest in mortgage
pass-through securities issued by the Government National Mortgage
Association, the Federal Home Loan Mortgage Corporation, and the Federal
National Mortgage Association. The U.S. Bond Index Fund invests all of its
Assets in the U.S. Bond Index Portfolio.
WHO MAY WANT TO INVEST
Shares of the Fund are offered through this Prospectus to institutional
investors.
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The Portfolio is not managed according to traditional methods of `active''
investment management, which involve the buying and selling of securities
based upon economic, financial and market analysis and investment judgment.
Instead, the Portfolio, utilizing a ``assive'' or ``indexing'' investment
approach, attempts to replicate the investment performance of the index
through statistical procedures.
The Portfolio represents all major sectors of the investment grade fixed-
income securities markets. The Fund may be a suitable investment vehicle
for those investors seeking ownership in the ``ond market'' as a whole,
without regard to particular sectors. The Fund is also suitable for those
investors with common stock holdings who are seeking a complementary fixed-
income investment to create a more balanced asset mix.
The Trust is intended to be a long-term investment vehicle and is not
designated to provide investors with a means of speculating on short-term
market movements. Investors who engage in excessive account activity
generate additional costs which are borne by all the Trust's shareholders.
In order to minimize such costs, the Trust has adopted the following
policies. The Trust reserves the right to reject any purchase request
(including exchange purchases from other BT Advisor Funds) that is
reasonably deemed to be disruptive to efficient portfolio management,
either because of the timing of the investment or previous excessive
trading by the investor. Additionally, the Trust has adopted exchange
privilege limitations as described in the section ``xchange Limitations''
herein. Finally, the Trust reserves the right to suspend the offering of
its shares.
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The Fund is not in itself a balanced investment plan. Investors should
consider their investment objective and tolerance for risk when making an
investment decision. When investors sell their Fund Shares, they may be
worth more or less than what they paid for them.
INVESTMENT PRINCIPLES AND RISKS
The value of the Portfolio's investments varies based on many factors. The
value of bonds fluctuates based on changes in domestic or foreign interest
rates, the credit quality of the issuer, market conditions, and other
economic and political news. In general, bond prices rise when interest
rates fall, and vice versa. This effect is usually more pronounced for
longer-term securities. Lower-quality securities offer higher yields, but
also carry more risk.
When investors sell their Fund Shares, they may be worth more or less than
what they paid for them. See `Risk Factors and Certain Securities and
Investment Practices''herein for more information.
SUMMARY OF FUND EXPENSES
Annual operating expenses are paid out of the assets of the Portfolio and
the Fund. The Portfolio pays an investment advisory fee and an
administrative services fee to Bankers Trust. The Fund incurs expenses such
as maintaining shareholder records and furnishing shareholder statements.
The Fund must provide financial reports.
The following table provides: (i) a summary of expenses relating to
purchases and sales of the Shares of the Fund and the annual operating
expenses of the Fund and expenses of the Portfolio, in the aggregate, as a
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percentage of average daily net assets of the Fund; and (ii) an example
illustrating the dollar cost of such expenses on a $1,000 investment in the
Fund. The Trustees of the Trust believe that the Expenses of the Fund and
expenses of the Portfolio, in the aggregate, will be less than or
approximately equal to the expenses which the Fund would incur if the Trust
retained the services of an investment adviser and the Assets of the Fund
were invested directly in the type of securities being held by the
Portfolio.
Shareholder Transaction Expenses
Maximum Sales Charge on Purchases
(as a percentage of offering price) None
Maximum Sales Charge on Reinvested Distributions None
Redemption Fee None
Exchange Fee None
Shareholder transaction expenses are charges paid when investors buy,
sell, exchange, or hold Shares of the Fund. See `Purchase and Redemption
of Shares''for an explanation of how and when these charges apply.
Annual Operating Expenses
Investment advisory fee (after reimbursements or waiver)
0.10%
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Other expenses (after reimbursements or waivers)
0.15%
Total operating expenses (after reimbursements or waivers)
0.25%
Example:
1 Year 3 Years
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2) redemption
at the end of each time period:
$3 $8
The expense table and the example above show the costs and expenses that an
investor will bear directly or indirectly as a shareholder of the Fund.
Bankers Trust has voluntarily agreed to waive a portion of its investment
advisory fee with respect to the Portfolio. Without such waiver, the
Portfolio's investment advisory fee would be equal to 0.15%. The expense
table and the example reflect a voluntary undertaking by Bankers Trust to
waive or reimburse expenses such that the total operating expenses will not
exceed 0.25% of the Fund's-Institutional Class Shares average net assets
annually. In the absence of this undertaking, it is estimated that for the
fiscal year ending December 31, 1997, ``otal Operating Expenses'' would be
0.55%. The example should not be considered a representation of past or
future expenses and actual expenses may be greater or less than those
shown. Moreover, while the example assumes a 5% annual return, actual
performance will vary and may result in a return greater or less than 5%.
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The Fund is distributed by Edgewood Services, Inc. ("Edgewood" or the
"Distributor") to customers of Bankers Trust or to customers of another
bank or a dealer or other institution that has a sub-shareholder servicing
agreement with Bankers Trust (along with Bankers Trust, a "Service Agent").
Some Service Agents may impose certain conditions on their customers in
addition to or different from those imposed by the Fund and may charge
their customers a direct fee for their services. Each Service Agent has
agreed to transmit to shareholders who are its customers appropriate
disclosures of any fees that it may charge them directly.
Currently, the Fund has issued two classes of Shares. The Fund offers by
separate prospectus another class of Shares. Because the expenses vary
between the classes, performance will vary with respect to each class.
Additional information concerning the Fund's other class of Shares is
available from Bankers Trust, as administrator, at (800) 368-4031.
For more information about the Fund's and the Portfolio's expenses see
``anagement of the Trust and the Portfolio'' herein.
THE FUND IN DETAIL
Investment Objectives and Policies
The Trust seeks to achieve the investment objective of the Fund by
investing all of its Assets in the Portfolio, which has the same investment
objective as the Fund. Since the investment characteristics of the Fund
will correspond directly to those of the Portfolio, the following is a
discussion of the various investments of and techniques employed by the
Portfolio. Additional information about the investment policies of the
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Portfolio appears in `Risk Factors and Certain Securities and Investment
Practices''in this Prospectus and in the Fund's SAI. There can be no
assurance that the investment objective of either the Fund or the Portfolio
will be achieved.
The Portfolio seeks to replicate as closely as possible (before deduction
of Expenses) the investment performance of the Aggregate Bond Index, a
broad market weighted index which encompasses four major classes of
investment grade fixed-income securities in the United States: U.S.
Treasury and agency securities, corporate bonds, international (dollar-
denominated) bonds, and mortgage-backed securities, with maturities greater
than one year.
As of December 31, 1996, the major classes of fixed-income securities
represented the following proportions of the Index's total market value.
Aggregate
Bond Index
U.S. Treasury and agency securities
51%
Corporate bonds
14%
International (dollar-denominated) bonds
4%
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Mortgage-backed securities
29%
Asset Backed Securities
1%
Dollar-weighted average maturity (Years)
8.7 yrs
The Portfolio will be unable to hold all of the individual issues which
comprise the Index because of the large number of securities involved.
Instead, the Portfolio will hold a representative sample of the securities
in the Index, selecting one or two issues to represent entire ``lasses''
or types of securities in the Index. The Portfolio will be constructed so
as to match as closely as possible the composition of the Index by
investing in fixed-income securities approximating their relative
proportion of the Index's total market value.
At the broadest level, the U.S. Bond Index Portfolio will seek to hold
securities and other investments which reflect the weighting of the major
asset classes in the Index. These classes include U.S. Treasury and agency
securities, corporate bonds, and mortgage-backed securities. For example,
if U.S. Treasury and agency securities represent approximately 51% of the
Index's interest rate risk, then approximately 51% of the Portfolio's
interest rate risk will come from such securities and other investments.
Similarly, if corporate bonds represent 20% of the interest rate risk of
the Index, then they will represent approximately 20% of the interest rate
risk of the Portfolio. Such a sampling technique is expected to be an
effective means of substantially replicating the income and capital returns
provided by the Index before deduction of Fund and Portfolio expenses.
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The Portfolio may, from time to time, substitute one type of investment
grade bond for another. For instance, a Portfolio may hold more short-term
corporate bonds (and, in turn, hold fewer short U.S. Treasury bonds) than
represented in the Index so as to increase income. This corporate
substitution strategy will entail the assumption of additional credit risk;
however, substantial diversification within the corporate sector should
moderate issue-specific credit risk. Overall, credit risk is expected to be
very low for the U.S. Bond Index Portfolio.
Fixed-income securities will be primarily of investment grade quality -
i.e., those rated at least Baa by Moody's Investors Service, Inc.
(``oody's'') or BBB- by Standard & Poor's Ratings Group (``S&P'').
Securities rated Baa or BBB possess some speculative characteristics.
The Portfolio may invest in U.S. Treasury bills, notes and bonds and other
``ull faith and credit'' obligations of the U.S. government and in U.S.
government agency securities, which are debt obligations issued or
guaranteed by agencies or instrumentalities of the U.S. government (``.S.
Government Securities''. Such ``agency'' securities may not be backed by
the `full faith and credit'' of the U.S. government. Such U.S. government
agencies may include the Farm Credit Banks, the Resolution Trust
Corporation and the Government National Mortgage Association. Even though
they all carry top (AAA) credit ratings, ``gency'' obligations are not
explicitly guaranteed by the U.S. government and so are perceived as
somewhat riskier than comparable Treasury bonds.
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As a mutual fund investing primarily in fixed-income securities, the
Portfolio is subject to interest rate, income, call and credit risks. Since
the Portfolio also invests in mortgage-backed securities, it is also
subject to prepayment risk. See ``isk Factors and Certain Securities and
Investment Practices.''
For more information about the historical performance of the Aggregate Bond
Index, see the SAI.
General
Over time, the correlation between the performance of the Fund and the
Index is expected to be 0.95 or higher before deduction of Expenses of the
Fund and expenses of the Portfolio. A correlation of 1.00 would indicate
perfect correlation, which would be achieved when the net asset value of
the Fund, including the value of its dividend and any capital gain
distributions, increases or decreases in exact proportion to changes in the
Index. The Fund's ability to track its Index may be affected by, among
other things, transaction costs, administration and other expenses incurred
by the Fund or the Portfolio, changes in either the composition of the
Index or the assets of the Portfolio, and the timing and amount of
Portfolio investor contributions and withdrawals, if any. In the unlikely
event that a high correlation is not achieved, the Trust's Board of
Trustees will consider alternatives. Because the Portfolio seeks to track
the Index, Bankers Trust will not attempt to judge the merits of any
particular stock as an investment.
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Under normal circumstances, the Portfolio will invest at least 80% of its
assets in the securities of its Index.
As a diversified fund, no more than 5% of the assets of the Portfolio may
be invested in the securities of one issuer (other than U.S. Government
Securities), except that up to 25% of the Portfolio's assets may be
invested without regard to this limitation. The Portfolio will not invest
more than 25% of its assets in the securities of issuers in any one
industry. These are fundamental investment policies of the Portfolio which
may not be changed without investor approval. No more than 15% of the
Portfolio's net assets may be invested in illiquid or not readily
marketable securities (including repurchase agreements and time deposits
maturing in more than seven days). Additional investment policies of the
Portfolio are contained in the SAI.
The Portfolio may maintain up to 25% of its assets in short-term debt
securities and money market instruments to meet redemption requests or to
facilitate investment in the securities of the Index. Securities index
futures contracts and related options, warrants, convertible securities and
swap agreements may be used for several reasons: to simulate full
investment in the underlying Index while retaining a cash balance for fund
management purposes, to facilitate trading, or to reduce transaction costs
or to seek higher investment returns when a futures contract, option,
warrant, convertible security or swap agreement is priced more attractively
than the underlying equity security or Index. These instruments may be
considered derivatives. See ``isk Factors and Certain Securities and
Investment Practices''herein.
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The use of derivatives for non-hedging purposes may be considered
speculative. While each of these securities can be used as leveraged
investments, the Portfolio may not use them to leverage its net assets. The
Portfolio will not invest in such instruments as part of a temporary
defensive strategy (such as altering the aggregate maturity of the
Portfolio) to protect the Portfolio against potential market declines.
The Portfolio may lend its investment securities and purchase securities on
a when-issued and a delayed delivery basis. The Portfolio may also invest
in mortgage-related and other asset-backed securities. See `Risk Factors
and Certain Securities and Investment Practices''herein and in the SAI for
more information about the investment practices of the Portfolio.
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of
instruments in which the Portfolio may invest and strategies Bankers Trust
may employ in pursuit of the Portfolio's investment objective. A summary of
risks and restrictions associated with these instrument types and
investment practices is included as well.
Bankers Trust may not buy all of these instruments or use all of these
techniques to the full extent permitted unless it believes that doing so
will help the Portfolio achieve its goal. Holdings and recent investment
strategies are described in the financial reports of the Fund and the
Portfolio, which are sent to Fund shareholders twice a year. For a free SAI
or financial report, call your Service Agent or Bankers Trust.
Fixed Income Security Risk
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Investors in the Fund are exposed to four types of risk from fixed income
securities: (1) Interest rate risk is the potential for fluctuations in
bond prices due to changing interest rates; (2) Income risk is the
potential for a decline in a Portfolio's income due to falling market
interest rates; (3) Credit risk is the possibility that a bond issuer will
fail to make timely payments of either interest or principal to the
Portfolio; and (4) Prepayment risk or call risk is the likelihood that,
during periods of falling interest rates, securities with high stated
interest rates will be prepaid (or ``alled'') prior to maturity, requiring
the Portfolio to invest the proceeds at generally lower interest rates.
Special Information Concerning Master-Feeder Fund Structure
Unlike other open-end management investment companies (mutual funds) which
directly acquire and manage their own portfolio securities, the Fund seeks
to achieve its investment objective by investing all of its Assets in the
Portfolio, a separate registered investment company with the same
investment objectives as the Fund. Therefore, an investor's interest in the
Portfolio's securities is indirect, like investments in other investment
companies and pooled investment vehicles. In addition to selling a
beneficial interest to the Fund, the Portfolio may sell beneficial
interests to other mutual funds or institutional investors. Such investors
will invest in the Portfolio on the same terms and conditions and will pay
a proportionate share of the Portfolio's expenses. However, the other
investors investing in the Portfolio are not required to sell their shares
at the same public offering price as the Fund due to variations in sales
commissions and other operating expenses. Therefore, investors in the Fund
should be aware that these differences may result in differences in returns
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experienced by investors in the different funds that invest in the
Portfolio. Such differences in returns are also present in other mutual
fund structures. Information concerning other holders of interests in the
Portfolio is available from Bankers Trust, as the Administrator, at (800)
368-4031.
The master-feeder structure is relatively complex, so shareholders should
carefully consider this investment approach.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large
fund withdraws from the Portfolio, the remaining funds may experience
higher pro rata operating expenses, thereby producing lower returns
(however, this possibility exists as well for traditionally structured
funds which have large institutional investors). Additionally, the
Portfolio may become less diverse, resulting in increased portfolio risk.
Also, funds with a greater pro rata ownership in the Portfolio could have
effective voting control of the operations of the Portfolio. Except as
permitted by the SEC, whenever the Trust is requested to vote on matters
pertaining to the Portfolio, the Trust will hold a meeting of shareholders
of the Fund and will cast all of its votes in the same proportion as the
votes of the Fund's shareholders. Fund shareholders who do not vote will
not affect the Trust's votes at the Portfolio meeting. The percentage of
the Trust's votes representing Fund shareholders not voting will be voted
by the Trustees or officers of the Trust in the same proportion as the Fund
shareholders who do, in fact, vote. Certain changes in the Portfolio's
investment objectives, policies or restrictions may require the Fund to
withdraw its interest in the Portfolio. Any such withdrawal could result in
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a distribution `in kind'' of portfolio securities (as opposed to a cash
distribution from the Portfolio). If securities are distributed, the Fund
could incur brokerage, tax or other charges in converting the securities to
cash. In addition, the distribution in kind may result in a less
diversified portfolio of investments or adversely affect the liquidity of
the Fund. Notwithstanding the above, there are other means for meeting
redemption requests, such as borrowing.
The Fund may withdraw its investment from the Portfolio at any time, if the
Board of Trustees of the Trust determines that it is in the best interests
of the shareholders of the Fund to do so. Upon any such withdrawal, the
Board of Trustees of the Trust would consider what action might be taken,
including the investment of all the Assets of the Fund in another pooled
investment entity having the same investment objectives as the Fund or the
retaining of an investment adviser to manage the Fund's Assets in
accordance with the investment policies described herein with respect to
the corresponding Portfolio.
The Fund's investment objective is not a fundamental policy and may be
changed upon notice to but without the approval of the Fund's shareholders.
If there is a change in the Fund's investment objective, the Fund's
shareholders should consider whether the Fund remains an appropriate
investment in light of their then-current needs. The investment objective
of the Portfolio is also not a fundamental policy. Shareholders of the Fund
will receive 30 days prior written notice with respect to any change in the
investment objective of the Fund or the Portfolio. See ``isk Factors and
Certain Securities and Investment Practices''in the SAI for a description
of the fundamental policies of the Portfolio that cannot be changed without
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approval by `the vote of a majority of the outstanding voting securities''
(as defined in the Investment Company Act of 1940, as amended (the `1940
Act'') of the Portfolio.
For descriptions of the investment objective, policies and restrictions of
the Portfolio, see `The Fund in Detail'' herein and ``Risk Factors and
Certain Securities and Investment Practices''herein and in the SAI. For
descriptions of the management and expenses of the Trust and the Portfolio,
see ``anagement of the Trust and the Portfolio'' herein and in the SAI.
SECURITIES AND INVESTMENT PRACTICES
Short-Term Investments. The Portfolio may invest in certain short-term
fixed income securities. Such securities may be used to invest uncommitted
cash balances, to maintain liquidity to meet shareholder redemptions or to
serve as collateral for the obligations underlying the Portfolio's
investment in securities index futures or related options or warrants.
These securities include: obligations issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities or by any of the
states, repurchase agreements, time deposits, certificates of deposit,
bankers' acceptances and commercial paper.
U.S. Government Securities Some U.S. Government Securities, such as
Treasury bills, notes and bonds, are supported by the full faith and credit
of the United States; others, such as those of the Federal Home Loan Banks,
are supported by the right of the issuer to borrow from the Treasury;
others, such as those of the Federal National Mortgage Association, are
supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others, such as those of the Student
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Loan Marketing Association, are supported only by the credit of the
instrumentality.
Securities Lending. The Portfolio may lend its investment securities to
qualified institutional investors for either short-term or long-term
purposes of realizing additional income. Loans of securities by the
Portfolio will be collateralized by cash, letters of credit, or securities
issued or guaranteed by the U.S. government or its agencies. The collateral
will equal at least 100% of the current market value of the loaned
securities, and such loans may not exceed 30% of the value of the
Portfolio's net assets. The risks in lending portfolio securities, as with
other extensions of credit, consist of possible loss of rights in the
collateral should the borrower fail financially. In determining whether to
lend securities, Bankers Trust will consider all relevant facts and
circumstances, including the creditworthiness of the borrower.
When Issues Are Delayed Delivery Securities. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and
payment for these securities may take place as long as a month or more
after the date of the purchase commitment. The value of these securities is
subject to market fluctuation during this period and no income accrues to
the Portfolio until settlement takes place. The Portfolio segregates with
the Custodian liquid securities in an amount at least equal to these
commitments.
Mortgage-Related Securities. As part of its effort to replicate the
investment performance of its Index, the Portfolio may invest in mortgage-
backed securities. Mortgage-backed securities represent an interest in an
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underlying pool of mortgages. Unlike ordinary fixed-income securities,
which generally pay a fixed rate of interest and return principal upon
maturity, mortgage-backed securities repay both interest income and
principal as part of their periodic payments. Because the mortgages
underlying mortgage-backed certificates can be prepaid at any time by
homeowners or corporate borrowers, mortgage-backed securities give rise to
certain unique ``re-payment'' risks. See ``Risk Factors and Certain
Securities and Investment Practices.''
The Portfolio may purchase mortgage-backed securities issued by the
Government National Mortgage Association (GNMA), the Federal Home Loan
Mortgage Corporation (FHLMC), the Federal National Mortgage Association
(FNMA), and the Federal Housing Authority (FHA). GNMA securities are
guaranteed by the U.S. government as to the timely payment of principal and
interest; securities from other Government-sponsored entities are generally
not secured by an explicit pledge of the U.S. government. The Portfolio may
also invest in conventional mortgage securities, which are packaged by
private corporations and are not guaranteed by the U.S. government.
Mortgage securities that are guaranteed by the U.S. government are
guaranteed only as to the timely payment of principal and interest. The
market value of such securities is not guaranteed and may fluctuate.
Derivatives
The Portfolio may invest in various instruments that are commonly known as
`derivatives.'' Generally, a derivative is a financial arrangement, the
value of which is based on, or ``erived'' from, a traditional security,
asset, or market index. Some `derivatives'' such as mortgage-related and
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other asset-backed securities are in many respects like any other
investment, although they may be more volatile or less liquid than more
traditional debt securities. There are, in fact, many different types of
derivatives and many different ways to use them. There are a range of risks
associated with those uses. Futures and options are commonly used for
traditional hedging purposes to attempt to protect a fund from exposure to
changing interest rates, securities prices, or currency exchange rates and
as a low cost method of gaining exposure to a particular securities market
without investing directly in those securities. Derivatives will not be
used to increase portfolio risk above the level that could be achieved
using only traditional investment securities or to acquire exposure to
changes in the value of assets or indices that by themselves would not be
purchased for the Portfolio.
Securities Index Futures and Related Options. The Portfolio may enter into
securities index futures contracts and related options provided that not
more than 5% of its assets are required as a margin deposit for futures
contracts or options and provided that not more than 20% of the Portfolio's
assets are invested in futures and options at any time. When the Portfolio
has cash from new investments in the Portfolio or holds a portion of its
assets in money market instruments, it may enter into index futures or
options to attempt to increase its exposure to the market. Strategies the
Portfolio could use to accomplish this include purchasing futures
contracts, writing put options, and purchasing call options. When the
Portfolio wishes to sell securities, because of shareholder redemptions or
otherwise, it may use index futures or options to hedge against market risk
until the sale can be completed. These strategies could include selling
futures contracts, writing call options, and purchasing put options.
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Swap Agreements. The Portfolio may enter into swap agreements only to the
extent that obligations under such agreements represent not more than 10%
of the Portfolio's total assets. Swap agreements are contracts between
parties in which one party agrees to make payments to the other party based
on the change in market value of a specified index or asset. In return, the
other party agrees to make payments to the first party based on the return
of a different specified index or asset.
Although swap agreements entail the risk that a party will default on its
payment obligations thereunder, the Portfolio will minimize this risk by
entering into agreements that mark to market no less frequently than
quarterly. Swap agreements also bear the risk that the Portfolio will not
be able to meet its obligation to the counterparty. This risk will be
mitigated by investing the Portfolio in the specific asset for which it is
obligated to pay a return.
Warrants. The Portfolio's investment in warrants will not exceed more than
5% of its assets (2% with respect to warrants not listed on the New York or
American Stock Exchanges). Warrants are instruments which entitle the
holder to buy underlying equity securities at a specific price for a
specific period of time. A warrant tends to be more volatile than its
underlying securities and ceases to have value if it is not exercised prior
to its expiration date. In addition, changes in the value of a warrant do
not necessarily correspond to changes in the value of its underlying
securities.
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Convertible Securities. The Portfolio may invest in convertible securities
which are a bond or preferred stock which may be converted at a stated
price within a specific period of time into a specified number of shares of
common stock of the same or different issuer. Convertible securities are
senior to common stock in a corporation's capital structure, but usually
are subordinated to non-convertible debt securities. While providing a
fixed income stream -- generally higher in yield than in the income derived
from a common stock but lower than that afforded by a non-convertible debt
security -- a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation of common stock into which it is convertible.
In general, the market value of a convertible security is the higher of its
investment value (its value as a fixed income security) or its conversion
value (the value of the underlying shares of common stock if the security
is converted). As a fixed income security, the market value of a
convertible security generally increases when interest rates decline and
generally decreases when interest rates rise; however, the price of a
convertible security generally increases as the market value of the
underlying stock increases, and generally decreases as the market value of
the underlying stock declines. Investments in convertible securities
generally entail less risk than investments in the common stock of the same
issuer.
Further risks associated with the use of futures contracts, options,
warrants, convertible securities and swap agreements. The risk of loss
associated with futures contracts in some strategies can be substantial due
to both the low margin deposits required and the extremely high degree of
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leverage involved in futures pricing. As a result, a relatively small price
movement in a futures contract may result in an immediate and substantial
loss or gain. However, the Portfolio will not use futures contracts,
options, warrants, convertible securities and swap agreements for
speculative purposes or to leverage their net assets. Accordingly, the
primary risks associated with the use of futures contracts, options,
warrants, convertible securities and swap agreements by the Portfolio are:
(i) imperfect correlation between the change in market value of the
securities held by the Portfolio and the prices of futures contracts,
options, warrants, convertible securities and swap agreements; and (ii)
possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures position prior to its maturity date.
The risk of imperfect correlation will be minimized by investing only in
those contracts whose behavior is expected to resemble that of the
Portfolio's underlying securities. The risk that the Portfolio will be
unable to close out a futures position will be minimized by entering into
stock transactions on an exchange with an active and liquid secondary
market. However options, warrants, convertible securities and swap
agreements purchased or sold over-the-counter may be less liquid than
exchange-traded securities. Illiquid securities, in general, may not
represent more than 15% of the net assets of the Portfolio.
Asset Coverage. To assure that the Portfolio's use of futures and related
options, as well as when-issued and delayed-delivery securities, interest
rate swaps and foreign currency forward futures and related options
transactions are not used to achieve excessive investment leverage, the
Portfolio will cover such transactions, as required under applicable
interpretations of the SEC, either by owning the underlying securities,
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entering into an off-setting transaction, or by segregating with the
Portfolio's Custodian liquid securities in an amount at all times equal to
or exceeding the Portfolio's commitment with respect to these instruments
or contracts.
Portfolio Turnover
The frequency of Portfolio transactions-the Portfolio's portfolio turnover
rate-will vary from year to year depending on market conditions and the
Portfolio's cash flows. The Portfolio's annual portfolio turnover rate is
not expected to exceed 100%.
PERFORMANCE
Performance
The Portfolio's recent strategies and holdings, and the Fund's performance,
is detailed twice a year in the Fund's financial reports, which are sent to
Fund shareholders.
For current Fund performance or a free copy of the Fund's financial report,
please contact your Service Agent or Bankers Trust.
Mutual fund performance is commonly measured as total return and/or yield.
The Fund's performance is affected by the expenses of the Fund.
Explanation of Terms
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Total return is the change in value of an investment in the Fund over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative total return reflects actual performance over a stated period of
time. An average annual total return is a hypothetical rate of return that,
if achieved annually, would have produced the same cumulative total return
if performance had been constant over the entire period. Average annual
total return calculations smooth out variations in performance; they are
not the same as actual year-by-year results. Average annual total returns
covering periods of less than one year assume that performance will remain
constant for the rest of the year.
Yield refers to the income generated by an investment in a Fund over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all stock and bond
funds. Because this differs from other accounting methods, the quoted yield
may not equal the income actually paid to shareholders.
Performance information may include comparisons of the Fund's investment
results to various unmanaged indices or results of other mutual funds or
investment or savings vehicles. From time to time, Fund rankings may be
quoted from various sources, such as Lipper Analytical Services, Inc.,
Value Line and Morningstar, Inc.
Unlike some bank deposits or other investments which pay a fixed yield for
a stated period of time, the total return of the Fund will vary depending
upon interest rates, the current market value of the securities held by the
Portfolio and changes in the expenses of the Fund or Portfolio. In
addition, during certain periods for which total return may be provided,
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Bankers Trust may have voluntarily agreed to waive portions of their fees,
or reimburse certain operating expenses of the Fund or the Portfolio, on a
month-to-month basis. Such waivers will have the effect of increasing the
Fund's net income (and therefore its yield and total return) during the
period such waivers are in effect.
Total returns and yields are based on past results and are not an
indication of future performance.
MANAGEMENT OF THE TRUST AND THE PORTFOLIOS BOARD OF TRUSTEES
Board of Trustees
The Trust and each Portfolio is governed by a Board of Trustees which is
responsible for protecting the interests of investors. A majority of the
Trustees who are not ``nterested persons'' (as defined in the 1940 Act) of
the Trust or the Portfolio, as the case may be, have adopted written
procedures reasonably appropriate to deal with potential conflicts of
interest arising from the fact that some of the same individuals are
Trustees of the Trust and the Portfolios, up to and including creating
separate boards of trustees. See ``anagement of the Trusts and the
Portfolios''in the SAI for more information with respect to the Trustees
and officers of the Trust and each Portfolio.
Investment Adviser
The Trust has not retained the services of an investment adviser since the
Trust seeks to achieve the investment objective of each of its Funds by
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investing all the Assets of the Fund in the corresponding Portfolio. Each
Portfolio has retained the services of Bankers Trust as investment adviser.
Bankers Trust Company and Its Affiliates
Bankers Trust Company, a New York banking corporation with principal
offices at 280 Park Avenue, New York, New York 10017, is a wholly owned
subsidiary of Bankers Trust New York Corporation. Bankers Trust conducts a
variety of general banking and trust activities and is a major wholesale
supplier of financial services to the international and domestic
institutional market.
As of December 31, 1996, Bankers Trust New York Corporation was the seventh
largest bank holding company in the United States with total assets of
approximately $120 billion. Bankers Trust is a worldwide merchant bank
dedicated to servicing the needs of corporations, governments, financial
institutions and private clients through a global network of over 120
offices in more than 40 countries. Investment management is a core business
of Bankers Trust, built on a tradition of excellence from its roots as a
trust bank founded in 1903. The scope of Bankers Trust's investment
management capability is unique due to its leadership positions in both
active and passive quantitative management and its presence in major equity
and fixed income markets around the world. Bankers Trust is one of the
nation's largest and most experienced investment managers with
approximately $227 billion in assets under management globally. Of that
total, approximately $92 billion are in U.S. equity index assets alone.
This makes Bankers Trust one of the nation's leading managers of index
funds.
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Bankers Trust has more than 50 years of experience managing retirement
assets for the nation's largest corporations and institutions. In the past,
these clients have been serviced through separate account and commingled
fund structures. Now, the BT Family of Funds brings Bankers Trust's
extensive investment management expertise - once available to only the
largest institutions in the U.S. - to individual investors. Bankers Trust's
officers have had extensive experience in managing investment portfolios
having objectives similar to those of the Portfolio.
Bankers Trust, subject to the supervision and direction of the Board of
Trustees of the Portfolio, manages the Portfolio in accordance with the
Portfolio's investment objective and stated investment policies, makes
investment decisions for the Portfolio, places orders to purchase and sell
securities and other financial instruments on behalf of the Portfolio and
employs professional investment managers and securities analysts who
provide research services to the Portfolio. Bankers Trust may utilize the
expertise of any of its world wide subsidiaries and affiliates to assist it
in its role as investment adviser. All orders for investment transactions
on behalf of the Portfolio are placed by Bankers Trust with broker-dealers
and other financial intermediaries that it selects, including those
affiliated with Bankers Trust. A Bankers Trust affiliate will be used in
connection with a purchase or sale of an investment for the Portfolio only
if Bankers Trust believes that the affiliate's charge for the transaction
does not exceed usual and customary levels. The Portfolio will not invest
in obligations for which Bankers Trust or any of its affiliates is the
ultimate obligor or accepting bank. The Portfolio may, however, invest in
the obligations of correspondents and customers of Bankers Trust.
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The Investment Advisory Agreement provides for the Portfolio to pay Bankers
Trust a fee from the Portfolio, accrued daily and paid monthly, equal on an
annual basis to 0.15% of the average daily net assets of the Portfolio for
its then-current fiscal year.
Bankers Trust has been advised by its counsel that, in counsel's opinion,
Bankers Trust currently may perform the services for the Trust and the
Portfolio described in this Prospectus and the SAI without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. State
laws on this issue may differ from the interpretations of relevant Federal
law, and banks and financial institutions may be required to register as
dealers pursuant to state securities law.
Bankers Trust investment personnel may invest in securities for their own
account pursuant to a code of ethics that establishes procedures for
personal investing and restricts certain transactions.
Portfolio Manager
Louis R. D'Arienzo, Vice President of Bankers Trust, is responsible for the
day-to-day management of the U.S. Bond Index Portfolio. Mr. D'Arienzo has
been employed by Bankers Trust since 1981 and has twelve years trading and
investment experience in fixed income securities.
Administrator
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Under its Administration and Services Agreement with the Trust, Bankers
Trust calculates the net asset value of the Fund and generally assists the
Board of Trustees of the Trust in all aspects of the administration and
operation of the Fund. The Administration and Services Agreement provides
for the respective Trust to pay Bankers Trust a fee, accrued daily and paid
monthly equal on an annual basis to 0.20% of the average daily net assets
of the Fund, attributable to the Class, for its then-current fiscal year.
Under an Administration and Services Agreement with the Portfolio, Bankers
Trust calculates the value of the assets of the Portfolio and generally
assists the Board of Trustees in all aspects of the administration and
operation of the Portfolio. The Administration and Services Agreement
provides for the Portfolio to pay Bankers Trust a fee, accrued daily and
paid monthly, equal on an annual basis to 0.05% of the Portfolio's average
daily net assets for its then-current fiscal year. Under the Administration
and Services Agreement, Bankers Trust may delegate one or more of its
responsibilities to others, including affiliates of Edgewood, at Bankers
Trust's expense.
Distributor
Edgewood Services, Inc. is the principal distributor for Shares of the
Fund. In addition, Edgewood and its affiliates provide the Trust with
office facilities and currently provide administration and distribution
services for other registered investment companies. The principal business
address of Edgewood and its affiliates is Clearing Operations, P.O. Box
897, Pittsburgh, Pennsylvania 15230-0897.
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Custodian and Transfer Agent
Bankers Trust acts as custodian of the assets of the Trust and Portfolio
and serves as the transfer agent (the ``ransfer Agent'') for the Trust and
Portfolio under the Administration and Services Agreement with the Trust
and Portfolio.
Net Asset Value
The Fund is open for business each day the New York Stock Exchange, Inc.
(the ``YSE'') is open( a ``Valuation Day''). The Fund's NAV is calculated
as of the close of regular trading on the NYSE, currently 4:00 p.m. Eastern
time (``aluation Time).
The Fund's NAV per share is the value of a single Share. The NAV per share
of the Fund is computed by dividing the value of the Fund's Assets (i.e.,
the value of its investment in the Portfolio and other assets), less all
liabilities, allocable to the Institutional Class Shares by the total
number of its Shares outstanding. The Portfolio's securities and other
assets are valued primarily on the basis of market quotations or, if
quotations are not readily available, by Bankers Trust pursuant to
procedures adopted by the Portfolio's Board of Trustees. These procedures
require Bankers Trust to value such a security at the same value as an
equivalent security which is readily marketable and, in making such
comparisons, to consider all relevant factors under applicable guidelines
of the SEC.
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Under procedures adopted by the Board, a NAV for a Fund later determined to
have been inaccurate for any reason will be recalculated. Purchases and
redemptions made at NAV determined to have been inaccurate will be
adjusted, although in certain circumstances, such as where the difference
between the original NAV and the recalculated NAV divided by the
recalculated NAV is 0.005 (1/2 of 1%) or less or shareholder transactions
are otherwise insubstantially affected, further action is not required.
PURCHASE AND REDEMPTION OF SHARES
How To Buy Shares
The Trust accepts purchase orders for shares of the Fund at the NAV per
share next determined after the order is received on each Valuation Day.
See ``et Asset Value'' herein. Shares of the Fund may be available through
Investment Professionals, such as broker/dealers and investment advisers
(including service agents).
Purchase orders for shares of the Fund (including those purchased through a
Service Agent) that are transmitted to the Trust's Transfer Agent (the
``ransfer Agent''), prior to the Valuation Time on any Valuation Day will
be effective at that day's Valuation Time. The Trust and Transfer Agent
reserve the right to reject any purchase order.
Shares must be purchased in accordance with procedures established by the
Transfer Agent and each Service Agent. It is the responsibility of each
Service Agent to transmit to the Transfer Agent purchase and redemption
orders and to transmit to Bankers Trust as the Trust's custodian (the
`Custodian'') purchase payments by the following business day (trade date
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+ 1) after an order for shares is placed. A shareholder must settle with
the Service Agent for his or her entitlement to an effective purchase or
redemption order as of a particular time. Because Bankers Trust is the
Custodian and Transfer Agent of the Trust, funds may be transferred
directly from or to a customer's account held with Bankers Trust to settle
transactions with the Fund without incurring the additional costs or delays
associated with the wiring of Federal funds.
Certificates for shares will not be issued. Each shareholder's account
will be maintained by a Service Agent or Transfer Agent.
If orders are placed through an Investment Professional, it is the
responsibility of the Investment Professional to transmit the order to buy
shares of each class to the Transfer Agent before 4:00 p.m. Eastern time.
The Transfer Agent must receive payment within one business day after an
order for shares is placed; otherwise, the purchase order may be canceled
and the investor could be held liable for resulting fees and/or losses.
Minimum Investments
To Open an Account $5 million
To Add to an Account No minimum
Minimum Balance $1 million
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If you are new to BT Advisor Funds, complete and sign an account
application and mail it along with your check to the address listed below.
If there is no account application accompanying this Prospectus, call the
BT Service Center at 1-800-368-4031.
BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
Overnight mailings:
BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
If you already have money invested in a fund in the BT Family of Funds, you
can:
o Mail an account application with a check,
o Wire money into your account,
o Open an account by exchanging from another fund in the BT Family of
Funds, or
o Contact your Service Agent or Investment Professional.
If you are investing through a tax-sheltered retirement plan, such as an
IRA, for the first time, you will need a special application. Contact your
Investment Professional for more information and a retirement account
application.
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Additional Information About Buying Shares
To Open an Account To Add to an Account
By Wire Call the BT Service Center at Call your Investment
Professional or wire
1-800-368-4031 to receive additional investment to:
wire instructions for account
establishment.
Routing No.: 021001033
Attn: Bankers Trust/IFTC Deposit
DDA No.: 00-226-296
FBO: (Account name)
(Account number)
Credit: Fund Number
U.S. Bond Index Fund - 511
Specify the complete name of the Fund of
your choice, and include your account num-
ber and your name.
By Phone Contact your Service Agent, Contact your Service Agent,
Investment Professional, or call Investment Professional, or
call
BT's Service Center at 1-800-368-4031. BT's Service Center at 1-800-
368-4031.
If you are an existing shareholder, If you are an
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you may exchange from another BT existing shareholder, you may
account with the same registration, exchange from another BT
account
including, name, address, and taxpayer with the same registration,
including,
ID number. name, address, and taxpayer ID
number.
By Mail Complete and sign the account appli- Make your check payable
to the complete
cation. Make your check payable to name of the Fund of your
choice. Indicate
the complete name of the Fund of your Fund account number on your
check
your choice. Mail to the appropriate and mail to the address
printed on your
address indicated on the application. account statement.
How to Sell Shares
You can arrange to take money out of your Fund account at any time by
selling (redeeming) some or all of your shares. Your shares shall be sold
at the next NAV calculated after an order is received by the Transfer
Agent. Redemption requests should be transmitted by customers in accordance
with procedures established by the Transfer Agent and the Shareholder's
Service Agent. Redemption requests for shares of the Fund received by the
Service Agent and transmitted to the Transfer Agent prior to the Valuation
Time on each Valuation Day will be effective at that day's Valuation Time
i
and the redemption proceeds normally will be delivered to the shareholder's
account the next day, but in any event within seven calendar days following
receipt of the request.
Service Agents may allow redemptions or exchanges by telephone and may
disclaim liability for following instructions communicated by telephone
that the Service Agent reasonably believes to be genuine. The Service Agent
must provide the investor with an opportunity to choose whether or not to
utilize the telephone redemption or exchange privilege. The Transfer Agent
and the Service Agent must employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. If the Shareholder
Servicing Agent does not do so, it may be liable for any losses due to
unauthorized or fraudulent instructions. Such procedures may include, among
others, requiring some form of personal identification prior to acting upon
instructions received by telephone, providing written confirmation of such
transactions and/or tape recording of telephone instructions.
Redemption orders are processed without charge by the Trust. A Service
Agent may on at least 30 days' notice involuntarily redeem a shareholder's
account with the Fund having a balance below the minimum, but not if an
account is below the minimum due to a change in market value. See ``inimum
Investments''above for minimum balance amounts.
To sell Shares in a retirement account, your request must be made in
writing, except for exchanges to other eligible funds in the BT Family of
Funds, which can be requested by phone or in writing. For information on
retirement distributions, contact your Service Agent or call the BT Service
Center at 1-800-368-4031.
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If you are selling some but not all of your non-retirement account shares,
leave at least $1,000 worth of shares in the account to keep it open.
To sell shares by bank wire you will need to sign up for these services in
advance when completing your account application.
Certain requests must include a signature guarantee to protect you and
Bankers Trust from fraud. Redemption requests in writing must include a
signature guarantee if any of the following situations apply:
o Your account registration has changed within the last 30 days,
o The check is being mailed to a different address than the one on your
account (record address),
o The check is being made payable to someone other than the account
owner,
o The redemption proceeds are being transferred to a BT account with a
different registration, or
o You wish to have redemption proceeds wired to a non-predesignated bank
account.
A signature guarantee is also required if you change the pre-designated
bank information for receiving redemption proceeds on your account.
You should be able to obtain a signature guarantee from a bank, broker,
dealer, credit union (if authorized under state law), securities exchange
or association, clearing agency, or savings association. A notary public
cannot provide a signature guarantee.
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Additional Information About Selling Shares
By Wire - You must sign up for the wire feature before using it. To verify
that it is in place, call 1-800-368-4031. Minimum wire: $1,000. Your wire
redemption request must be received by the Transfer Agent before 4:00 p.m.
Eastern time for money to be wired on the next business day.
In Writing - Write a signed ``etter of instruction'' with your name, the
Fund's name and Fund's number, your Fund account number, the dollar amount
or number of Shares to be redeemed, and mail to one of the following
addresses:
BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
Overnight mailings:
BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
For Trust accounts, the trustee must sign the letter indicating capacity as
trustee. If the trustee's name is not on the account registration, provide
a copy of the trust document certified within the last 60 days.
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For a Business or Organization account, at least one person authorized by
corporate resolution to act on the account must sign the letter.
Unless otherwise instructed, the Transfer Agent will send a check to the
account address of record. The Trust reserves the right to close investor
accounts via 30 day notice in writing if the Fund account balance falls
below the Fund minimums.
Investor Services
BT Advisor Funds provide a variety of services to help you manage your
account.
Information Services
Statements and reports that your Investment Professional or the Transfer
Agent may send to you include the following:
o Confirmation statements (after every transaction that affects your
account balance, including distributions or your account registration)
o Account statements (monthly)
o Financial reports (every six months)
To reduce expenses, only one copy of most financial reports will be mailed,
even if you have more than one account in the Fund. Call your Investment
Professional or the BT Service Center at 1-800-368-4031 if you need
additional copies of financial reports.
Exchange Privilege
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Shareholders may exchange their shares for shares of certain other funds in
the BT Family of Funds registered in their state. The Fund reserves the
right to terminate or modify the exchange privilege in the future. To make
an exchange, follow the procedures indicated in ``ow to Purchase Shares''
and ``ow to Redeem Shares'' herein. Before making an exchange, please note
the following:
o Call your Service Agent for information and a prospectus. Read the
prospectus for relevant information.
o Complete and sign an application, taking care to register your new
account in the same name, address and taxpayer identification number as
your existing account(s).
o Each exchange represents the sale of shares of one fund and the
purchase of shares of another, which may produce a gain or loss for tax
purposes. Your Service Agent will receive a written confirmation of each
exchange transaction.
Note that exchanges out of a Fund may be limited to four per calendar year
and that they may have tax consequences for you.
o Because excessive trading can hurt Fund performance and shareholders,
the Fund reserves the right to temporarily or permanently terminate the
exchange privilege of any investor who makes more than four exchanges out
of the Fund per calendar year. Accounts under common ownership or control,
i
including accounts with the same taxpayer identification number, will be
counted together for purposes of the four exchange limit.
o The Fund reserves the right to refuse exchange purchases by any person
or group if, in Bankers Trust's judgment, the Fund would be unable to
invest the money effectively in accordance with its investment objective
and policies, or would otherwise potentially be adversely affected.
o Exchanges may be restricted or refused if the Fund receives or
anticipates simultaneous orders affecting significant portions of the
Fund's assets. In particular, a pattern of exchanges that coincide with a
``arket timing'' strategy may be disruptive to the Fund.
Systematic Programs
To move money from your bank account to BT Advisor Funds
Minimum Minimum Frequency
Setting up or changing
Initial Subsequent
$1,000 $100 Monthly, bimonthly, For a new account, complete the
appropriate section
quarterly or semi- on the
application.
annually
For existing accounts, call your Investment
i
Professional for an application.
To change the amount or frequency of your
investment, contact your Investment
Professional directly or call 1-800-368-4031.
Call at least 10 business days prior to your next
scheduled investment date.
Systematic Withdrawal Program lets you set up periodic redemptions from
your account.
Minimum Frequency
Setting up or changing
$100 Monthly, quarterly, semi-annually or To
establish, call your Investment Professional or call
annually
1-800-368-4031 after your account is open. The
accounts from which the withdrawals be processed
must have a minimum balance of $10,000.
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Tax-Saving Retirement Plans
Retirement plans offer significant tax savings and are available to
individuals, partnerships, small businesses, corporations, nonprofit
organizations and other institutions. Contact Bankers Trust for further
information. Bankers Trust can set up your new account in the Fund under a
number of several tax-savings or tax-deferred plans. Minimums may differ
from those listed elsewhere in this Prospectus.
o Individual Retirement Accounts (IRAs): personal savings plans that
offer tax advantages for individuals to set aside money for retirement and
allow new contributions of $2,000 per tax year.
o Rollover IRAs: tax-deferred retirement accounts that retain the
special tax advantages of lump sum distributions from qualified retirement
plans and transferred IRA accounts.
o Simplified Employee Pension Plans (SEP): a relatively easy and
inexpensive alternative to retirement planning for sole proprietors,
partnerships and corporations. Under a SEP, employers make tax-deductible
contributions to their own and to eligible employees' IRA accounts.
Employee contributions are available through a `Salary Deferral'' SEP for
businesses with fewer than 25 eligible employees.
o Keogh Plans: defined contribution plans available to individuals with
self-employed income and nonincorporated businesses such as sole
proprietors, professionals and partnerships. Contributions are tax-
i
deductible to the employer and earnings are tax-sheltered until
distribution.
o Corporate Profit-Sharing and Money-Purchase Plans: defined
contribution plans available to corporations to benefit their employees by
making contributions on their behalf and in some cases permitting their
employees to make contributions.
o 401(k) Programs: defined contribution plans available to corporations
allowing tax-deductible employer contributions and permitting employees to
contribute a percentage of their wages on a tax-deferred basis.
o 403(b) Custodian Accounts: defined contribution plans open to
employees of most non-profit organizations and educational institutions.
o Deferred Benefit Plans: plan sponsors may invest all or part of their
pension assets in the Fund.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
The Fund distributes substantially all of its net income and capital gains
to shareholders each year. Normally, income dividends and capital gains are
distributed annually.
The Fund intends to qualify as a regulated investment company, as defined
in the Internal Revenue Code of 1986, as amended (the `Code''). Provided
the Fund meets the requirements imposed by the Code, the Fund will not pay
any Federal income or excise taxes. Dividends paid by the Fund from its
i
taxable net investment income and distribution by the Fund of its net
realized short-term capital gains are taxable to shareholders as ordinary
income, whether received in cash or reinvested in additional shares of the
Fund. The Funds dividends and distributions will not qualify for the
dividends-received deduction for corporations.
Distribution Options
When you open an account, specify on your account application how you want
to receive distributions. The Trust offers four options:
1. Reinvestment Option. Your dividend and capital gain distributions will
be automatically reinvested in additional Shares of the Fund. If you do not
indicate a choice on your application you will be assigned this option.
2. Income-Earned Option. Your capital gain distributions will be
automatically reinvested in additional Shares of the Fund, but you will be
sent a check for each dividend distribution.
3. Cash Option. You will be sent a check for your dividend and capital
gain distributions.
4. Automatic Dividends Program. Your dividend and capital gain
distributions be automatically invested in Shares of another fund in the BT
Family of Funds as long as the minimums for that account are met.
If you select distribution option 2 or 3 and the U.S. Postal Service cannot
deliver your checks, or if your checks remain uncashed for six months,
i
those checks will be reinvested in your account at the current NAV and your
election may be converted to the Reinvestment Option. You may change
distribution option at anytime by notifying the Transfer Agent in writing.
For retirement accounts, all distributions are automatically reinvested.
When you are over 59 years old, you can receive distributions in cash. If
-
distributions from a retirement account for any taxable year following the
year in which the participant reaches age 70 are less than the ``inimum
-
required distribution''for that taxable year, an excise tax equal to 50%
of the deficiency may be imposed by the Internal Revenue Service (the
`IRS''). The administrator, trustee or custodian of such a retirement
account will be responsible for reporting distributions from such accounts
to the IRS.
When the Fund deducts a distribution from its NAV, the reinvestment price
is the Fund's NAV at the close of business that day. Distribution checks
will be mailed within seven days, or longer for a December ex-dividend
date.
Taxes
As with any investment, you should consider how an investment in the Fund
could affect you. Below are some of the Fund's tax implications. If your
account is not a tax-deferred retirement account beware of these tax
implications.
Taxes on Distributions. Distributions from the Fund are subject to federal
income tax and may also be subject to state or local taxes. Annual
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Statements as to the federal tax status of distributions, and distributions
that are attributable to state and local income and personal taxes, if
applicable, will be mailed to shareholders shortly after the end of the
year. If living outside the United States, your distributions from the Fund
could also be taxed by the country in which you reside.
For federal tax purposes, income and short-term capital gain distributions
from the Fund are taxed as dividends; long-term capital gain distributions
are taxed as long-term capital gains.
Mutual fund dividends from U.S. government securities are generally free
from state and local income taxes. However, particular states may limit
this benefit, and some types of securities, such as repurchase agreements
and some agency-backed securities, may not qualify for the benefit. In
addition, some states may impose intangible property taxes. You should
consult your own tax adviser for details and up-to-date information on the
tax laws in your state.
Distributions are taxable when they are paid, whether you take them in cash
or reinvest them. However, distributions declared in December and paid in
January are taxable as if they were paid on December 31.
Every January, the Transfer Agent will send the IRS a statement showing the
taxable distributions paid to you in the previous year.
Taxes on Transactions. Your redemptions, including exchanges, are subject
to capital gains tax. A capital gain or loss is the difference between the
cost of your Shares and the price you receive when you sell them.
i
Whenever you sell Shares of the Fund, the Transfer Agent will send you or
your Service Agent a confirmation statement showing how many Shares you
sold and at what price. You also receive a consolidated transaction
statement at least quarterly. However, it is up to you or your tax preparer
to determine whether this sale resulted in a capital gain and, if so, the
amount of tax to be paid. Be sure to keep your regular account statements;
the information they contain will be essential in calculating the amount of
your capital gains.
``uying a Dividend.'' If you buy Shares just before the Fund deducts a
capital gain distribution or dividend distribution, as applicable, from its
NAV, you will pay the full price for the Shares and then receive a portion
of the price back in the form of a taxable distribution.
There are tax requirements that all Funds must follow in order to avoid
federal taxation. In its effort to adhere to these requirements, the Fund
may have to limit its investment activity in some types of instruments.
ADDITIONAL INFORMATION
The Fund is a mutual fund: an investment that pools shareholders' money and
invests it toward a specified goal. The Fund is a separate diversified
series of BT Advisor Funds, a Massachusetts business trust. The Fund offers
two classes of Shares of beneficial interest, Institutional Class Shares
and Advisor Class Shares. The Portfolio is a separate diversified series of
BT Investment Portfolios, a New York master trust fund.
i
The Portfolio is a separate subtrust (or `Series'') of BT Investment
Portfolios. The Trust and BT Investment Portfolios reserves the right to
add additional series in the future. The Trust also reserves the right to
issue additional classes of Shares of the Fund.
The Trust or the Portfolio may hold special meetings and mail proxy
materials. These meetings may be called to elect or remove trustees, change
fundamental policies, approve Portfolio's investment advisory agreement, or
for other purposes. Shareholders not attending these meetings are
encouraged to vote by proxy. The Trust's Transfer Agent will mail proxy
materials in advance, including a voting card and information about the
proposals to be voted on.
When matters are submitted for shareholder vote, shareholders of the Fund
will have one vote for each full share held and proportionate, fractional
votes for fractional shares held. A separate vote of the Fund or classes is
required on any matter affecting only the Fund or class on which
shareholders are entitled to vote. Shareholders of the Fund or class are
not entitled to vote on Trust matters that do not affect the Fund or class,
respectively, and do not require a separate vote of the Fund or class. All
series of the Trust and all classes will vote together on certain matters,
such as electing trustees or approving independent public auditors. There
normally will be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of Trustees
holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election
of Trustees. Any Trustee may be removed from office upon the vote of
shareholders holding at least two-thirds of the Trust's outstanding shares
i
at a meeting called for that purpose. The Trustees are required to call
such a meeting upon the written request of shareholders holding at least
10% of the Trust's outstanding shares. The Trust will also assist
shareholders in communicating with one another as provided for in the 1940
Act.
Each series of the Trust will vote separately on any matter involving the
corresponding Portfolio. Shareholders of all of the series of the Trust
will, however, vote together to elect Trustees of the Trust and for certain
other matters. Under certain circumstances, the shareholders of one or more
series could control the outcome of these votes. The series of BT
Investment Portfolios will vote together or separately on matters in the
same manner, and in the same circumstances, as do the series of the Trust.
As with the Trust, the investors in one or more series of BT Investment
Portfolios could control the outcome of these votes.
The Trust is an entity of the type commonly known as a ``assachusetts
business trust.''Under Massachusetts law, shareholders of such a business
trust may, under certain circumstances, be held personally liable as
partners for its obligations. However, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to
circumstances in which both inadequate insurance existed and the Trust
itself was unable to meet its obligations.
The Declaration of Trust of BT Investment Portfolios provides that the Fund
and other entities investing in the Portfolio (e.g., other investment
companies, insurance company separate accounts and common and commingled
trust funds) will each be liable for all obligations of the Portfolio.
i
However, the risk of the Fund incurring financial loss on account of such
liability is limited to circumstances in which both inadequate insurance
existed and the Portfolio itself was unable to meet its obligations.
Accordingly, the Trustees of the Trust believe that neither the Fund nor
its shareholders will be adversely affected by reason of the Fund's
investing in the Portfolio. No series of BT Investment Portfolios has any
preference over any other series.
(THIS PAGE INTENTIONALLY LEFT BLANK)
(THIS PAGE INTENTIONALLY LEFT BLANK)
BT ADVISOR FUNDS
U.S. Bond Index Fund
Investment Adviser of the Portfolio and Administrator
BANKERS TRUST COMPANY
280 Park Avenue
New York, NY 10017
Distributor
Edgewood Services, Inc.
Clearing Operations
P.O. Box 897
Pittsburgh, PA 15230-0897
i
Custodian and Transfer Agent
BANKERS TRUST COMPANY
280 Park Avenue
New York, NY 10017
Independent Accountants
COOPERS & LYBRAND L.L.P.
1100 Main Street, Suite 900
Kansas City, MO 64105
Counsel
WILLKIE FARR & GALLAGHER
153 East 53rd Street
New York, NY 10022
No person has been authorized to give any information or to make any
representations other than those contained in the Trusts' Prospectuses, the
corresponding SAIs or the Trusts' official sales literature in connection
with the offering of the Trust's Shares and, if given or made, such other
information or representations must not be relied on as having been
authorized by a Trust. This Prospectus does not constitute an offer in any
state in which, or to any person to whom, such offer may not lawfully be
made.
Cusip #
STA511300 (3/97)
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STATEMENT OF{PRIVATE }
ADDITIONAL INFORMATION
FEBRUARY 28, 1997
BT ADVISOR FUNDS -- INSTITUTIONAL CLASS SHARES
U.S. BOND INDEX FUND
EQUITY 500 EQUAL WEIGHTED INDEX FUND
SMALL CAP INDEX FUND
EAFE(R) EQUITY INDEX FUND
BT INSTITUTIONAL FUNDS
EQUITY 500 INDEX FUND
BT Advisor Funds (the "Trust") is comprised of several funds. The
funds listed above (with the exception of BT Investment Equity 500 Index
Fund) (each, a "Fund") are each a series of the Trust and offers two
classes of shares (each a "Class" and collectively the "Classes"). This
Statement of Additional Information describes the Institutional Class
Shares. Institutional Equity 500 Index Fund (the "Equity 500 Index Fund")
is a series of BT Institutional Funds (the "Institutional Trust") (together
with the Trust, the "Trusts").
As described in the Prospectuses, the Trusts seek to achieve the
investment objectives of each Fund by investing all the investable assets
("Assets") of the Fund in a diversified open-end management investment
company (or a series thereof) having the same investment objectives as such
Fund. These investment companies are, respectively, BT Investment
Portfolios and Equity 500 Index Portfolio. U.S. Bond Index Portfolio,
i
Equity 500 Equal Weighted Index Portfolio, Small Cap Index Portfolio and
EAFE(R) Equity Index Portfolio are each a series of BT Investment
Portfolios.
Shares of the Funds are sold Edgewood Services, Inc. ("Edgewood"), the
Trusts' Distributor, to clients and customers (including affiliates and
correspondents) of Bankers Trust Company ("Bankers Trust"), the Portfolios'
Adviser, and to clients and customers of other organizations.
The Trusts' Prospectuses for the Funds are dated February 28, 1997.
The Prospectuses provide the basic information investors should know before
investing and may be obtained without charge by calling the Trust at the
telephone number listed below or by contacting your Investment
Professional. This Statement of Additional Information, which is not a
Prospectus, is intended to provide additional information regarding the
activities and operations of the Trusts and should be read in conjunction
with a Fund's Prospectus. This Statement of Additional Information is not
an offer of any Fund for which an investor has not received a Prospectus.
Capitalized terms not otherwise defined in this Statement of Additional
Information have the meanings accorded to them in a Fund's Prospectus.
BANKERS TRUST COMPANY
INVESTMENT ADVISER OF EACH PORTFOLIO AND ADMINISTRATOR
EDGEWOOD SERVICES, INC.
DISTRIBUTOR
Clearing Operations, Pittsburgh, Pennsylvania 15230-0897
(800) 730- 1313
P.O. Box 897
i
TABLE OF CONTENTS
Risk Factors and Certain Securities and Investment Practices.....1
Performance Information..........................................24
Valuation of Securities; Redemptions and Purchases in Kind.......26
Management of the Trusts and Portfolios..........................28
Organization of the Trusts.......................................35
Taxation.........................................................35
Financial Statements.............................................37
Appendix.........................................................38
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RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
INVESTMENT OBJECTIVES
The investment objective(s) of each Fund is described in that Fund's
Prospectus. There can, of course, be no assurance that any Fund will
achieve its investment objective(s).
INVESTMENT PRACTICES
Each Fund seeks to achieve its investment objective by investing all
of its Assets in the corresponding Portfolio. The Trusts may withdraw a
Fund's investment from the corresponding Portfolio at any time if the Board
of Trustees of the respective Trust determines that it is in the best
interests of the Fund to do so.
Since the investment characteristics of each Fund will correspond
directly to those of the corresponding Portfolio, the following is a
discussion of the various investments of and techniques employed by each
Portfolio.
Certificates of Deposit and Bankers' Acceptances. Certificates of
deposit are receipts issued by a depository institution in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus
interest to the bearer of the receipt on the date specified on the
certificate. The certificate usually can be traded in the secondary market
prior to maturity. Bankers' acceptances typically arise from short-term
credit arrangements designed to enable businesses to obtain funds to
1
finance commercial transactions. Generally, an acceptance is a time draft
drawn on a bank by an exporter or an importer to obtain a stated amount of
funds to pay for specific merchandise. The draft is then "accepted" by a
bank that, in effect, unconditionally guarantees to pay the face value of
the instrument on its maturity date. The acceptance may then be held by the
accepting bank as an earning asset or it may be sold in the secondary
market at the going rate of discount for a specific maturity. Although
maturities for acceptances can be as long as 270 days, most acceptances
have maturities of six months or less.
Commercial Paper. Commercial paper consists of short-term (usually
from 1 to 270 days) unsecured promissory notes issued by corporations in
order to finance their current operations. A variable amount master demand
note (which is a type of commercial paper) represents a direct borrowing
arrangement involving periodically fluctuating rates of interest under a
letter agreement between a commercial paper issuer and an institutional
lender pursuant to which the lender may determine to invest varying
amounts.
For a description of commercial paper ratings, see Appendix A to this
Statement of Additional Information.
Illiquid Securities. 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, as amended
(the "1933 Act"), securities which are otherwise not readily marketable and
repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the 1933 Act are referred
2
to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual funds do not
typically hold a significant amount of these 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 a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register
such restricted securities in order to dispose of them resulting in
additional expense and delay. Adverse market conditions could impede such a
public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the 1933 Act,
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 of such investments to the general public or to certain institutions
may not be indicative of their liquidity.
The Securities and Exchange Commission (the "SEC") has adopted
Rule 144A, which allows a broader institutional trading market for
securities otherwise subject to restriction on their resale to the general
public. Rule 144A establishes a "safe harbor" from the registration
requirements of the 1933 Act of resales of certain securities to qualified
3
institutional buyers. The Adviser anticipates that the market for certain
restricted securities such as institutional commercial paper will expand
further as a result of this regulation and the development of automated
systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System
sponsored by the National Association of Securities Dealers, Inc.
The Adviser will monitor the liquidity of Rule 144A securities in each
Portfolio's portfolio under the supervision of the Portfolio's Board of
Trustees. In reaching liquidity decisions, the Adviser will consider, among
other things, the following factors: (i) the frequency of trades and quotes
for the security; (ii) the number of dealers and other potential purchasers
wishing to purchase or sell the security; (iii) dealer undertakings to make
a market in the security and (iv) the nature of the security and of the
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer).
Lending of Portfolio Securities. Each Portfolio has the authority to
lend portfolio securities to brokers, dealers and other financial
organizations. The Portfolio will not lend securities to Bankers Trust,
Edgewood or their affiliates. By lending its securities, a Portfolio can
increase its income by continuing to receive interest on the loaned
securities as well as by either investing the cash collateral in short-term
securities or obtaining yield in the form of interest paid by the borrower
when U.S. government obligations are used as collateral. There may be risks
of delay in receiving additional collateral or risks of delay in recovery
of the securities or even loss of rights in the collateral should the
borrower of the securities fail financially. A Portfolio will adhere to the
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following conditions whenever its securities are loaned: (i) the Portfolio
must receive at least 100 percent cash collateral or equivalent securities
from the borrower; (ii) the borrower must increase this collateral whenever
the market value of the securities including accrued interest rises above
the level of the collateral; (iii) the Portfolio must be able to terminate
the loan at any time; (iv) the Portfolio must receive reasonable interest
on the loan, as well as any dividends, interest or other distributions on
the loaned securities, and any increase in market value; (v) the Portfolio
may pay only reasonable custodian fees in connection with the loan; and
(vi) voting rights on the loaned securities may pass to the borrower;
provided, however, that if a material event adversely affecting the
investment occurs, the Board of Trustees of the Portfolio must terminate
the loan and regain the right to vote the securities.
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Short-Term Instruments. When a Portfolio experiences large cash
inflows through the sale of securities and desirable equity securities,
that are consistent with the Portfolio's investment objective, which are
unavailable in sufficient quantities or at attractive prices, the Portfolio
may hold short-term investments for a limited time pending availability of
such equity securities. Short-term instruments consist of foreign and
domestic: (i) short-term obligations of sovereign governments, their
agencies, instrumentalities, authorities or political subdivisions; (ii)
other short-term debt securities rated AA or higher by (`S&P'') or Aa or
higher by Moody's Investors Service, Inc. (``oody's'') or, if unrated, of
comparable quality in the opinion of Bankers Trust; (iii) commercial paper;
(iv) bank obligations, including negotiable certificates of deposit, time
deposits and banker's acceptances; and (v) repurchase agreements. At the
time the Portfolio invests in commercial paper, bank obligations or
repurchase agreements, the issuer of the issuer's parent must have
outstanding debt rated AA or higher by S&P or Aa or higher by Moody's or
outstanding commercial paper or bank obligations rated A-1 by S&P or
Prime-1 by Moody's; or, if no such ratings are available, the instrument
must be of comparable quality in the opinion of Bankers Trust. These
instruments may be denominated in U.S dollars or in foreign currencies.
When-Issued and Delayed Delivery Securities. Each Portfolio may
purchase securities on a when-issued or delayed delivery basis. For
example, delivery of and payment for these securities can take place a
month or more after the date of the purchase commitment. The purchase price
and the interest rate payable, if any, on the securities are fixed on the
purchase commitment date or at the time the settlement date is fixed. The
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value of such securities is subject to market fluctuation and no interest
accrues to a Portfolio until settlement takes place. At the time a
Portfolio makes the commitment to purchase securities on a when-issued or
delayed delivery basis, it will record the transaction, reflect the value
each day of such securities in determining its net asset value and, if
applicable, calculate the maturity for the purposes of average maturity
from that date. At the time of settlement a when-issued security may be
valued at less than the purchase price. To facilitate such acquisitions,
each Portfolio will maintain with the Custodian a segregated account with
liquid assets, consisting of cash, U.S. government securities or other
appropriate securities, in an amount at least equal to such commitments. On
delivery dates for such transactions, each Portfolio will meet its
obligations from maturities or sales of the securities held in the
segregated account and/or from cash flow. If a Portfolio chooses to dispose
of the right to acquire a when-issued security prior to its acquisition, it
could, as with the disposition of any other portfolio obligation, incur a
gain or loss due to market fluctuation. It is the current policy of each
Portfolio not to enter into when-issued commitments exceeding in the
aggregate 15% of the market value of the Portfolio's total assets, less
liabilities other than the obligations created by when-issued commitments.
Additional U.S. Government Obligations. Each Portfolio may invest in
obligations issued or guaranteed by U.S. government agencies or
instrumentalities. These obligations may or may not be backed by the "full
faith and credit" of the United States. In the case of securities not
backed by the full faith and credit of the United States, each Portfolio
must look principally to the federal agency issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim
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against the United States itself in the event the agency or instrumentality
does not meet its commitments. Securities in which each Portfolio may
invest that are not backed by the full faith and credit of the United
States include, but are not limited to, obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation and the U.S. Postal
Service, each of which has the right to borrow from the U.S. Treasury to
meet its obligations, and obligations of the Farm Credit Banks and the
Federal Home Loan Banks, both of whose obligations may be satisfied only by
the individual credits of each issuing agency. Securities which are backed
by the full faith and credit of the United States include obligations of
the Government National Mortgage Association, the Farmers Home
Administration, and the Export-Import Bank.
Equity Investments. With the exception of the U.S. Bond Index
Portfolio, each Portfolio may invest in equity securities listed on any
domestic or foreign securities exchange or traded in the over-the-counter
market as well as certain restricted or unlisted securities. They may or
may not pay dividends or carry voting rights. Common stock occupies the
most junior position in a company's capital structure.
Swap Agreements. Swap agreements are contracts entered into by two
parties, primarily institutional investors, for periods ranging from a few
weeks to more than one year. In a standard swap transaction, two parties
agree to exchange the returns (or differentials in rates of return) earned
or realized on particular predetermined investments or instruments. The
gross returns to be exchanged or swapped between the parties are calculated
with respect to a notional amount, i.e., the return on or increase in value
of a particular dollar amount invested at a particular interest rate, in a
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particular foreign currency, or in a basket of securities representing a
particular index. The notional amount of the swap agreement is only a
fictive basis on which to calculate the obligations which the parties to a
swap agreement have agreed to exchange. A Portfolio's obligations (or
rights) under a swap agreement will generally be equal only to the net
amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net
amount"). A Portfolio's obligations under a swap agreement will be accrued
daily (offset against any amounts owing to the Portfolio) and any accrued
but unpaid net amounts owed to a swap counterparty will be covered by the
maintenance of a segregated account consisting of cash, U.S. Government
securities, or high grade debt obligations, to avoid any potential
leveraging of the Portfolio's portfolio.
The use of swap agreements will be successful in furthering its
investment objective will depend on the Adviser's ability to correctly
predict whether certain types of investments are likely to produce greater
returns than other investments. Swap agreements may be considered to be
illiquid because they are two party contracts and because they may have
terms of greater than seven days. Moreover, a Portfolio bears the risk of
loss of the amount expected to be received under a swap agreement in the
event of the default or bankruptcy of a swap agreement counterparty. A
Portfolio will enter into swap agreements only with counterparties that
would be eligible for consideration as repurchase agreement counterparties
under the Portfolio's repurchase agreement guidelines. Certain restrictions
imposed on the Portfolios by the Internal Revenue Code may limit the
Portfolios' ability to use swap agreements. The swaps market is a
relatively new market and is largely unregulated. It is possible that
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developments in the swaps market, including potential government
regulation, could adversely affect a Portfolio's ability to terminate
existing swap agreements or to realize amounts to be received under such
agreements.
Certain swap agreements are exempt from most provisions of the
Commodity Exchange Act (the "CEA") and, therefore, are not regulated as
futures or commodity option transactions under the CEA, pursuant to
regulations approved by the Commodity Futures Trading Commission (the
"CFTC") effective February 22, 1993. To qualify for this exemption, a swap
agreement must be entered into by eligible participants, which includes the
following, provided the participant's total assets exceed established
levels: a bank or trust company, savings association or credit union,
insurance company, investment company subject to regulation under the
Investment Company Act of 1940, as amended (the "1940 Act"), commodity
pool, corporation, partnership, proprietorship, organization, trust or
other entity, employee benefit plan, governmental entity, broker-dealer,
futures commission merchant, natural person, or regulated foreign person.
To be eligible, natural persons and most other entities must have total
assets exceeding $10 million; commodity pools and employee benefit plans
must have asset exceeding $5 million. In addition, an eligible swap
transaction must meet three conditions. First, the swap agreement may not
be part of a fungible class of agreements that are standardized as to their
material economic terms. Second, the creditworthiness of parties with
actual or potential obligations under the swap agreement must be a material
consideration in entering into or determining the terms of the swap
agreement, including pricing, cost or credit enhancement terms. Third, swap
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agreements may not be entered into and traded on or through a multilateral
transaction execution facility.
This exemption is not exclusive, and participants may continue to rely
on existing exclusions for swaps, such as the Policy Statement issued in
July 1989 which recognized a "safe harbor" for swap transactions from
regulation as futures or commodity option transactions under the CEA or its
regulations. The Policy Statement applies to swap transactions settled in
cash that: (i) have individually tailored terms; (ii) lack exchange style
offset and the use of a clearing organization or margin system; (iii) are
undertaken in conjunction with a line of business; and (iv) are not
marketed to the public.
Reverse Repurchase Agreements. The Portfolios may borrow funds for
temporary or emergency purposes, such as meeting larger than anticipated
redemption requests, and not for leverage, by among other things, agreeing
to sell portfolio securities to financial institutions such as banks and
broker-dealers and to repurchase them at a mutually agreed date and price
(a "reverse repurchase agreement"). At the time a Portfolio enters into a
reverse repurchase agreement it will place in a segregated custodial
account cash, U.S. Government Obligations or high-grade debt obligations
having a value equal to the repurchase price, including accrued interest.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by a Portfolio may decline below the repurchase price of
those securities. Reverse repurchase agreements are considered to be
borrowings by a Portfolio.
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Warrants. Warrants entitle the holder to buy common stock from the
issuer at a specific price (the strike price) for a specific period of
time. The strike price of warrants sometimes is much lower than the current
market price of the underlying securities, yet warrants are subject to
similar price fluctuations. As a result, warrants may be more volatile
investments than the underlying securities.
Warrants do not entitle the holder to dividends or voting rights with
respect to the underlying securities and do not represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a
warrant ceases to have value if it is not exercised prior to the expiration
date.
Convertible Securities. Convertible securities may be a debt security
or preferred stock which may be converted into common stock or carries the
right to purchase common stock. Convertible securities entitle the holder
to exchange the securities for a specified number of shares of common
stock, usually of the same company, at specified prices within a certain
period of time.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible
debentures, the holders' claims on assets and earnings are subordinated to
the claims of other creditors, and are senior to the claims of preferred
and common shareholders. In the case of convertible preferred stock, the
holders' claims on assets and earnings are subordinated to the claims of
all creditors and are senior to the claims of common shareholders.
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Ginnie Mae Certificates. The Government National Mortgage Association
(`Ginnie Mae'') is a wholly-owned corporate instrumentality of the United
States within the Department of Housing and Urban Development. The National
Housing Act of 1934, as amended (the "Housing Act"), authorizes Ginnie Mae
to guarantee the timely payment of the principal of and interest on
certificates that are based on and backed by a pool of mortgage loans
insured by the Federal Housing Administration under the Housing Act, or
Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by the
Department of Veterans Affairs under the Servicemen's Readjustment Act of
1944, as amended ("VA Loans"), or by pools of other eligible mortgage
loans. The Housing Act provides that the full faith and credit of the
U.S. government is pledged to the payment of all amounts that may be
required to be paid under any Ginnie Mae guaranty. In order to meet its
obligations under such guaranty, Ginnie Mae is authorized to borrow from
the U.S. Treasury with no limitations as to amount.
The Ginnie Mae Certificates in which the U.S. Bond Index Portfolio
will invest will represent a pro rata interest in one or more pools of the
following types of mortgage loans: (i) fixed-rate level payment mortgage
loans; (ii) fixed-rate graduated payment mortgage loans; (iii) fixed-rate
growing equity mortgage loans; (iv) fixed-rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multifamily residential
properties under construction; (vi) mortgage loans on completed multifamily
projects; (vii) fixed-rate mortgage loans as to which escrowed funds are
used to reduce the borrower's monthly payments during the early years of
the mortgage loans ("buydown" mortgage loans); (viii) mortgage loans that
provide for adjustments in payments based on periodic changes in interest
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rates or in other payment terms of the mortgage loans; and
(ix) mortgage-backed serial notes. All of these mortgage loans will be FHA
Loans or VA Loans and, except as otherwise specified above, will be
fully-amortizing loans secured by first liens on one- to four-family
housing units.
Fannie Mae Certificates. The Federal National Mortgage Association
(``annie Mae'') is a federally chartered and privately owned corporation
organized and existing under the Federal National Mortgage Association
Charter Act of 1938. The obligations of Fannie Mae are not backed by the
full faith and credit of the U.S. government.
Each Fannie Mae Certificate will represent a pro rata interest in one
or more pools of FHA Loans, VA Loans or conventional mortgage loans (i.e.,
mortgage loans that are not insured or guaranteed by any governmental
agency) of the following types: (i) fixed-rate level payment mortgage
loans; (ii) fixed-rate growing equity mortgage loans; (iii) fixed-rate
graduated payment mortgage loans; (iv) variable rate mortgage loans;
(v) other adjustable rate mortgage loans; and (vi) fixed-rate and
adjustable mortgage loans secured by multifamily projects.
Freddie Mac Certificates. The Federal Home Loan Mortgage Corporation
(``reddie Mac'') is a corporate instrumentality of the United States
created pursuant to the Emergency Home Finance Act of 1970, as amended (the
"FHLMC Act"). The obligations of Freddie Mac are obligations solely of
Freddie Mac and are not backed by the full faith and credit of the
U.S. government.
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Freddie Mac Certificates represent a pro rata interest in a group of
mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie
Mac. The mortgage loans underlying the Freddie Mac Certificates will
consist of fixed-rate or adjustable rate mortgage loans with original terms
to maturity of between ten and thirty years, substantially all of which are
secured by first liens on one- to four-family residential properties or
multifamily projects. Each mortgage loan must meet the applicable standards
set forth in the FHLMC Act. A Freddie Mac Certificate group may include
whole loans, participating interests in whole loans and undivided interests
in whole loans and participations comprising another Freddie Mac
Certificate group.
Adjustable Rate Mortgages - Interest Rate Indices. Adjustable rate
mortgages in which the U.S. Bond Index Portfolio invests may be adjusted on
the basis of one of several indices. The One Year Treasury Index is the
figure derived from the average weekly quoted yield on U.S. Treasury
Securities adjusted to a constant maturity of one year. The Cost of Funds
Index reflects the monthly weighted average cost of funds of savings and
loan associations and savings banks whose home offices are located in
Arizona, California and Nevada (the "FHLB Eleventh District") that are
member institutions of the Federal Home Loan Bank of San Francisco (the
"FHLB of San Francisco"), as computed from statistics tabulated and
published by the FHLB of San Francisco. The FHLB of San Francisco normally
announces the Cost of Funds Index on the last working day of the month
following the month in which the cost of funds was incurred.
A number of factors affect the performance of the Cost of Funds Index
and may cause the Cost of Funds Index to move in a manner different from
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indices based upon specific interest rates, such as the One Year Treasury
Index. Because of the various origination dates and maturities of the
liabilities of members of the FHLB Eleventh District upon which the Cost of
Funds Index is based, among other things, at any time the Cost of Funds
Index may not reflect the average prevailing market interest rates on new
liabilities of similar maturities. There can be no assurance that the Cost
of Funds Index will necessarily move in the same direction or at the same
rate as prevailing interest rates since as longer term deposits or
borrowings mature and are renewed at market interest rates, the Cost of
Funds Index will rise or fall depending upon the differential between the
prior and the new rates on such deposits and borrowings. In addition,
dislocations in the thrift industry in recent years have caused and may
continue to cause the cost of funds of thrift institutions to change for
reasons unrelated to changes in general interest rate levels. Furthermore,
any movement in the Cost of Funds Index as compared to other indices based
upon specific interest rates may be affected by changes instituted by the
FHLB of San Francisco in the method used to calculate the Cost of Funds
Index. To the extent that the Cost of Funds Index may reflect interest
changes on a more delayed basis than other indices, in a period of rising
interest rates, any increase may produce a higher yield later than would be
produced by such other indices, and in a period of declining interest
rates, the Cost of Funds Index may remain higher than other market interest
rates which may result in a higher level of principal prepayments on
mortgage loans which adjust in accordance with the Cost of Funds Index than
mortgage loans which adjust in accordance with other indices.
LIBOR, the London interbank offered rate, is the interest rate that
the most creditworthy international banks dealing in
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U.S. dollar-denominated deposits and loans charge each other for large
dollar-denominated loans. LIBOR is also usually the base rate for large
dollar-denominated loans in the international market. LIBOR is generally
quoted for loans having rate adjustments at one, three, six or twelve month
intervals.
Asset-Backed Securities. The asset-backed securities in which the U.S.
Bond Index Portfolio may invest are limited to those which are readily
marketable, dollar-denominated and rated BBB or higher by S&P or Baa or
higher by Moody's. Asset-backed securities present certain risks that are
not presented by mortgage-backed securities. Primarily, these securities do
not have the benefit of the same type of security interest in the related
collateral. Credit card receivables are generally unsecured and the debtors
are entitled to the protection of a number of state and federal consumer
credit laws, many of which give such debtors the right to avoid payment of
certain amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of automobile receivables permit the servicer to retain
possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of the automobile receivables may
not have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities.
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Mortgage-Backed Securities and Asset-Backed Securities-Types of Credit
Support. The mortgage-backed securities in which the U.S. Bond Index
Portfolio may invest are limited to those relating to residential
mortgages. Mortgage-backed securities and asset-backed securities are often
backed by a pool of assets representing the obligations of a number of
different parties. To lessen the effect of failure by obligors on
underlying assets to make payments, such securities may contain elements of
credit support. Such credit support falls into two categories:
(i) liquidity protection and (ii) protection against losses resulting from
ultimate default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in
the pool. Such protection may be provided through guarantees, insurance
policies or letters of credit obtained by the issuer or sponsor from third
parties, through various means of structuring the transaction or through a
combination of such approaches. The U.S. Bond Index Portfolio will not pay
any additional fees for such credit support, although the existence of
credit support may increase the price of a security.
The ratings of mortgage-backed securities and asset-backed securities
for which third-party credit enhancement provides liquidity protection or
protection against losses from default are generally dependent upon the
continued creditworthiness of the provider of the credit enhancement. The
ratings of such securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider
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even in cases where the delinquency and loss experience on the underlying
pool of assets is better than expected.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class
securities with one or more classes subordinate to other classes as to the
payment of principal thereof and interest thereon, with the result that
defaults on the underlying assets are borne first by the holders of the
subordinated class), creation of "reserve funds" (where cash or
investments, sometimes funded from a portion of the payments on the
underlying assets, are held in reserve against future losses) and "over-
collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of
the securities and pay any servicing or other fees). The degree of credit
support provided for each issue is generally based on historical
information with respect to the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that which is
anticipated could adversely affect the return on an investment in such a
security.
Stripped Mortgage-Backed Securities. The cash flows and yields on IO
and PO classes are extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets. For
example, a rapid or slow rate of principal payments may have a material
adverse effect on the yield to maturity of IOs or POs, respectively. If the
underlying mortgage assets experience greater than anticipated prepayments
of principal, an investor may fail to recoup fully its initial investment
in an IO class of a stripped mortgage-backed security, even if the IO class
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is rated AAA or Aaa. Conversely, if the underlying mortgage assets
experience slower than anticipated prepayments of principal, the yield on a
PO class will be affected more severely than would be the case with a
traditional mortgage-backed security.
Foreign Securities: Special Considerations Concerning Hong Kong,
Malaysia, Singapore and Japan. Many Asian countries may be subject to a
greater degree of social, political and economic instability than is the
case in the United States and European countries. Such instability may
result from (i) authoritarian governments or military involvement in
political and economic decision-making; (ii) popular unrest associated with
demands for improved political, economic and social conditions; (iii)
internal insurgencies; (iv) hostile relations with neighboring countries;
and (v) ethnic, religious and racial disaffection.
The economies of most of the Asian countries are heavily dependent
upon international trade and are accordingly affected by protective trade
barriers and the economic conditions of their trading partners,
principally, the United States, Japan, China and the European Community.
The enactment by the United States or other principal trading partners of
protectionist trade legislation, reduction of foreign investment in the
local economies and general declines in the international securities
markets could have a significant adverse effect upon the securities markets
of the Asian countries.
Hong Kong's impending return to Chinese dominion in 1997 has not
initially had a positive effect on its economic growth which was vigorous
in the 1980s. However, authorities in Beijing have agreed to maintain a
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capitalist system for 50 years that, along with Hong Kong's economic
growth, continued to further strong stock market returns. In preparation
for 1997, Hong Kong has to develop trade with China, where it is the
largest foreign investor, while also maintaining its longstanding export
relationship with the United States. Spending on infrastructure
improvements is a significant priority of the colonial government while the
private sector continues to diversify abroad based on its position as an
established international trade center in the Far East.
The Hong Kong stock market is undergoing a period of growth and change
which may result in trading volatility and difficulties in the settlement
and recording of transactions, and in interpreting and applying the
relevant law and regulations.
Singapore has an open entrepreneurial economy with strong service and
manufacturing sectors and excellent international trading links derived
from its entrepot history. During the 1970's and early 1980's, the economy
expanded rapidly, achieving an average annual growth rate of 9%. Per capita
GDP is among the highest in Asia. Singapore holds a position as a major
oil refining and services center.
Investing in Japanese securities may involve the risks associated with
investing in foreign securities generally. In addition, because it invests
in Japan, the EAFE(R) Equity Index Portfolio will be subject to the general
economic and political conditions in Japan.
The common stocks of many Japanese companies continue to trade at high
price earnings ratios in comparison with those in the United States, even
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after the recent market decline.There can be no assurance that additional
market corrections will not occur. Differences in accounting methods make
it difficult to compare the earnings of Japanese companies with those of
companies in other countries, especially the United States.
Since the EAFE(R) Equity Index Portfolio invests in securities
denominated in yen, changes in exchange rates between the U.S. dollar and
the yen affect the U.S. dollar value of the EAFE(R) Equity Index
Portfolio's assets. Such rate of exchange is determined by forces of supply
and demand on the foreign exchange markets. These forces are in turn
affected by the international balance of payments and other economic,
political and financial conditions, government intervention, speculation
and other factors.
Japanese securities held by the EAFE(R) Equity Index Portfolio are not
registered with the SEC nor are the issuers thereof subject to its
reporting requirements. There may be less publicly available information
about issuers of Japanese securities than about U.S. companies and such
issuers may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those to which U.S. companies are
subject.
Japan's success in exporting its products has generated a sizeable
trade surplus. Such trade surplus has caused tensions at times between
Japan and some of its trading partners. In particular, Japan's trade
relations with the United States have recently been the subject of
discussion and negotiation between the two nations. The United States has
imposed certain measures designed to address trade issues in specific
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industries. These measures and similar measures in the future may adversely
affect the performance of the EAFE(R) Equity Index Portfolio.
Japan's economy has typically exhibited low inflation and low interest
rates. There can be no assurance that low inflation and low interest rates
will continue, and it is likely that a reversal of such factors would
adversely affect the Japanese economy. Moreover, the Japanese economy may
differ,
favorably or unfavorably, from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position.
Japan has a parliamentary form of government. In 1993 a coalition
government was formed which, for the first time since 1955, did not include
the Liberal Democratic Party. Since mid-1993, there have been several
changes in leadership in Japan. What, if any, effect the current political
situation will have on prospective regulatory reforms of the economy in
Japan cannot be predicted. Recent and future developments in Japan and
neighboring Asian countries may lead to changes in policy that might
adversely affect the EAFE(R) Equity Index Portfolio.
Futures Contracts and Options on Futures Contracts
General. The successful use of such instruments draws upon the
Adviser's skill and experience with respect to such instruments and usually
depends on the Adviser's ability to forecast interest rate and currency
exchange rate movements correctly. Should interest or exchange rates move
in an unexpected manner, a Portfolio may not achieve the anticipated
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benefits of futures contracts or options on futures contracts or may
realize losses and thus will be in a worse position than if such strategies
had not been used. In addition, the correlation between movements in the
price of futures contracts or options on futures contracts and movements in
the price of the securities and currencies hedged or used for cover will
not be perfect and could produce unanticipated losses.
Successful use of the futures contract and related options are subject
to special risk considerations. A liquid secondary market for any futures
or options contract may not be available when a futures or options position
is sought to be closed. In addition, there may be an imperfect correlation
between movements in the securities or currency in the Portfolio.
Successful use of futures or options contracts is further dependent on
Bankers Trust's ability to correctly predict movements in the securities or
foreign currency markets and no assurance can be given that its judgment
will be correct. Successful use of options on securities or stock indices
are subject to similar risk considerations. In addition, by writing covered
call options, the Portfolio gives up the opportunity, while the option is
in effect, to profit from any price increase in the underlying securities
above the options exercise price.
Futures Contracts. Each Portfolio may enter into contracts for the
purchase or sale for future delivery of fixed-income securities, foreign
currencies, or contracts based on financial indices including any index of
U.S. Government securities, foreign government securities or corporate debt
securities. U.S. futures contracts have been designed by exchanges which
have been designated "contracts markets" by the CFTC, and must be executed
through a futures commission merchant, or brokerage firm, which is a member
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of the relevant contract market. Futures contracts trade on a number of
exchange markets, and, through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of
the exchange. Each Portfolio may enter into futures contracts which are
based on debt securities that are backed by the full faith and credit of
the U.S. government, such as long-term U.S. Treasury Bonds, Treasury Notes,
Ginnie Mae modified pass-through mortgage-backed securities and three-month
U.S. Treasury Bills. A Portfolio may also enter into futures contracts
which are based on bonds issued by entities other than the U.S. government.
At the same time a futures contract is purchased or sold, the
Portfolio must allocate cash or securities as a deposit payment ("initial
deposit"). It is expected that the initial deposit would be approximately 1
1/2% to 5% of a contract's face value. Daily thereafter, the futures
contract is valued and the payment of "variation margin" may be required,
since each day the Portfolio would provide or receive cash that reflects
any decline or increase in the contract's value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the
delivery of securities with a different interest rate from that specified
in the contract. In some (but not many) cases, securities called for by a
futures contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
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accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same
month. Such a transaction, which is effected through a member of an
exchange, cancels the obligation to make or take delivery of the
securities. Since all transactions in the futures market are made, offset
or fulfilled through a clearinghouse associated with the exchange on which
the contracts are traded, the Portfolio will incur brokerage fees when it
purchases or sells futures contracts.
The purpose of the acquisition or sale of a futures contract, in the
case of a Portfolio which holds or intends to acquire fixed-income
securities, is to attempt to protect the Portfolio from fluctuations in
interest or foreign exchange rates without actually buying or selling
fixed-income securities or foreign currencies. For example, if interest
rates were expected to increase, the Portfolio might enter into futures
contracts for the sale of debt securities. Such a sale would have much the
same effect as selling an equivalent value of the debt securities owned by
the Portfolio. If interest rates did increase, the value of the debt
security in the Portfolio would decline, but the value of the futures
contracts to the Portfolio would increase at approximately the same rate,
thereby keeping the net asset value of the Portfolio from declining as much
as it otherwise would have. The Portfolio could accomplish similar results
by selling debt securities and investing in bonds with short maturities
when interest rates are expected to increase. However, since the futures
market is more liquid than the cash market, the use of futures contracts as
an investment technique allows the Portfolio to maintain a defensive
position without having to sell its portfolio securities.
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Similarly, when it is expected that interest rates may decline,
futures contracts may be purchased to attempt to hedge against anticipated
purchases of debt securities at higher prices. Since the fluctuations in
the value of futures contracts should be similar to those of debt
securities, a Portfolio could take advantage of the anticipated rise in the
value of debt securities without actually buying them until the market had
stabilized. At that time, the futures contracts could be liquidated and the
Portfolio could then buy debt securities on the cash market. To the extent
a Portfolio enters into futures contracts for this purpose, the assets in
the segregated asset account maintained to cover the Portfolio's
obligations with respect to such futures contracts will consist of cash,
cash equivalents or high quality liquid debt securities from its portfolio
in an amount equal to the difference between the fluctuating market value
of such futures contracts and the aggregate value of the initial and
variation margin payments made by the Portfolio with respect to such
futures contracts.
The ordinary spreads between prices in the cash and futures market,
due to differences in the nature of those markets, are subject to
distortions. First, all participants in the futures market are subject to
initial deposit and variation margin requirements. Rather than meeting
additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of
the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent
participants decide to make or take delivery, liquidity in the futures
market could be reduced, thus producing distortion. Third, from the point
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of view of speculators, the margin 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
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still
not result in a successful transaction.
In addition, futures contracts entail risks. Although the Adviser
believes that use of such contracts will benefit the Portfolios, if the
Adviser's investment judgment about the general direction of interest rates
is incorrect, a Portfolio's overall performance would be poorer than if it
had not entered into any such contract. For example, if a Portfolio has
hedged against the possibility of an increase in interest rates which would
adversely affect the price of debt securities held in its portfolio and
interest rates decrease instead, the Portfolio will lose part or all of the
benefit of the increased value of its debt securities which it has hedged
because it will have offsetting losses in its futures positions. In
addition, in such situations, if a Portfolio has insufficient cash, it may
have to sell debt securities from its portfolio to meet daily variation
margin requirements. Such sales of bonds may be, but will not necessarily
be, at increased prices which reflect the rising market. A Portfolio may
have to sell securities at a time when it may be disadvantageous to do so.
Options on Futures Contracts. Each Portfolio may purchase and write
options on futures contracts for hedging purposes. The purchase of a call
option on a futures contract is similar in some respects to the purchase of
a call option on an individual security. Depending on the pricing of the
option compared to either the price of the futures contract upon which it
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is based or the price of the underlying debt securities, it may or may not
be less risky than ownership of the futures contract or underlying debt
securities. As with the purchase of futures contracts, when a Portfolio is
not fully invested it may purchase a call option on a futures contract to
hedge against a market advance due to declining interest rates.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the underlying security or
foreign currency which is deliverable upon exercise of the futures
contract. If the futures price at expiration of the option is below the
exercise price, a Portfolio will retain the full amount of the option
premium which provides a partial hedge against any decline that may have
occurred in the Portfolio's portfolio holdings. The writing of a put option
on a futures contract constitutes a partial hedge against increasing prices
of the underlying security or foreign currency which is deliverable upon
exercise of the futures contract. If the futures price at expiration of the
option is higher than the exercise price, the Portfolio will retain the
full amount of the option premium which provides a partial hedge against
any increase in the price of securities which the Portfolio intends to
purchase. If a put or call option the Portfolio has written is exercised,
the Portfolio will incur a loss which will be reduced by the amount of the
premium it receives. Depending on the degree of correlation between changes
in the value of its portfolio securities and changes in the value of its
futures positions, the Portfolio's losses from existing options on futures
may to some extent be reduced or increased by changes in the value of
portfolio securities.
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The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities.
For example, a Portfolio may purchase a put option on a futures contract to
hedge its portfolio against the risk of rising interest rates.
The amount of risk a Portfolio assumes when it purchases an option on
a futures contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above,
the purchase of an option also entails the risk that changes in the value
of the underlying futures contract will not be fully reflected in the value
of the option purchased.
The Board of Trustees of each Portfolio has adopted the requirement
that futures contracts and options on futures contracts be used as a hedge
and may also use stock index futures on continual basis to equitize cash so
that the Portfolio may maintain 100% equity exposure. In addition to this
requirement, the Board of Trustees of each Portfolio has also adopted a
restriction that the Portfolio will not enter into any futures contracts or
options on futures contracts if immediately thereafter the amount of margin
deposits on all the futures contracts of the Portfolio and premiums paid on
outstanding options on futures contracts owned by the Portfolio (other than
those entered into for bona fide hedging purposes) would exceed 5% of the
market value of the total assets of the Portfolio.
Options on Foreign Currencies. The EAFE(R) Equity Index Portfolio may
purchase and write options on foreign currencies for hedging purposes in a
manner similar to that in which futures contracts on foreign currencies, or
forward contracts, will be utilized. For example, a decline in the dollar
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value of a foreign currency in which portfolio securities are denominated
will reduce the dollar value of such securities, even if their value in the
foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, the Portfolio may
purchase put options on the foreign currency. If the value of the currency
does decline, the Portfolio will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, the EAFE(R) Equity Index Portfolio may
purchase call options thereon. The purchase of such options could offset,
at least partially, the effects of the adverse movements in exchange rates.
As in the case of other types of options, however, the benefit to the
Portfolio deriving from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the direction or to
the extent anticipated, the Portfolio could sustain losses on transactions
in foreign currency options which would require it to forego a portion or
all of the benefits of advantageous changes in such rates.
The EAFE(R) Equity Index Portfolio may write options on foreign
currencies for the same types of hedging purposes. For example, where the
Portfolio anticipates a decline in the dollar value of foreign currency
denominated securities due to adverse fluctuations in exchange rates it
could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the options will most
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likely not be exercised, and the diminution in value of portfolio
securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
EAFE(R) Equity Index Portfolio could write a put option on the relevant
currency which, if rates move in the manner projected, will expire
unexercised and allow the Portfolio to hedge such increased cost up to the
amount of the premium. As in the case of other types of options, however,
the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and
the Portfolio would be required to purchase or sell the underlying currency
at a loss which may not be offset by the amount of the premium. Through the
writing of options on foreign currencies, the Portfolio also may be
required to forego all or a portion of the benefits which might otherwise
have been obtained from favorable movements in exchange rates.
The EAFE(R) Equity Index Portfolio intends to write covered call
options on foreign currencies. A call option written on a foreign currency
by the Portfolio is "covered" if the Portfolio owns the underlying foreign
currency covered by the call or has an absolute and immediate right to
acquire that foreign currency without additional cash consideration (or for
additional cash consideration held in a segregated account by its
Custodian) upon conversion or exchange of other foreign currency held in
its portfolio. A call option is also covered if the Portfolio has a call on
the same foreign currency and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less
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than the exercise price of the call written or (b) is greater than the
exercise price of the call written if the difference is maintained by the
Portfolio in cash, U.S. Government securities and other high quality liquid
debt securities in a segregated account with its custodian.
The EAFE(R) Equity Index Portfolio also intends to write call options
on foreign currencies that are not covered for cross-hedging purposes. A
call option on a foreign currency is for cross-hedging purposes if it is
not covered, but is designed to provide a hedge against a decline in the
U.S. dollar value of a security which the Portfolio owns or has the right
to acquire and which is denominated in the currency underlying the option
due to an adverse change in the exchange rate. In such circumstances, the
Portfolio collateralizes the option by maintaining in a segregated account
with its custodian, cash or U.S. Government securities or other high
quality liquid debt securities in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked to market daily.
Additional Risks of Options on Futures Contracts, Forward Contracts
and Options on Foreign Currencies. Unlike transactions entered into by a
Portfolio in futures contracts, options on foreign currencies and forward
contracts are not traded on contract markets regulated by the CFTC or (with
the exception of certain foreign currency options) by the SEC. To the
contrary, such instruments are traded through financial institutions acting
as market-makers, although foreign currency options are also traded on
certain national securities exchanges such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation.
Similarly, options on currencies may be traded over-the-counter. In an
over-the-counter trading environment, many of the protections afforded to
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exchange participants will not be available. For example, there are no
daily price fluctuation limits, and adverse market movements could
therefore continue to an unlimited extent over a period of time. Although
the purchaser of an option cannot lose more than the amount of the premium
plus related transaction costs, this entire amount could be lost. Moreover,
the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a
national securities exchange are cleared and guaranteed by the Options
Clearing Corporation (the "OCC"), thereby reducing the risk of counterparty
default. Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the over-the-
counter market, potentially permitting a Portfolio to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses
in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects
of other political and economic events. In addition, exchange-traded
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options on foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As
a result, the OCC may, if it determines that foreign governmental
restrictions or taxes would prevent the orderly settlement of foreign
currency option exercises, or would result in undue burdens on the OCC or
its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the
fixing of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and credit
risks which may not be present in the case of exchange-traded currency
options. A Portfolio's ability to terminate over-the-counter options will
be more limited than with exchange-traded options. It is also possible that
broker-dealers participating in over-the-counter options transactions will
not fulfill their obligations. Until such time as the staff of the SEC
changes its position, each Portfolio will treat purchased over-the-counter
options and assets used to cover written over-the-counter options as
illiquid securities. With respect to options written with primary dealers
in U.S. Government securities pursuant to an agreement requiring a closing
purchase transaction at a formula price, the amount of illiquid securities
may be calculated with reference to the repurchase formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign
exchanges. Such transactions are subject to the risk of governmental
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actions affecting trading in or the prices of foreign currencies or
securities. The value of such positions also could be adversely affected
by: (i) other complex foreign political and economic factors; (ii) lesser
availability than in the United States of data on which to make trading
decisions; (iii) delays in the Portfolio's ability to act upon economic
events occurring in foreign markets during nonbusiness hours in the United
States; (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States; and
(v) lesser trading volume.
Options on Securities. Each Portfolio except for Equity 500 Equal
Weighted Index Portfolio may write (sell) covered call and put options to a
limited extent on its portfolio securities ("covered options") in an
attempt to increase income. However, the Portfolio may forgo the benefits
of appreciation on securities sold or may pay more than the market price on
securities acquired pursuant to call and put options written by the
Portfolio.
When a Portfolio writes a covered call option, it gives the purchaser
of the option the right to buy the underlying security at the price
specified in the option (the "exercise price") by exercising the option at
any time during the option period. If the option expires unexercised, the
Portfolio will realize income in an amount equal to the premium received
for writing the option. If the option is exercised, a decision over which
the Portfolio has no control, the Portfolio must sell the underlying
security to the option holder at the exercise price. By writing a covered
call option, the Portfolio forgoes, in exchange for the premium less the
commission ("net premium"), the opportunity to profit during the option
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period from an increase in the market value of the underlying security
above the exercise price.
When a Portfolio writes a covered put option, it gives the purchaser
of the option the right to sell the underlying security to the Portfolio at
the specified exercise price at any time during the option period. If the
option expires unexercised, the Portfolio will realize income in the amount
of the premium received for writing the option. If the put option is
exercised, a decision over which the Portfolio has no control, the
Portfolio must purchase the underlying security from the option holder at
the exercise price. By writing a covered put option, the Portfolio, in
exchange for the net premium received, accepts the risk of a decline in the
market value of the underlying security below the exercise price. The
Portfolio will only write put options involving securities for which a
determination is made at the time the option is written that the Portfolio
wishes to acquire the securities at the exercise price.
A Portfolio may terminate its obligation as the writer of a call or
put option by purchasing an option with the same exercise price and
expiration date as the option previously written. This transaction is
called a "closing purchase transaction." The Portfolio will realize a
profit or loss for a closing purchase transaction if the amount paid to
purchase an option is less or more, as the case may be, than the amount
received from the sale thereof. To close out a position as a purchaser of
an option, the Portfolio, may make a `closing sale transaction'' which
involves liquidating the Portfolio's position by selling the option
previously purchased. Where the Portfolio cannot effect a closing purchase
transaction, it may be forced to incur brokerage commissions or dealer
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spreads in selling securities it receives or it may be forced to hold
underlying securities until an option is exercised or expires.
When a Portfolio writes an option, an amount equal to the net premium
received by the Portfolio is included in the liability section of the
Portfolio's Statement of Assets and Liabilities as a deferred credit. The
amount of the deferred credit will be subsequently marked to market to
reflect the current market value of the option written. The current market
value of a traded option is the last sale price or, in the absence of a
sale, the mean between the closing bid and asked price. If an option
expires on its stipulated expiration date or if the Portfolio enters into a
closing purchase transaction, the Portfolio will realize a gain (or loss if
the cost of a closing purchase transaction exceeds the premium received
when the option was sold), and the deferred credit related to such option
will be eliminated. If a call option is exercised, the Portfolio will
realize a gain or loss from the sale of the underlying security and the
proceeds of the sale will be increased by the premium originally received.
The writing of covered call options may be deemed to involve the pledge of
the securities against which the option is being written. Securities
against which call options are written will be segregated on the books of
the custodian for the Portfolio.
A Portfolio may purchase call and put options on any securities in
which it may invest. The Portfolio would normally purchase a call option in
anticipation of an increase in the market value of such securities. The
purchase of a call option would entitle the Portfolio, in exchange for the
premium paid, to purchase a security at a specified price during the option
period. The Portfolio would ordinarily have a gain if the value of the
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securities increased above the exercise price sufficiently to cover the
premium and would have a loss if the value of the securities remained at or
below the exercise price during the option period.
A Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective
puts") or securities of the type in which it is permitted to invest. The
purchase of a put option would entitle the Portfolio, in exchange for the
premium paid, to sell a security, which may or may not be held in the
Portfolio's portfolio, at a specified price during the option period. The
purchase of protective puts is designed merely to offset or hedge against a
decline in the market value of the Portfolio's portfolio securities. Put
options also may be purchased by the Portfolio for the purpose of
affirmatively benefiting from a decline in the price of securities which
the Portfolio does not own. The Portfolio would ordinarily recognize a gain
if the value of the securities decreased below the exercise price
sufficiently to cover the premium and would recognize a loss if the value
of the securities remained at or above the exercise price. Gains and losses
on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
Each Portfolio has adopted certain other nonfundamental policies
concerning option transactions which are discussed below. The Portfolio's
activities in options may also be restricted by the requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification
as a regulated investment company.
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The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that
the option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying
securities markets that cannot be reflected in the option markets. It is
impossible to predict the volume of trading that may exist in such options,
and there can be no assurance that viable exchange markets will develop or
continue.
A Portfolio may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately
ten broker-dealers, including several of the largest primary dealers in
U.S. government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker
rather than an exchange, and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. To
reduce this risk, the Portfolio will purchase such options only from
broker-dealers who are primary government securities dealers recognized by
the Federal Reserve Bank of New York and who agree to (and are expected to
be capable of) entering into closing transactions, although there can be no
guarantee that any such option will be liquidated at a favorable price
prior to expiration. The Adviser will monitor the creditworthiness of
dealers with whom the Portfolio enters into such options transactions under
the general supervision of the Portfolios' Trustees.
Options on Securities Indices. In addition to options on securities,
each Portfolio may also purchase and write (sell) call and put options on
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securities indices. Such options give the holder the right to receive a
cash settlement during the term of the option based upon the difference
between the exercise price and the value of the index. Such options will be
used for the purposes described above under "Options on Securities."
EAFE(R) Equity Index Portfolio may, to the extent allowed by Federal
and state securities laws, invest in securities indices instead of
investing directly in individual foreign securities.
Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close
out options positions on securities indices is more likely to occur,
although the Portfolio generally will only purchase or write such an option
if the Adviser believes the option can be closed out.
Use of options on securities indices also entails the risk that
trading in such options may be interrupted if trading in certain securities
included in the index is interrupted. The Portfolio will not purchase such
options unless the Adviser believes the market is sufficiently developed
such that the risk of trading in such options is no greater than the risk
of trading in options on securities.
Price movements in a Portfolio's portfolio may not correlate precisely
with movements in the level of an index and, therefore, the use of options
on indices cannot serve as a complete hedge. Because options on securities
indices require settlement in cash, the Adviser may be forced to liquidate
portfolio securities to meet settlement obligations.
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Forward Foreign Currency Exchange Contracts. Because each Portfolio
may buy and sell securities denominated in currencies other than the U.S.
dollar and receives interest, dividends and sale proceeds in currencies
other than the U.S. dollar, each Portfolio from time to time may enter into
foreign currency exchange transactions to convert to and from different
foreign currencies and to convert foreign currencies to and from the U.S.
dollar. A Portfolio either enters into these transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange
market or uses forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by a
Portfolio to purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract. Forward
foreign currency exchange contracts establish an exchange rate at a future
date. These contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and
their customers. A forward foreign currency exchange contract generally has
no deposit requirement and is traded at a net price without commission.
Each Portfolio maintains with its custodian a segregated account of high
grade liquid assets in an amount at least equal to its obligations under
each forward foreign currency exchange contract. Neither spot transactions
nor forward foreign currency exchange contracts eliminate fluctuations in
the prices of the Portfolio's securities or in foreign exchange rates, or
prevent loss if the prices of these securities should decline.
Each Portfolio may enter into foreign currency hedging transactions in
an attempt to protect against changes in foreign currency exchange rates
between the trade and settlement dates of specific securities transactions
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or changes in foreign currency exchange rates that would adversely affect a
portfolio position or an anticipated investment position. Since
consideration of the prospect for currency parities will be incorporated
into Bankers Trust's long-term investment decisions, a Portfolio will not
routinely enter into foreign currency hedging transactions with respect to
security transactions; however, Bankers Trust believes that it is important
to have the flexibility to enter into foreign currency hedging transactions
when it determines that the transactions would be in the Portfolio's best
interest. Although these transactions tend to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same time they
tend to limit any potential gain that might be realized should the value of
the hedged currency increase. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of such
securities between the date the forward contract is entered into and the
date it matures. The projection of currency market movements is extremely
difficult, and the successful execution of a hedging strategy is highly
uncertain.
While these contracts are not presently regulated by the CFTC, the
CFTC may in the future assert authority to regulate forward contracts. In
such event the Portfolio's ability to utilize forward contracts in the
manner set forth in the Prospectus may be restricted. Forward contracts may
reduce the potential gain from a positive change in the relationship
between the U.S. dollar and foreign currencies. Unanticipated changes in
currency prices may result in poorer overall performance for the Portfolio
than if it had not entered into such contracts. The use of foreign currency
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forward contracts may not eliminate fluctuations in the underlying U.S.
dollar equivalent value of the prices of or rates of return on a
Portfolio's foreign currency denominated portfolio securities and the use
of such techniques will subject a Portfolio to certain risks.
The matching of the increase in value of a forward contract and the
decline in the U.S. dollar equivalent value of the foreign currency
denominated asset that is the subject of the hedge generally will not be
precise. In addition, a Portfolio may not always be able to enter into
foreign currency forward contracts at attractive prices and this will limit
the Portfolio's ability to use such contract to hedge or cross-hedge its
assets. Also, with regard to a Portfolio's use of cross-hedges, there can
be no assurance that historical correlations between the movement of
certain foreign currencies relative to the U.S. dollar will continue. Thus,
at any time poor correlation may exist between movements in the exchange
rates of the foreign currencies underlying a Portfolio's cross-hedges and
the movements in the exchange rates of the foreign currencies in which the
Portfolio's assets that are the subject of such cross-hedges are
denominated.
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Rating Services
The ratings of rating services represent their opinions as to the
quality of the securities that they undertake to rate. It should be
emphasized, however, that ratings are relative and subjective and are not
absolute standards of quality. Although these ratings are an initial
criterion for selection of portfolio investments, Bankers Trust also makes
its own evaluation of these securities, subject to review by the Board of
Trustees. After purchase by a Portfolio, an obligation may cease to be
rated or its rating may be reduced below the minimum required for purchase
by the Portfolio. Neither event would require a Fund to eliminate the
obligation from its portfolio, but Bankers Trust will consider such an
event in its determination of whether a Fund should continue to hold the
obligation. A description of the ratings used herein and in the Funds'
Prospectuses is set forth in the Appendix herein.
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Investment Restrictions
The following investment restrictions are "fundamental policies" of
each Fund and each Portfolio and may not be changed with respect to the
Fund or the Portfolio without the approval of a "majority of the
outstanding voting securities" of the Fund or the Portfolio, as the case
may be. "Majority of the outstanding voting securities" under the 1940 Act,
and as used in this Statement of Additional Information and the Prospectus,
means, with respect to the Fund (or the Portfolio), the lesser of (i) 67%
or more of the outstanding voting securities of the Fund (or of the total
beneficial interests of the Portfolio) present at a meeting, if the holders
of more than 50% of the outstanding voting securities of the Fund or of the
total beneficial interests of the Portfolio) are present or represented by
proxy or (ii) more than 50% of the outstanding voting securities of the
Fund (or of the total beneficial interests of the Portfolio). Whenever the
Trust is requested to vote on a fundamental policy of a Portfolio, the
Trust will hold a meeting of the corresponding Fund's shareholders and will
cast its vote as instructed by that Fund's shareholders. Fund shareholders
who do not vote will not affect the Trust's votes at the Portfolio meeting.
The percentage of the Trust's votes representing Fund shareholders not
voting will be voted by the Trustees of the Trust in the same proportion as
the Fund shareholders who do, in fact, vote.
As a matter of fundamental policy, no Portfolio (or Fund) may (except
that no investment restriction of a Fund shall prevent a Fund from
investing all of its Assets in an open-end investment company with
substantially the same investment objectives):
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(1) borrow money or mortgage or hypothecate assets of the Portfolio
(Fund), except that in an amount not to exceed 1/3 of the current value of
the Portfolio's (Fund's) assets, it may borrow money as a temporary measure
for extraordinary or emergency purposes and enter into reverse repurchase
agreements or dollar roll transactions, and except that it may pledge,
mortgage or hypothecate not more than 1/3 of such assets to secure such
borrowings (it is intended that money would be borrowed only from banks and
only either to accommodate requests for the withdrawal of beneficial
interests (redemption of shares) while effecting an orderly liquidation of
portfolio securities or to maintain liquidity in the event of an
unanticipated failure to complete a portfolio security transaction or other
similar situations) or reverse repurchase agreements, provided that
collateral arrangements with respect to options and futures, including
deposits of initial deposit and variation margin, are not considered a
pledge of assets for purposes of this restriction and except that assets
may be pledged to secure letters of credit solely for the purpose of
participating in a captive insurance company sponsored by the Investment
Company Institute; for additional related restrictions, see clause (i)
under the caption "Additional Restrictions" below (as an operating policy,
the Portfolios may not engage in dollar roll transactions);
(2) underwrite securities issued by other persons except insofar as
the Portfolios (Trust or the Funds) may technically be deemed an
underwriter under the 1933 Act in selling a portfolio security;
(3) make loans to other persons except: (a) through the lending of the
Portfolio's (Fund's) portfolio securities and provided that any such loans
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not exceed 30% of the Portfolio's (Fund's) total assets (taken at market
value); (b) through the use of repurchase agreements or the purchase of
short-term obligations; or (c) by purchasing a portion of an issue of debt
securities of types distributed publicly or privately;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or commodity
contracts (except futures and option contracts) in the ordinary course of
business (except that the Portfolio (Trust) may hold and sell, for the
Portfolio's (Fund's) portfolio, real estate acquired as a result of the
Portfolio's (Fund's) ownership of securities);
(5) concentrate its investments in any particular industry (excluding
U.S. Government securities), but if it is deemed appropriate for the
achievement of a Portfolio's (Fund's) investment objective(s), up to 25% of
its total assets may be invested in any one industry; and
(6) issue any senior security (as that term is defined in the
1940 Act) if such issuance is specifically prohibited by the 1940 Act or
the rules and regulations promulgated thereunder, provided that collateral
arrangements with respect to options and futures, including deposits of
initial deposit and variation margin, are not considered to be the issuance
of a senior security for purposes of this restriction.
Additional Restrictions. In order to comply with certain statutes and
policies each Portfolio (or the Trust, on behalf of each Fund) will not as
a matter of operating policy (except that no operating policy shall prevent
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a Fund from investing all of its Assets in an open-end investment company
with substantially the same investment objectives):
(i) borrow money (including through reverse repurchase or forward
roll transactions) for any purpose in excess of 5% of the Portfolio's
(Fund's) total assets (taken at cost), except that the Portfolio
(Fund) may borrow for temporary or emergency purposes up to 1/3 of its
total assets;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10%
of the Portfolio's (Fund's) total assets (taken at market value),
provided that collateral arrangements with respect to options and
futures, including deposits of initial deposit and variation margin,
and reverse repurchase agreements are not considered a pledge of
assets for purposes of this restriction;
(iii) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the
clearance of purchases and sales of securities may be obtained and
except that deposits of initial deposit and variation margin may be
made in connection with the purchase, ownership, holding or sale of
futures;
(iv) sell securities it does not own such that the dollar amount of
such short sales at any one time exceeds 25% of the net equity of the
Portfolio (Fund), and the value of securities of any one issuer in
which the Portfolio (Fund) is short exceeds the lesser of 2.0% of the
value of the Portfolio's (Fund's) net assets or 2.0% of the securities
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of any class of any U.S. issuer and, provided that short sales may be
made only in those securities which are fully listed on a national
securities exchange or a foreign exchange (This provision does not
include the sale of securities of the Portfolio (Fund)
contemporaneously owns or has the right to obtain securities
equivalent in kind and amount to those sold, i.e., short sales against
the box.) (the Portfolios (Funds) have no current intention to engage
in short selling);
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a sponsor
or dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation; provided,
however, that securities of any investment company will not be
purchased for the Portfolio (Fund) if such purchase at the time
thereof would cause: (a) more than 10% of the Portfolio's (Fund's)
total assets (taken at the greater of cost or market value) to be
invested in the securities of such issuers; (b) more than 5% of the
Portfolio's (Fund's) total assets (taken at the greater of cost or
market value) to be invested in any one investment company; or
(c) more than 3% of the outstanding voting securities of any such
issuer to be held for the Portfolio (Fund); provided further that,
except in the case of a merger or consolidation, the Portfolio (Fund)
shall not purchase any securities of any open-end investment company
unless the Portfolio (Fund) (1) waives the investment advisory fee
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with respect to assets invested in other open-end investment companies
and (2) incurs no sales charge in connection with the investment (as
an operating policy, each Portfolio will not invest in another open-
end registered investment company);
(vii) invest more than 10% of the Portfolio's (Fund's) total assets
(taken at the greater of cost or market value) in securities that are
restricted as to resale under the 1933 Act (other than Rule 144A
securities deemed liquid by the Portfolio's (Fund's) Board of
Trustees);
(viii) invest more than 15% of the Portfolio's (Fund's) net assets
(taken at the greater of cost or market value) in securities that are
illiquid or not readily marketable not including (a) Rule 144A
securities that have been determined to be liquid by the Board of
Trustees; and (b) commercial paper that is sold under section 4(2) of
the 1933 Act which: (i) is not traded flat or in default as to
interest or principal; and (ii) is rated in one of the two highest
categories by at least two nationally recognized statistical rating
organizations and the Portfolio's (Fund's) Board of Trustees have
determined the commercial paper to be liquid; or (iii) is rated in one
of the two highest categories by one nationally recognized statistical
rating agency and the Portfolio's (Fund's) Board of Trustees have
determined that the commercial paper is equivalent quality and is
liquid;
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(ix) no more than 5% of the Portfolio's (Fund's) total assets are
invested in securities issued by issuers which (including
predecessors) have been in operation less than three years;
(x) with respect to 75% of the Portfolio's (Fund's) total assets,
purchase securities of any issuer if such purchase at the time thereof
would cause the Portfolio (Fund) to hold more than 10% of any class of
securities of such issuer, for which purposes all indebtedness of an
issuer shall be deemed a single class and all preferred stock of an
issuer shall be deemed a single class, except that futures or option
contracts shall not be subject to this restriction;
(xi) if the Portfolio (Fund) is a "diversified" fund with respect to
75% of its assets, invest more than 5% of its total assets in the
securities (excluding U.S. government securities) of any one issuer;
(xii) invest in securities issued by an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of
the Portfolio (Trust), or is an officer or partner of the Adviser, if
after the purchase of the securities of such issuer for the Portfolio
(Fund) one or more of such persons owns beneficially more than 1/2 of
1% of the shares or securities, or both, all taken at market value, of
such issuer, and such persons owning more than 1/2 of 1% of such
shares or securities together own beneficially more than 5% of such
shares or securities, or both, all taken at market value;
(xiii) invest in warrants (other than warrants acquired by the Portfolio
(Fund) as part of a unit or attached to securities at the time of
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purchase) if, as a result, the investments (valued at the lower of
cost or market) would exceed 5% of the value of the Portfolio's
(Fund's) net assets or if, as a result, more than 2% of the
Portfolio's (Fund's) net assets would be invested in warrants not
listed on a recognized United States or foreign stock exchange, to the
extent permitted by applicable state securities laws;
(xiv) write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is
within the Investment Practices of the Portfolio (Fund) and the option
is issued by the Options Clearing Corporation, except for put and call
options issued by non-U.S. entities or listed on non-U.S. securities
or commodities exchanges; (b) the aggregate value of the obligations
underlying the puts determined as of the date the options are sold
shall not exceed 5% of the Portfolio's (Fund's) net assets; (c) the
securities subject to the exercise of the call written by the
Portfolio (Fund) must be owned by the Portfolio (Fund) at the time the
call is sold and must continue to be owned by the Portfolio (Fund)
until the call has been exercised, has lapsed, or the Portfolio (Fund)
has purchased a closing call, and such purchase has been confirmed,
thereby extinguishing the Portfolio's (Fund's) obligation to deliver
securities pursuant to the call it has sold; and (d) at the time a put
is written, the Portfolio (Fund) establishes a segregated account with
its custodian consisting of cash or short-term U.S. government
securities equal in value to the amount the Portfolio (Fund) will be
obligated to pay upon exercise of the put (this account must be
maintained until the put is exercised, has expired, or the Portfolio
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(Fund) has purchased a closing put, which is a put of the same series
as the one previously written); and
(xv) buy and sell puts and calls on securities, stock index futures or
options on stock index futures, or financial futures or options on
financial futures unless such options are written by other persons
and: (a) the options or futures are offered through the facilities of
a national securities association or are listed on a national
securities or commodities exchange, except for put and call options
issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate premiums paid on all such
options which are held at any time do not exceed 20% of the
Portfolio's (Fund's) total net assets; and (c) the aggregate margin
deposits required on all such futures or options thereon held at any
time do not exceed 5% of the Portfolio's (Fund's) total assets.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or
total assets, in the securities rating of the investment, or any other
later change.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Adviser is responsible for decisions to buy and sell securities,
futures contracts and options on such securities and futures for each
Portfolio, the selection of brokers, dealers and futures commission
merchants to effect transactions and the negotiation of brokerage
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commissions, if any. Broker-dealers may receive brokerage commissions on
portfolio transactions, including options, futures and options on futures
transactions and the purchase and sale of underlying securities upon the
exercise of options. Orders may be directed to any broker-dealer or futures
commission merchant, including to the extent and in the manner permitted by
applicable law, Bankers Trust or its subsidiaries or affiliates. Purchases
and sales of certain portfolio securities on behalf of a Portfolio are
frequently placed by the Adviser with the issuer or a primary or secondary
market-maker for these securities on a net basis, without any brokerage
commission being paid by the Portfolio. Trading does, however, involve
transaction costs. Transactions with dealers serving as market-makers
reflect the spread between the bid and asked prices. Transaction costs may
also include fees paid to third parties for information as to potential
purchasers or sellers of securities. Purchases of underwritten issues may
be made which will include an underwriting fee paid to the underwriter.
The Adviser seeks to evaluate the overall reasonableness of the
brokerage commissions paid (to the extent applicable) in placing orders for
the purchase and sale of securities for a Portfolio taking into account
such factors as price, commission (negotiable in the case of national
securities exchange transactions), if any, size of order, difficulty of
execution and skill required of the executing broker-dealer through
familiarity with commissions charged on comparable transactions, as well as
by comparing commissions paid by the Portfolio to reported commissions paid
by others. The Adviser reviews on a routine basis commission rates,
execution and settlement services performed, making internal and external
comparisons.
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The Adviser is authorized, consistent with Section 28(e) of the
Securities Exchange Act of 1934, as amended, when placing portfolio
transactions for a Portfolio with a broker to pay a brokerage commission
(to the extent applicable) in excess of that which another broker might
have charged for effecting the same transaction on account of the receipt
of research, market or statistical information. The term "research, market
or statistical information" includes advice as to the value of securities;
the advisability of investing in, purchasing or selling securities; the
availability of securities or purchasers or sellers of securities; and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of
accounts.
Consistent with the policy stated above, the Rules of Fair Practice of
the NASD and such other policies as the Trustees of the Portfolio may
determine, the Adviser may consider sales of shares of the Fund as a factor
in the selection of broker-dealers to execute portfolio transactions.
Bankers Trust will make such allocations if commissions are comparable to
those charged by nonaffiliated, qualified broker-dealers for similar
services.
Higher commissions may be paid to firms that provide research services
to the extent permitted by law. Bankers Trust may use this research
information in managing each Portfolio's assets, as well as the assets of
other clients.
Except for implementing the policies stated above, there is no
intention to place portfolio transactions with particular brokers or
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dealers or groups thereof. In effecting transactions in over-the-counter
securities, orders are placed with the principal market-makers for the
security being traded unless, after exercising care, it appears that more
favorable results are available otherwise.
Although certain research, market and statistical information from
brokers and dealers can be useful to a Portfolio and to the Adviser, it is
the opinion of the management of the Portfolios that such information is
only supplementary to the Adviser's own research effort, since the
information must still be analyzed, weighed and reviewed by the Adviser's
staff. Such information may be useful to the Adviser in providing services
to clients other than the Portfolios, and not all such information is used
by the Adviser in connection with the Portfolios. Conversely, such
information provided to the Adviser by brokers and dealers through whom
other clients of the Adviser effect securities transactions may be useful
to the Adviser in providing services to the Portfolios.
In certain instances there may be securities which are suitable for a
Portfolio as well as for one or more of the Adviser's other clients.
Investment decisions for a Portfolio and for the Adviser's other clients
are made with a view to achieving their respective investment objectives.
It may develop that a particular security is bought or sold for only one
client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more
clients when one or more clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the
same security is suitable for the investment objectives of more than one
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client. When two or more clients are simultaneously engaged in the purchase
or sale of the same security, the securities are allocated among clients in
a manner believed to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of
the security as far as a Portfolio is concerned. However, it is believed
that the ability of a Portfolio to participate in volume transactions will
produce better executions for the Portfolio.
For the years ended December 31, 1996, 1995, and 1994, Equity 500
Index Portfolio paid brokerage commissions in the amount of $289,791,
$172,924, and $97,069, respectively.
For the period from July 10, 1996 (Commencement of Operations) to
December 31, 1996, the Small Cap Index Portfolio, paid brokerage
commissions in the amount of $55,569.
For the period from January 24, 1996 (Commencement of Operations) to
December 31, 1996, the EAFE Equity Index Portfolio, paid brokerage
commissions in the amount of 66,791.
{PRIVATE }PERFORMANCE INFORMATION{TC \L 1 "PERFORMANCE INFORMATION"}
STANDARD PERFORMANCE INFORMATION
From time to time, quotations of a Fund's performance may be included
in advertisements, sales literature or shareholder reports. These
performance figures are calculated in the following manner:
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YIELD: Yields for a Fund used in advertising are computed by dividing
the Fund's interest and dividend income for a given 30-day or one-
month period, net of expenses, by the average number of shares
entitled to receive distributions during the period, dividing this
figure by the Fund's net asset value per share at the end of the
period, and annualizing the result (assuming compounding of income) in
order to arrive at an annual percentage rate. Income is calculated for
purpose of yield quotations in accordance with standardized methods
applicable to all stock and bond mutual funds. Dividends from equity
investments are treated as if they were accrued on a daily basis,
solely for the purpose of yield calculations. In general, interest
income is reduced with respect to bonds trading at a premium over
their par value by subtracting a portion of the premium from income on
a daily basis, and is increased with respect to bonds trading at a
discount by adding a portion of the discount to daily income. Capital
gains and losses generally are excluded from the calculation.
Income calculated for the purposes of calculating a Fund's yield
differs from income as determined for other accounting purposes.
Because of the different accounting methods used, and because of the
compounding assumed in yield calculations, the yield quoted for a Fund
may differ from the rate of distributions of the Fund paid over the
same period or the rate of income reported in the Fund's financial
statements.
TOTAL RETURN: A Fund's average annual total return is calculated for
certain periods by determining the average annual compounded rates of
return over those periods that would cause an investment of $1,000
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(made at the maximum public offering price with all distributions
reinvested) to reach the value of that investment at the end of the
periods. A Fund may also calculate total return figures which
represent aggregate performance over a period or year-by-year
performance.
PERFORMANCE RESULTS: Any total return quotation provided for a Fund
should not be considered as representative of the performance of the
Fund in the future since the net asset value and public offering price
of shares of the Fund will vary based not only on the type, quality
and maturities of the securities held in the corresponding Portfolio,
but also on changes in the current value of such securities and on
changes in the expenses of the Fund and the corresponding Portfolio.
These factors and possible differences in the methods used to
calculate total return should be considered when comparing the total
return of a Fund to total returns published for other investment
companies or other investment vehicles. Total return reflects the
performance of both principal and income.
COMPARISON OF FUND PERFORMANCE
Comparison of the quoted nonstandardized performance of various
investments is valid only if performance is calculated in the same manner.
Since there are different methods of calculating performance, investors
should consider the effect of the methods used to calculate performance
when comparing performance of a Fund with performance quoted with respect
to other investment companies or types of investments.
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In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or
to unmanaged indices which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management
costs.
Evaluations of a Fund's performance made by independent sources may
also be used in advertisements concerning the Fund. Sources for a Fund's
performance information could include the following:
Asian Wall Street Journal, a weekly Asian newspaper that often reviews
U.S. mutual funds investing internationally.
Barron's, a Dow Jones and Company, Inc. business and financial weekly
that periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports
the performance rankings and ratings of a variety of mutual funds investing
abroad.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
Consumer Digest, a monthly business/financial magazine that includes a
"Money Watch" section featuring financial news.
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Financial Times, Europe's business newspaper, which features from time
to time articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a
"Market Watch" department reporting on activities in the mutual fund
industry.
Forbes, a national business publication that from time to time reports
the performance of specific investment companies in the mutual fund
industry.
Fortune, a national business publication that periodically rates the
performance of a variety of mutual funds.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
Investor's Daily, a daily newspaper that features financial, economic
and business news.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a
weekly publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both
specific funds and the mutual fund industry as a whole.
Morningstar Inc., a publisher of financial information and mutual fund
research.
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New York Times, a nationally distributed newspaper which regularly
covers financial news.
Personal Investing News, a monthly news publication that often reports
on investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that
includes a "Mutual Funds Outlook" section reporting on mutual fund
performance measures, yields, indices and portfolio holdings.
Success, a monthly magazine targeted to the world of entrepreneurs and
growing business, often featuring mutual fund performance data.
U.S. News and World Report, a national business weekly that
periodically reports mutual fund performance data.
Value Line, a biweekly publication that reports on the largest 15,000
mutual funds.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.
Weisenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient
features, management results, income and dividend records, and price
ranges.
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Working Women, a monthly publication that features a "Financial
Workshop" section reporting on the mutual fund/financial industry.
VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND
Equity and debt securities (other than short-term debt obligations
maturing in 60 days or less), including listed securities and securities
for which price quotations are available, will normally be valued on the
basis of market valuations furnished by a pricing service. Short-term debt
obligations and money market securities maturing in 60 days or less are
valued at amortized cost, which approximates market.
Securities for which market quotations are not available are valued by
Bankers Trust pursuant to procedures adopted by each Portfolio's Board of
Trustees. It is generally agreed that securities for which market
quotations are not readily available should not be valued at the same value
as that carried by an equivalent security which is readily marketable.
The problems inherent in making a good faith determination of value
are recognized in the codification effected by SEC Financial Reporting
Release No. 1 ("FRR 1" (formerly Accounting Series Release No. 113)) which
concludes that there is "no automatic formula" for calculating the value of
restricted securities. It recommends that the best method simply is to
consider all relevant factors before making any calculation. According to
FRR 1 such factors would include consideration of the:
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type of security involved, financial statements, cost at date of
purchase, size of holding, discount from market value of
unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as to
any transactions or offers with respect to the security,
existence of merger proposals or tender offers affecting the
security, price and extent of public trading in similar
securities of the issuer or comparable companies, and other
relevant matters.
To the extent that a Portfolio purchases securities which are
restricted as to resale or for which current market quotations are not
available, the Adviser of the Portfolio will value such securities based
upon all relevant factors as outlined in FRR 1.
The Trust, on behalf of each Fund, and each Portfolio reserve the
right, if conditions exist which make cash payments undesirable, to honor
any request for redemption or repurchase order by making payment in whole
or in part in readily marketable securities chosen by the Trust, or the
Portfolio, as the case may be, and valued as they are for purposes of
computing the Fund's or the Portfolio's net asset value, as the case may be
(a redemption in kind). If payment is made to a Fund shareholder in
securities, an investor, including the Fund, the shareholder may incur
transaction expenses in converting these securities into cash. The Trust,
on behalf of each Fund, and each Portfolio have elected, however, to be
governed by Rule 18f-1 under the 1940 Act as a result of which each Fund
and each Portfolio are obligated to redeem shares or beneficial interests,
as the case may be, with respect to any one investor during any 90-day
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period, solely in cash up to the lesser of $250,000 or 1% of the net asset
value of the Fund or the Portfolio, as the case may be, at the beginning of
the period.
Each Portfolio has agreed to make a redemption in kind to the
corresponding Fund whenever the Fund wishes to make a redemption in kind
and therefore shareholders of the Fund that receive redemptions in kind
will receive portfolio securities of the corresponding Portfolio and in no
case will they receive a security issued by the Portfolio. The Portfolio
has advised the Trust that the Portfolio will not redeem in kind except in
circumstances in which the Fund is permitted to redeem in kind or unless
requested by the Fund.
Each investor in a Portfolio, including the corresponding Fund, may
add to or reduce its investment in the Portfolio on each day the Portfolio
determines its net asset value. At the close of each such business day, the
value of each investor's beneficial interest in the Portfolio will be
determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, which represents that investor's share
of the aggregate beneficial interests in the Portfolio. Any additions or
withdrawals which are to be effected as of the close of business on that
day will then be effected. The investor's percentage of the aggregate
beneficial interests in the Portfolio will then be recomputed as the
percentage equal to the fraction (i) the numerator of which is the value of
such investor's investment in the Portfolio as of the close of business on
such day plus or minus, as the case may be, the amount of net additions to
or withdrawals from the investor's investment in the Portfolio effected as
of the close of business on such day, and (ii) the denominator of which is
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the aggregate net asset value of the Portfolio as of the close of business
on such day plus or minus, as the case may be, the amount of net additions
to or withdrawals from the aggregate investments in the Portfolio by all
investors in the Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in the Portfolio
as the close of business on the following business day.
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Each Fund may, at its own option, accept securities in payment for
shares. The securities delivered in payment for shares are valued by the
method described under "Net Asset Value" as of the day the Fund receives
the securities. This is a taxable transaction to the shareholder.
Securities may be accepted in payment for shares only if they are, in the
judgment of Bankers Trust, appropriate investments for the Fund's
corresponding Portfolio. In addition, securities accepted in payment for
shares must: (i) meet the investment objective and policies of the
acquiring Fund's corresponding Portfolio; (ii) be acquired by the
applicable Fund for investment and not for resale (other than for resale to
the Fund's corresponding Portfolio); (iii) be liquid securities which are
not restricted as to transfer either by law or liquidity of market; and
(iv) if stock, have a value which is readily ascertainable as evidenced by
a listing on a stock exchange, over-the-counter market or by readily
available market quotations from a dealer in such securities. When
securities are used as payment for shares or as a redemption in kind from
the fund, the transaction fee will not be assessed. However, the
shareholder will be charged the costs associated with receiving or
delivering the securities. These costs include security movement costs and
taxes and registration costs. Each Fund reserves the right to accept or
reject at its own option any and all securities offered in payment for its
shares.
{PRIVATE }MANAGEMENT OF THE TRUSTS AND THE PORTFOLIOS{TC \L 1 "MANAGEMENT
OF THE TRUSTS AND THE PORTFOLIOS"}
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Each Board of Trustees is composed of persons experienced in financial
matters who meet throughout the year to oversee the activities of the Funds
or Portfolios they represent. In addition, the Trustees review contractual
arrangements with companies that provide services to the Funds/Portfolios
and review the Funds' performance.
The Trustees and officers of the Trusts and Portfolios their
birthdates, their principal occupations during the past five years, and
addresses are set forth below. Their titles may have varied during that
period. Asterisks indicate those Trustees who are "interested persons" (as
defined in the 1940 Act) of the Trust. Unless otherwise indicated, the
address of each officer is Clearing Operations, P.O. Box 897, Pittsburgh,
Pennsylvania 15230-0897.
TRUSTEES OF THE BT ADVISOR FUNDS
{PRIVATE }{TC \L 1 ""}
PHILIP W. COOLIDGE* (birthdate: September 2, 1951) - President and
Trustee; Chairman, Chief Executive Officer and President, Signature
Financial Group, Inc. ("SFG") (since December, 1988) and Signature (since
April, 1989). His address is 6 St. James Avenue, Boston, Massachusetts
02116.
MARTIN J. GRUBER (birthdate: July 15, 1937) - Trustee; Chairman of the
Finance Department and Nomura Professor of Finance, Leonard N. Stern School
of Business, New York University (since 1964). His address is 229 S.
Irving Street, Ridgewood, New Jersey 07450.
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RICHARD J. HERRING (birthdate: February 18, 1946) - Trustee;
Professor, Finance Department, The Wharton School, University of
Pennsylvania. His address is The Wharton School, University of Pennsylvania
Finance Department, 3303 Steinberg Hall/Dietrich Hall, Philadelphia,
Pennsylvania 19104.
BRUCE E. LANGTON (birthdate: May 10, 1931) - Trustee; Retired;
Director, Adela Investment Co. and University Patents, Inc.; formerly
Assistant Treasurer of IBM Corporation (until 1986). His address is 99
Jordan Lane, Stamford, Connecticut 06903.
HARRY VAN BENSCHOTEN (birthdate: February 18, 1928) - Trustee; Retired
(since 1987); Corporate Vice President, Newmont Mining Corporation (prior
to 1987); Director, Canada Life Insurance Company of New York and
Competitive Technologies, Inc., a public company listed on the American
Stock Exchange. His address is 6581 Ridgewood Drive, Naples, Florida 33963.
TRUSTEES OF BT INSTITUTIONAL FUNDS
PHILIP W. COOLIDGE* (birthdate: September 2, 1951) - President and
Trustee; Chairman, Chief Executive Officer and President, SFG (since
December, 1988) and Signature (since April, 1989). His address is 6 St.
James Avenue, Boston, Massachusetts 02116.
RICHARD J. HERRING (birthdate: February 18, 1946) - Trustee;
Professor, Finance Department, The Wharton School, University of
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Pennsylvania. His address is The Wharton School, University of Pennsylvania
Finance Department, 3303 Steinberg Hall/Dietrich Hall, Philadelphia,
Pennsylvania 19104.
BRUCE E. LANGTON (birthdate: May 10, 1931) - Trustee; Retired;
Director, Adela Investment Co. and University Patents, Inc.; formerly
Assistant Treasurer of IBM Corporation (until 1986). His address is 99
Jordan Lane, Stamford, Connecticut 06903.
CHARLES P. BIGGAR (birthdate: October 13, 1930) - Trustee; Retired;
Director of Chase/NBW Bank Advisory Board; Director, Batemen, Eichler, Hill
Richards Inc.; formerly Vice President of International Business Machines
and President of the National Services and the Field Engineering Divisions
of IBM. His address is 12 Hitching Post Lane, Chappaqua, New York 10514.
TRUSTEES OF THE PORTFOLIOS
CHARLES P. BIGGAR (birthdate: October 13, 1930) - Trustee; Retired;
Director of Chase/NBW Bank Advisory Board; Director, Batemen, Eichler, Hill
Richards Inc.; formerly Vice President of International Business Machines
and President of the National Services and the Field Engineering Divisions
of IBM. His address is 12 Hitching Post Lane, Chappaqua, New York 10514.
PHILIP W. COOLIDGE* (birthdate: September 2, 1951) - President and
Trustee; Chairman, Chief Executive Officer and President, SFG (since
December, 1988) and Signature (since April, 1989). His address is 6 St.
James Avenue, Boston, Massachusetts 02116.
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S. LELAND DILL (birthdate: March 28, 1930) - Trustee; Retired;
Director, Coutts Group, Coutts (U.S.A.) International; Coutts Trust Ltd.;
Director, Zweig Series Trust; formerly Partner of KPMG Peat Marwick;
Director, Vinters International Company Inc.; General Partner of Pemco (an
investment company registered under the 1940 Act). His address is 5070
North Ocean Drive, Singer Island, Florida 33404.
PHILIP SAUNDERS, JR. (birthdate: October 11, 1935) - Trustee;
Principal, Philip Saunders Associates (Consulting); former Director of
Financial Industry Consulting, Wolf & Company; President, John Hancock Home
Mortgage Corporation; and Senior Vice President of Treasury and Financial
Services, John Hancock Mutual Life Insurance Company, Inc. His address is
445 Glen Road, Weston, Massachusetts 02193.
* Indicates and ``nterested person'' as defined by the 1940 Act.
OFFICERS OF THE TRUSTS AND PORTFOLIOS
Unless otherwise specified, each officer listed below holds the same
position with each Trust and each Portfolio.
RONALD M. PETNUCH - (birthdate: February 27, 1960) - President and
Treasurer; Senior Vice President; Federated Services Company ("FSC");
formerly, Director of Proprietary Client Services, Federated Administrative
Services ("FAS"), and Associate Corporate Counsel, Federated Investors
("FI").
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CHARLES L. DAVIS, JR. - (birthdate: March 23, 1960) - Vice President
and Assistant Treasurer; Vice President, FAS.
JAY S. NEUMAN - (birthdate: April 22, 1950) - Secretary; Corporate
Counsel, FI.
Messrs. Coolidge, Petnuch, Davis & Neuman also hold similar positions
for other investment companies for which Signature or an affiliate serves
as the principal underwriter.
No person who is an officer or director of Bankers Trust is an officer
or Trustee of the Trusts or the Portfolios. No director, officer or
employee of Edgewood or any of its affiliates will receive any compensation
from the Trusts or the Portfolios for serving as an officer or Trustee of
the Trusts or the Portfolios.
Bankers Trust reimbursed the BT Investment Equity 500 Index Fund and
Equity 500 Index Portfolio for a portion of its their Trustees fees for the
period above. See "Investment Adviser" and "Administrator" below.
As of December 31, 1996, the Trustees and officers of the Trusts and
the Portfolios owned in the aggregate less than 1% of the shares of any
Fund or Trust (all series taken together).
The following table reflects fees paid to the Trustees for the year
ended December 31, 1996.
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AGGREGATE AGGREGATE TOTAL COMPENSATION
NAME OF PERSON, COMPENSATION COMPENSATION
FROM FUND COMPLEX
POSITION FROM TRUST FROM INSTITUTIONAL TRUST PAID
TO TRUSTEES*
Philip W. Coolidge
Trustee of Portfolios, Trust,
and Institutional Trust None None $1,250
Martin J. Gruber,
Trustee of the Trust $2,550 None
$27,500
Harry Van Benschoten,
Trustee of the Trust $2,550 None
$27,500
Bruce E. Langton
Trustee of the Trust
and Institutional Trust $2,550 $2,350
$27,500
Richard J. Herring
Trustee of the Trust
and Institutional Trust $2,550 $2,350
$27,500
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Charles P. Biggar,
Trustee of Portfolios
and Institutional Trust None $2,250
$28,750
S. Leland Dill,
Trustee of Portfolios None None $28,750
Philip Saunders, Jr.,
Trustee of Portfolios None None
$28,750
*Aggregated information is furnished for the BT Family of Funds which
consists of the following: BT Investment Funds, BT Institutional Funds, BT
Pyramid Mutual Funds, BT Advisor Funds, BT Investment Portfolios, Cash
Management Portfolio, Treasury Money Portfolio, Tax Free Money Portfolio,
NY Tax Free Money Portfolio, International Equity Portfolio, Utility
Portfolio, Short Intermediate US Government Securities Portfolio,
Intermediate Tax Free Portfolio, Asset Management Portfolio, Equity 500
Index Portfolio, and Capital Appreciation Portfolio.
As of December 31, 1996, the following shareholders of record owned 5%
or more of the outstanding Institutional Class Shares of Small Cap Index
Fund: Merck & Co. Inc. Employee Benefit, Whitehouse Station, New Jersey,
owned approximately 1,573,117 shares (27.87%); Miami Valley Equipment Inc.,
Dayton, Ohio, owned approximately 1,413,931 shares (25.05%); Dawn & Co.,
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New Britain, Connecticut, owned approximately 1,199,956 shares (21.26%);
and FMCO, Holland, Michigan, owned approximately 954,363 shares (17.08%).
As of December 31, 1996, the following shareholders of record owned 5%
or more of the outstanding Institutional Class Shares of the EAFE Equity
Index Fund: Bankers Trust for the benefit of Presbyterian Health Care
Systems, Houston, Texas, owned approximately 2,076,571 shares (55.59%);
Bankers Trust and Trustee for Pacificorp Master Retirement Trust, Portland,
Oregon, owned approximately 1,510,861 shares (40.44%); Swiss Bank
Corporation, New York, New York, owned approximately 923,611 shares
(24.72%); and Fox Family, St. Louis, Missouri, owned approximately 503,541
shares (13.48%).
INVESTMENT ADVISER
Under the terms of each Portfolio's investment advisory agreement with
Bankers Trust (the "Advisory Agreement"), Bankers Trust manages the
Portfolio subject to the supervision and direction of the Board of Trustees
of the Portfolio. Bankers Trust will: (i) act in strict conformity with
each Portfolio's Declaration of Trust, the 1940 Act and the Investment
Advisers Act of 1940, as the same may from time to time be amended; (ii)
manage each Portfolio in accordance with the Portfolio's investment
objectives, restrictions and policies; (iii) make investment decisions for
each Portfolio; and (iv) place purchase and sale orders for securities and
other financial instruments on behalf of each Portfolio.
Bankers Trust bears all expenses in connection with the performance of
services under each Advisory Agreement. The Trust and each Portfolio bears
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certain other expenses incurred in its operation, including: taxes,
interest, brokerage fees and commissions, if any; fees of Trustees of the
Trust or the Portfolio who are not officers, directors or employees of
Bankers Trust, Edgewood or any of their affiliates; SEC fees and state Blue
Sky qualification fees; charges of custodians and transfer and dividend
disbursing agents; certain insurance premiums; outside auditing and legal
expenses; costs of maintenance of corporate existence; costs attributable
to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports and
meetings of shareholders, officers and Trustees of the Trust or the
Portfolio; and any extraordinary expenses.
For the years ended December 31, 1996, 1995, and 1994, Bankers Trust
earned $1,505,963 $770,530, and $428,346, respectively, as compensation for
investment advisory services provided to the Equity 500 Index Portfolio.
During the same periods, Bankers Trust reimbursed $870,024, $418,814, and
$249,230, respectively, to the Portfolio to cover expenses.
For the period from July 1, 1996 (Commencement of Operations) to
December 31, 1996, Bankers Trust earned $34,759, for investment advisory
services provided to the Small Cap Index Portfolio. During the same
periods, Bankers Trust reimbursed $26,968, to the Portfolio to cover
expenses.
For the period from January 24, 1996 (Commencement of Operations) to
December 31, 1996, Bankers Trust earned $68,584, for investment advisory
services provided to the EAFE Equity Index Portfolio. During the same
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periods, Bankers Trust reimbursed $30,591, respectively, to the Portfolio
to cover expenses.
As of December 31, 1996, the U.S. Bond Index Fund (Portfolio) and the
Equity 500 Equal Weighted Index Fund (Portfolio) had not commenced
operations.
Bankers Trust may have deposit, loan and other commercial banking
relationships with the issuers of obligations which may be purchased on
behalf of the Portfolios, including outstanding loans to such issuers which
could be repaid in whole or in part with the proceeds of securities so
purchased. Such affiliates deal, trade and invest for their own accounts in
such obligations and are among the leading dealers of various types of such
obligations. Bankers Trust has informed the Portfolios that, in making its
investment decisions, it does not obtain or use material inside information
in its possession or in the possession of any of its affiliates. In making
investment recommendations for the Portfolios, Bankers Trust will not
inquire or take into consideration whether an issuer of securities proposed
for purchase or sale by a Portfolio is a customer of Bankers Trust, its
parent or its subsidiaries or affiliates and, in dealing with its
customers, Bankers Trust, its parent, subsidiaries and affiliates will not
inquire or take into consideration whether securities of such customers are
held by any fund managed by Bankers Trust or any such affiliate.
The prospectus contains disclosure as to the amount of Bankers Trust's
investment advisory and administration and services fees, including waivers
thereof. Bankers Trust may not recoup any of its waived investment advisory
or administration and services fees. Such waivers by Bankers Trust shall
stay in effect for at least 12 months.
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Administrator
Under the Administration and Services Agreements, Bankers Trust is
obligated on a continuous basis to provide such administrative services as
the Board of Trustees of the Trusts and the Portfolios reasonably deem
necessary for the proper administration of the Trusts or the Portfolios.
Bankers Trust will: generally assist in all aspects of each class of shares
of each Funds' and Portfolios' operations; supply and maintain office
facilities (which may be in Bankers Trust's own offices), statistical and
research data, data processing services, clerical, accounting, bookkeeping
and recordkeeping services (including without limitation the maintenance of
such books and records as are required under the 1940 Act and the rules
thereunder, except as maintained by other agents), internal auditing,
executive and administrative services, and stationery and office supplies;
prepare reports to shareholders or investors; prepare and file tax returns;
supply financial information and supporting data for reports to and filings
with the SEC and various state Blue Sky authorities; supply supporting
documentation for meetings of the Board of Trustees; provide monitoring
reports and assistance regarding compliance with Declarations of Trust,
by-laws, investment objectives and policies and with Federal and state
securities laws; arrange for appropriate insurance coverage; calculate net
asset values, net income and realized capital gains or losses; and
negotiate arrangements with, and supervise and coordinate the activities
of, agents and others to supply services.
Pursuant to a sub-administration agreement (the "Sub-Administration
Agreement"), FSC performs such sub-administration duties for the Trusts and
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the Portfolios as from time to time may be agreed upon by Bankers Trust and
FSC. The Sub-Administration Agreement provides that FSC will receive such
compensation as from time to time may be agreed upon by FSC and Bankers
Trust. All such compensation will be paid by Bankers Trust.
For the period from July 10, 1996 (Commencement of Operations) to
December 31, 1996, Bankers Trust earned $26,726 as compensation for
administrative and other services provided to Small Cap Index Fund. During
the same period, Bankers Trust reimbursed $69,671, to Small Cap Index Fund
to cover expenses.
For the period from January 24, 1996 (Commencement of Operations to
December 31, 1996, Bankers Trust earned $41,404 as compensation for
administrative and other services provided to EAFE Equity Index Fund.
During the same period, Bankers Trust reimbursed $104,356, to EAFE Equity
Index Fund to cover expenses.
For the fiscal years ended December 31, 1996, 1995, and 1994, Bankers
Trust earned $541,924, $270,327, and $139,997, respectively, for
administrative and other services provided to the Equity 500 Index Fund.
During the same periods, Bankers Trust reimbursed $658,635, $421,776, and
$194,084, respectively to Equity 500 Index Fund to cover expenses.
For the period from July 10, 1996 (Commencement of Operations) to
December 31, 1996, Bankers Trust earned $11,586, as compensation for
administrative and other services provided to the Small Cap Index
Portfolio.
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For the period from January 24, 1996 to December 31, 1996, Bankers
Trust earned $27,433, as compensation for administrative and other services
provided by the EAFE Equity Index Portfolio.
For the years ended December 31, 1996, 1995, and 1994, Bankers Trust
earned $752,981, $385,265, and $214,173, respectively, as compensation for
administrative and other services provided to the Equity 500 Index
Portfolio.
Bankers Trust has agreed that if in any fiscal year the aggregate
expenses of any Fund and its respective Portfolio (including fees pursuant
to the Advisory Agreement, but excluding interest, taxes, brokerage and, if
permitted by the relevant state securities commissions, extraordinary
expenses) exceed the expense limitation of any state having jurisdiction
over a Fund or Class, Bankers Trust will reimburse that Fund for the excess
expense to the extent required by state law. As of the date of this
Statement of Additional Information, the most restrictive annual expense
limitation applicable to any Fund or Class is 2.50% of the Fund's or Class'
first $30 million of average annual net assets, 2.00% of the next
$70 million of average annual net assets and 1.50% of the remaining average
annual net assets.
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Custodian and Transfer Agent
Bankers Trust, 280 Park Avenue, New York, New York 10017, serves as
Custodian for the Trusts and for the Portfolios pursuant to the
administration and services agreements. As Custodian, it holds the Funds'
and each Portfolio's assets. Bankers Trust also serves as transfer agent of
the Trusts and of each Portfolio pursuant to the respective administration
and services agreement. Under its transfer agency agreement with the
Trusts, Bankers Trust maintains the shareholder account records for each
Class of shares of each Fund, handles certain communications between
shareholders and the Trusts and causes to be distributed any dividends and
distributions payable by the Trusts. Bankers Trust may be reimbursed by the
Funds or the Portfolios for its out-of-pocket expenses. Bankers Trust will
comply with the self-custodian provisions of Rule 17f-2 under the 1940 Act.
Use of Name
The Trusts and Bankers Trust have agreed that each Trust may use "BT"
as part of its name for so long as Bankers Trust serves as investment
adviser to the Portfolios. The Trusts have acknowledged that the term "BT"
is used by and is a property right of certain subsidiaries of Bankers Trust
and that those subsidiaries and/or Bankers Trust may at any time permit
others to use that term.
Each Trust may be required, on 60 days' notice from Bankers Trust at
any time, to abandon use of the acronym "BT" as part of its name. If this
were to occur, the Trustees would select an appropriate new name for each
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Trust, but there would be no other material effect on the Trusts, their
shareholders or activities.
Banking Regulatory Matters
Bankers Trust has been advised by its counsel that in its opinion
Bankers Trust may perform the services for the Portfolios contemplated by
the Advisory Agreements and other activities for the Funds and the
Portfolios described in the Prospectuses and this Statement of Additional
Information without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. However, counsel has pointed out that future
changes in either Federal or state statutes and regulations concerning the
permissible activities of banks or trust companies, as well as future
judicial or administrative decisions or interpretations of present and
future statutes and regulations, might prevent Bankers Trust from
continuing to perform those services for the Trusts and the Portfolios.
State laws on this issue may differ from the interpretations of relevant
Federal law and banks and financial institutions may be required to
register as dealers pursuant to state securities law. If the circumstances
described above should change, the Boards of Trustees would review the
relationships with Bankers Trust and consider taking all actions necessary
in the circumstances.
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Counsel and Independent Accountants
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street,
New York, New York 10022-4669, serves as Counsel to the Trusts and each
Portfolio. Coopers & Lybrand L.L.P., 1100 Main Street, Suite 900, Kansas
City, Missouri 64105 acts as Independent Accountants of the Trusts and each
Portfolio.
ORGANIZATION OF THE TRUSTS
Shares of each Trust do not have cumulative voting rights, which means
that holders of more than 50% of the shares voting for the election of
Trustees can elect all Trustees. Shares are transferable but have no
preemptive, conversion or subscription rights. Shareholders generally vote
by Fund, except with respect to the election of Trustees and the
ratification of the selection of independent accountants.
Massachusetts law provides that shareholders could under certain
circumstances be held personally liable for the obligations of each Trust.
However, each Trust's Declaration of Trust disclaims shareholder liability
for acts or obligations of the respective Trust and requires that notice of
this disclaimer be given in each agreement, obligation or instrument
entered into or executed by a Trust or a Trustee. The Declaration of Trust
provides for indemnification from each Trust's property for all losses and
expenses of any shareholder held personally liable for the obligations of
each Trust. Thus, the risk of a shareholder's incurring financial loss on
account of shareholder liability is limited to circumstances in which each
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Trust itself would be unable to meet its obligations, a possibility that a
Trust believes is remote. Upon payment of any liability incurred by a
Trust, the shareholder paying the liability will be entitled to
reimbursement from the general assets of the respective Trust. The Trustees
intend to conduct the operations of each Trust in a manner so as to avoid,
as far as possible, ultimate liability of the shareholders for liabilities
of that Trust.
TAXATION
TAXATION OF THE FUNDS
The Fund intends to qualify annually as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the ``ode'').
As a regulated investment company, each Fund will not be subject to
U.S. Federal income tax on its investment company taxable income and net
capital gains (the excess of net long-term capital gains over net short-
term capital losses), if any, that it distributes to shareholders. The fund
intends to distribute to its shareholders, at least annually, substantially
all of its investment company taxable income and net capital gains, and
therefore does not anticipate incurring a Federal income tax liability.
DISTRIBUTIONS
Dividends paid out of the Fund's investment company taxable income
will be taxable to a U.S. shareholder as ordinary income. Distributions of
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net capital gains, if any, designated as capital gain dividends are taxable
as long-term capital gains, regardless of how long the shareholder has held
the Fund's shares, and are not eligible for the dividends-received
deduction. Shareholders receiving distributions in the form of additional
shares, rather than cash, generally will have a cost basis in each such
share equal to the net asset value of a share of the Fund on the
reinvestment date. Shareholders will be notified annually as to the U.S.
Federal tax status of distributions. Shareholders should consult their own
tax adviser concerning the application of federal, state and local taxes to
the distributions they receive from the Fund.
TAXATION OF THE PORTFOLIOS
The Portfolios are not subject to the Federal income taxation.
Instead, the Fund and other investors investing in a Portfolio must take
into account, in computing their Federal income tax liability, their share
of the Portfolio's income, gains, losses, deductions, credits and tax
preference items, without regard to whether they have received any cash
distributions from the Portfolio.
BACKUP WITHHOLDING
A Fund may be required to withhold U.S. Federal income tax at the rate
of 31% of all taxable distributions payable to shareholders who fail to
provide the Fund with their correct taxpayer identification number or to
make required certifications, or who have been notified by the Internal
Revenue Service that they are subject to backup withholding. Corporate
shareholders and certain other shareholders specified in the Code generally
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are exempt from such backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the
shareholder's U.S. Federal income tax liability.
FOREIGN SHAREHOLDERS
The tax consequences to a foreign shareholder of an investment in a
Fund may be different from those described herein. Foreign shareholders are
advised to consult their own tax advisers with respect to the particular
tax consequences to them of an investment in a Fund.
OTHER TAXATION
The Trust is organized as a Massachusetts business trust and, under
current law, neither the Trust nor any Fund is liable for any income or
franchise tax in the Commonwealth of Massachusetts, provided that the Fund
continues to qualify as a regulated investment company under Subchapter M
of the Code.
Each Portfolio is organized as a New York trust. Each Portfolio is not
subject to any income or franchise tax in the State of New York or the
Commonwealth of Massachusetts.
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FOREIGN WITHHOLDING TAXES
Income received by a Portfolio from sources within foreign countries
may be subject to withholding and other taxes imposed by such countries.
FINANCIAL STATEMENTS
The financial statements for the Funds and the Portfolios for the
period ended December 31,1996, are incorporated herein by reference to the
Funds' Annual Reports dated December 31, 1996. A copy of a Fund's Annual
Report may be obtained without charge by contacting the Fund.
APPENDIX
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-
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grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered as medium-grade obligations, i.e. they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such, bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA - Bonds rated Ba are judged to have speculative elements. Their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both (good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other
terms of the contract over any long period of time may be small.
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CAA - Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-
comings.
C - Bonds rated C are the lowest-rated class of bonds and issued so rated
can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond system. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
AAA - Debt rated AAA has the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
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A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to weakened capacity to pay interest
and repay principal for debt in this category than in higher-rated
categories.
BB - Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual
or implied BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay principal.
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CC - Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C -The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed but
debt service payments are continued.
CI - The rating CI is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The D rating will also
be used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
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INVESTMENT ADVISER OF EACH PORTFOLIO AND ADMINISTRATOR
BANKERS TRUST COMPANY
DISTRIBUTOR
EDGEWOOD SERVICES, INC.
CUSTODIAN AND TRANSFER AGENT
BANKERS TRUST COMPANY
INDEPENDENT ACCOUNTANTS
COOPERS & LYBRAND L.L.P.
COUNSEL
WILLKIE FARR & GALLAGHER
No person has been authorized to give any information or to make any
representations other than those contained in the Trust's Prospectuses, its
Statements of Additional Information or the Trust's official sales
literature in connection with the offering of the Trust's shares and, if
given or made, such other information or representations must not be relied
on as having been authorized by the Trust. Neither the Prospectuses nor
this Statement of Additional Information constitutes an offer in any state
in which, or to any person to whom, such offer may not lawfully be made.
Cusips:
05576L700
05576L809
05576L882
05576L874
055922751
BT0466H(3/97)
